Rational Expectations Theory
Definition of 'Rational Expectations Theory'An economic idea that the people in the economy make choices based on their rational outlook, available information and past experiences. The theory suggests that the current expectations in the economy are equivalent to what the future state of the economy will be. This contrasts the idea that government policy influences the decisions of people in the economy. |
|
Investopedia explains 'Rational Expectations Theory'The idea is that rational expectations of the players in an economy will partially affect what happens to the economy in the future. If a company believes that the price for its product will be higher in the future, it will stop or slow production until the price rises. Because the company weakens supply while demand stays the same, price will increase. In sum, the producer believes that the price will rise in the future, makes a rational decision to slow production and this decision partially affects what happens in the future. |
Related Definitions
Articles Of Interest
-
5 Economic Concepts Consumers Need To Know
A solid understanding of economics helps build a strong foundation in almost every area of life. -
Explaining The World Through Macroeconomic Analysis
From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone. -
Understanding Investor Behavior
Discover how some strange human tendencies can play out in the market, posing the question: are we really rational? -
Microeconomics
This tutorial teaches the basics of one of the most important economic topics. A must for all investors. -
Economics Basics
Learn economics principles such as the relationship of supply and demand, elasticity, utility, and more! -
The Nash Equilibrium
Nash Equilibrium is a key concept of game theory, which helps explain how people and groups approach complex decisions. Named after renowned mathematician John Nash, the idea of Nash Equilibrium ... -
Forces Behind Interest Rates
Get a deeper understanding of the importance of interest rates and what makes them change. -
Leading Economic Indicators Predict Market Trends
Leading indicators help investors to predict and react to where the market is headed. -
Great Company Or Growing Industry?
Look at the big picture when choosing a company - what you see may really be a stage in its industry's growth. -
Prisoner's Dilemma
Learn more about this classic game theory scenario.
Free Annual Reports