Adaptive Expectations Hypothesis

AAA

DEFINITION of 'Adaptive Expectations Hypothesis'

A hypothesis stating that individuals make investment decisions based on the direction of recent historical data, such as past inflation rates, and adjust the data (based on their expectations) to predict future rates.

INVESTOPEDIA EXPLAINS 'Adaptive Expectations Hypothesis'

For example, if inflation over the last 10 years has been running in the 2-3% range, investors would use an inflation expectation of that range when making investment decisions. Consequently, if a temporary extreme fluctuation in inflation occurred recently, such as a cost-push inflation phenomenon, investors will overestimate the movement of inflation rates in the future. The opposite would occur in a demand-pull inflationary environment.

RELATED TERMS
  1. Inflation

    The rate at which the general level of prices for goods and services ...
  2. Bond

    A debt investment in which an investor loans money to an entity ...
  3. Expectations Theory

    The hypothesis that long-term interest rates contain a prediction ...
  4. Cost-Push Inflation

    A phenomenon in which the general price levels rise (inflation) ...
  5. Demand-Pull Inflation

    A term used in Keynesian economics to describe the scenario that ...
  6. Treasury Direct

    The online market where investors can purchase federal government ...
Related Articles
  1. Cost-Push Inflation Versus Demand-Pull ...
    Entrepreneurship

    Cost-Push Inflation Versus Demand-Pull ...

  2. Understanding Investor Behavior
    Active Trading Fundamentals

    Understanding Investor Behavior

  3. Advanced Bond Concepts
    Bonds & Fixed Income

    Advanced Bond Concepts

  4. Bond Basics Tutorial
    Retirement

    Bond Basics Tutorial

comments powered by Disqus
Hot Definitions
  1. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  2. Odious Debt

    Money borrowed by one country from another country and then misappropriated by national rulers. A nation's debt becomes odious ...
  3. Takeover

    A corporate action where an acquiring company makes a bid for an acquiree. If the target company is publicly traded, the ...
  4. Harvest Strategy

    A strategy in which investment in a particular line of business is reduced or eliminated because the revenue brought in by ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  6. Pareto Principle

    A principle, named after economist Vilfredo Pareto, that specifies an unequal relationship between inputs and outputs. The ...
Trading Center