Talk:Rational expectations

message: This page was basically copied and pasted from its external link.
http://www.colombialink.com/01_INDEX/index_finanzas_eng/rational_expectations.html
Foraday 16:52, 26 March 2007 (UTC)
thread_title:  Is it plagiarism? 

message: It is not even a model, it is an assumption used to derive the expectations term of a model, and so can be (and has been) applied to many different models. The intuition is, if the error term was not symmetrically distributed with a mean of zero, systematic profit opportunities exist. If the opportunities are discoverable, they will be exploited, eliminating the systematic bias and revalidating the original assumption.  — Preceding unsigned comment added by 66.8.211.54 (talk) 06:28, 5 December 2012 (UTC)
replies: text: Yes, these are good points. As it stands now, some of the article reads like a defense of something, like the efficient market hypothesis, when these things are distinctly separate. I will see if I can do a few edits to clean some of this up. Nwlaw63 (talk) 15:14, 16 January 2015 (UTC)
thread_title:  rational expectations is a hypothesis or modeling technique, not a theory 

message: This article is suffering from excessive disclaimerism:  its writing is so concerned with avoid misinterpretation that it's not being direct, succinct, and readable.  I recommend that the first sentence in particular make some stab at a definition of rational expectations, rather than giving a detailed contextualization without even mentioning what the term means.  The article is showing the effects of a contentious editing process, but that process should end with a nuanced and appropriate re-writing.  And, I would do it myself, if I didn't have the apparently, woefully incorrect assumption that rational expectations meant that people were perfectly rational/utility optimizers in their decision making.71.224.206.164 (talk) 10:52, 17 January 2010 (UTC)
replies: text: Definition now in first sentence. Nurg (talk) 04:24, 30 January 2010 (UTC)

text: That's Wikipedia's mode of operating. A bunch of useless editing and petty fights between pseudo-intellectuals who finally culminates into a bunch of sentences that are so crappy it's embarrassing.  —Preceding unsigned comment added by 70.41.205.20 (talk) 05:34, 5 February 2010 (UTC)
thread_title:  First sentence 

message: This article has been found to be edited by students of the Wikipedia:India Education Program project as part of their (still ongoing) course-work. Unfortunately, many of the edits in this program so far have been identified as plain copy-jobs from books and online resources and therefore had to be reverted. See the India Education Program talk page for details. In order to maintain the WP standards and policies, let's all have a careful eye on this and other related articles to ensure that no material violating copyrights remains in here. --Matthiaspaul (talk) 12:34, 1 November 2011 (UTC)
thread_title:  Look out for possible copyright violations in this article 

message: A term should be defined by indicating what it means, not what it implies. No one would define a first derivative as something that must vanish in an optimum. I change the definition accordingly.--Herbert81 (talk) 17:42, 14 October 2015 (UTC)
thread_title:  Definition not encyclopedic style 

message: Dr. Davila has reviewed this Wikipedia page, and provided us with the following comments to improve its quality:
We hope Wikipedians on this talk page can take advantage of these comments and improve the quality of the article accordingly.
We believe Dr. Davila has expertise on the topic of this article, since he has published relevant scholarly research:
*Reference : The Rationality of Expectations Formation, The B.E. Journal of Theoretical Economics 16(2), 515-543 (2016)
ExpertIdeasBot (talk) 14:53, 8 August 2016 (UTC)
thread_title:  Dr. Davila's comment on this article 

