rational expectations theory

Examples of rational expectations theory in the following topics:

• Relationship Between Expectations and Inflation

  • There are two theories of expectations (adaptive or rational) that predict how people will react to inflation.
  • The theory of adaptive expectations states that individuals will form future expectations based on past events.
  • The theory of rational expectations states that individuals will form future expectations based on all available information, with the result that future predictions will be very close to the market equilibrium.
  • However, under rational expectations theory, workers are intelligent and fully aware of past and present economic variables and change their expectations accordingly.
  • In essence, rational expectations theory predicts that attempts to change the unemployment rate will be automatically undermined by rational workers.

• Keynesian Theory

  • In economics, the Keynesian theory was first introduced by British economist John Maynard Keynes in his book The General Theory of Employment, Interest, and Money which was published in 1936 during the Great Depression .
  • According to the Keynesian theory, aggregate demand does not necessarily equal the productive capacity of the economy.
  • Although the beliefs of each school vary, all of the schools of economic thought have contributed to economic theory is some way.
  • In contrast, the Chicago School of economic thought focused price theory, rational expectations, and free market policies with little government intervention.
  • John Maynard Keynes introduced Keynesian theory in his book, The General Theory of Employment, Interest, and Money.

• Psychological Pricing

  • Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact.
  • Psychological pricing or price ending is a marketing practice based on the theory that certain prices have a psychological impact.
  • The theory is that this drives demand greater than would be expected if consumers were perfectly rational.

• Theory of Utility

  • The theory of utility states that, all else equal, a rational person will always choose the option that has the highest utility.
  • The theory of utility is based on the assumption of that individuals are rational.
  • Rationality has a different meaning in economics than it does in common parlance.
  • If, when everything is taken into account, one decision provides the greatest utility, which is equivalent to meaning that it is the most preferred, then we would expect the individual to take that most preferred option.
  • Based on their preferences, both made the economically rational choice.

• Problems with the Rational Decision-Making Model

  • Critics of rational choice theory—or the rational model of decision-making—claim that this model makes unrealistic and over-simplified assumptions.
  • Alternative theories of how people make decisions include Amos Tversky's and Daniel Kahneman's prospect theory.
  • Prospect theory reflects the empirical finding that, contrary to rational choice theory, people fear losses more than they value gains, so they weigh the probabilities of negative outcomes more heavily than their actual potential cost.
  • The theory of bounded rationality holds that an individual's rationality is limited by the information they have, the cognitive limitations of their minds, and the finite amount of time they have to make a decision.
  • This theory was proposed by Herbert A.

• Rational Decision Making

  • Rational decision making is a multi-step process, from problem identification through solution, for making logically sound decisions.
  • Rational decision making is a multi-step process for making choices between alternatives.
  • The process of rational decision making favors logic, objectivity, and analysis over subjectivity and insight.
  • The word "rational" in this context does not mean sane or clear-headed as it does in the colloquial sense.
  • The idea of rational choice is easy to see in economic theory.

• Exchange

  • The theory is fundamentally oriented around rational choice theory, or the idea that all human behavior is guided by an individual's interpretation of what is in his best interest.
  • Social exchange theory is only comprehensible through the lens of rational choice theory.
  • Rational choice theory supposes that every individual evaluates his/her behavior by that behavior's worth, which is a function of rewards minus costs.
  • Second, humans are rational actors.
  • Explain how social exchange theory is based upon rational choice theory

• Crowds

  • There are several problems with LeBon's theory.
  • First, contagion theory presents members of crowds as irrational.
  • Much crowd behavior, however, is actually the result of rational fear (e.g., being trapped in a burning theater) or a rational sense of injustice (e.g., the Cincinnati race riots).
  • Emergent-Norm Theory combines the above two theories, arguing that it is a combination of like-minded individuals, anonymity, and shared emotion that leads to crowd behavior.
  • It argues that people come together with specific expectations and norms, but in the interactions that follow the development of the crowd, new expectations and norms can emerge, allowing for behavior that normally would not take place.

• Disengagement Theory

  • Disengagement theory was the first theory of aging developed by social scientists.
  • They formulate their argument along nine postulates to explain why it is rational for individuals who know that death is approaching and who have seen friends of their age pass to begin to anticipate their own deaths and disengage.
  • Postulate one: Everyone expects death, and one's abilities will likely deteriorate over time.
  • When the individual is ready and society is not, a disjunction between the expectations of the individual and of the members of this social systems results, but engagement usually continues.
  • Disengagement theory suggests that adults become increasingly withdrawn as they get older.

• Sunk Costs

  • In traditional microeconomic theory, only prospective (future) costs are relevant to an investment decision.
  • At that point, they have no rational bearing on further investment decisions.
  • The sum originally paid should not affect any rational future decision-making about the car, regardless of the resale value.
  • The sunk cost may be used to refer to the original cost or the expected economic loss.