message: This article should have a more wider perspective than it currently has. This is the question of framing the Rational Expectations in a larger phenomenon called biopolitics. The core of biopolitics is a claim that governance can be done using more hidden tools than the tools of modern democracy. This is actually the claim known as 'Hayek's crystal'. Hayek uses the word 'law' to refer both legislation and a law of nature. David Hume has explained this with the claim that a human being can not be without expecting. Hume has also pointed out that this is a question of 'human nature'. Human nature is not limited to expectation.
Rational Expectations does not empty the concept of biopolitics in economics or Hume's notion about human nature. It leaves outside a vast domain that is both known and unknown at the same time. The environment we live today includes the synthetic environment of electrical devices. These tools have been a remarkable part of the modern era. The difference is that the current low voltage systems are the product of the postmodern era. This difference should be highlighted. The devices that measure our heartbeat etc. have been in the market for a long time and the technology has been advancing fast. There are now devices that are more or less implants to human bodies and connected to the nervous system. But still electricity is understood as separate from a human body and we are living at the same time in the middle of the wireless communications systems' signals.
Rational Expectations is not only a feature in economics. It is a model of governance. This article about Rational Expectations has been updated with minor constraints. This implies that Rational Expectations is no more the focus of economics but on the contrary. The expectations are currently so crudely utilized in the political discourse focused on so-called sound economic policies, that it seems to be the very intention to blow the expectations out of the toolbox of economics. This would lead more or less to the state of what is called Pyrrhomism that Hume saw as to be prohibited. How can the powerholders allow this to happen? The explanation is that there is an alternative paradigm of governance. The weakness of Rational Expectations is that metacognition can be a major obstacle for it. Therefore the focus of the investigation should be in unconscious processes.
There is the major problem that the focus on expectations leads to skepticism to expectations in general. This can damage the modern institutions that are operating on discourses, such as the parliamentary system. Focusing on expectations can in fact damage the democracy at the same time economics has established a beeper biological base.Dancing Mickey Mouse (talk) 22:50, 21 September 2016 (UTC)
thread_title:  Possible extension to this article 

message: These details describing reflexive events using full-blown rational expectations are alarming. Soros states that the hypothesis is not valid for these events all the time. This is actually a repeat of the famous claim that "You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time".
I interpret Soros' claim that using full-blown rational expectations of this kind all the time is not possible, but it is possible to use these now and then. In addition to this there is the possibility to use these in different geographical locations. What is needed is that people have trust on the people using them. Burdekin and Langdana claim that one of the key components in RE is trust. This should be absent in the world of game theory but most of the people are not aware of it.
The RE does not require that all people buy the predictions (induced expectations) and RE does not require it. The operators themselves do not buy them. There has been in the literature the concept "emotional attack". This describes well what happened in in 2001. What happened was also a prime example of Milton and Rose Friedman's Free to Choose claim about the usefulness of television regarding the emotions.
The Soros 1998 book includes a claim that the political stage of the United States has to be rearranged. He also referred to the reflexivity of Greek drama in it. In addition to that he demanded there the usage of full-blown rational expectations. Soros' Open Society organizations work still around the world and these organizations did not cease to exist after the coups in the socialist countries.
An interesting detail is that this 1998 book cover does not simply read "The Crisis of Global Capitalism". Little, Brown and Company 1998 print reads "The Crisis George of Global Soros Capitalism": http://www.alibris.co.uk/The-Crisis-of-Global-Capitalism-Open-Society-Endangered-George-Soros/book/1398212? Who is Crisis George?Dancing Mickey Mouse (talk) 21:27, 23 September 2016 (UTC)
thread_title:  Reflexive events and full blown rational expectations 

message: That first sentence is actually fine. Then we get a couple paragraphs of borderline stuff - some of it is legit but I think whoever added it in doesn't actually understand the sources. And then we get the nutzoid stuff which should obviously be removed. The stuff about agents "knowing the model" and the difficulties that multiple equilibria present for RATEX could possibly be put back in? Volunteer Marek (talk) 22:53, 25 September 2016 (UTC)
thread_title:  Unsourced and off-topic OR deleted from the article 

message: Rational expectations are expected values in the mathematical sense. In order to be able to compute expected values, individuals must know the true economic model, its parameters, and the nature of the stochastic processes that govern its evolution. If these extreme assumptions are violated, individuals simply cannot form rational expectationsEvans, G. W. and G. Ramey (2006) Adaptive Expectations, Underparameterization and the Lucas Critique. Journal of Monetary Economics, vol. 53, pp. 249-264.
The models of Muth and Lucas (and the strongest version of the efficient-market hypothesis) assume that at any specific time, a market or the economy has only one equilibrium (which was determined ahead of time), so that people form their expectations around this unique equilibrium. Muth's math (sketched above) assumed that P* was unique. Lucas assumed that equilibrium corresponded to a unique "full employment" level (potential output) – corresponding to a unique NAIRU or natural rate of unemployment. If there is more than one possible equilibrium at any time then the more interesting implications of the theory of rational expectations do not apply. In fact, expectations would determine the nature of the equilibrium attained, reversing the line of causation posited by rational expectations economists.
A further problem relates to the application of the rational expectations hypothesis to aggregate behavior. It is well known that assumptions about individual behavior do not carry over to aggregate behavior (Sonnenschein-Mantel-Debreu theorem). The same holds true for rationality assumptions: Even if all individuals have rational expectations, the representative household describing these behaviors may exhibit behavior that does not satisfy rationality assumptions (Janssen 1993). Hence the rational expectations hypothesis, as applied to the representative household, is unrelated to the presence or absence of rational expectations on the micro level and lacks, in this sense, a microeconomic foundation.
It can be argued that it is difficult to apply the standard efficient-market hypothesis (efficient market theory) to understand the stock market bubble that ended in 2000 and collapsed thereafter; however, advocates of rational expectations say that the problem of ascertaining all the pertinent effects of the stock-market crash is a great challenge.
Furthermore, social scientists have criticized the movement of rational choice theory into other fields such as political science. In his book Essence of Decision, political scientist Graham T. Allison specifically attacked applications of rational choice theory. This should not be confused with rational expectations theory.
Some economists now use the adaptive expectations model, but then complement it with ideas based on the rational expectations theory. For example, an anti-inflation campaign by the central bank is more effective if it is seen as "credible," i.e., if it convinces people that it will "stick to its guns." The bank can convince people to lower their inflationary expectations, which implies less of a feedback into the actual inflation rate. (An advocate of Rational Expectations would say, rather, that the pronouncements of central banks are facts that must be incorporated into one's forecast because central banks can act independently).  Those studying financial markets similarly apply the efficient-markets hypothesis but keep the existence of exceptions in mind.
Maurice Allais’s Hereditary, Relativist and Logistic (HRL) theory of monetary dynamics contains an original theory of expectations formation that is a genuine alternative to both adaptive and rational expectations.Allais, M. (1965), Reformulation de la théorie quantitative de la monnaie, Société d’études et de documentation économiques, industrielles et sociales (SEDEIS), Paris. Praised by Milton Friedman in 1968 with the following words:
This work [the HRL formulation] introduces a very basic and important distinction between psychological time and chronological time. It is one of the most important and original paper that has been written for a long time … for its consideration of the problem of the formation of expectations.”Friedman, M. (1968), Factors affecting the level of interest rates, in Savings and residential financing: 1968 Conference Proceedings, Jacobs, D. P., and Pratt, R. T., (eds.), The United States Saving and Loan League, Chicago, IL, p. 375.
Allais’s contribution has nevertheless been “lost”: it has been absent from the debate about expectations.Barthalon, E. (2014), Uncertainty, Expectations and Financial Instability, Reviving Allais’s Lost Theory of Psychological Time, Columbia University Press, New York.
Milton Friedman and his followers claim that rational expectations lead to the situation where government policies are ineffective. This is the message of Lucas critique and works of other new classical economists, like Henri Theil. The problem with these simplified claims is that these claims concern the decisions of actors who use metacognition about expectations, and do not operate on simple expectations. The decisions are rather based on interests and lead to interpret Friedman's and Lucas work, among others, normative, political and less scientific. Finn E. Kydland's and Edward Prescott's (1977) article Rules Rather Than Discretion: The Inconsistency of Optimal Plans shows this quite straightforward, even if the article is dressed in rational expectations jargon and warnings about government decisions which are unpleasant to the moneyed class, using Thorstein Veblen's terminology. Instead of rational expectations, it is more appropriate to describe these decisions by metacognitive mind as the decisions of an epistemic community. The epistemic community utilizes the linguistic division of labor to reach it's private goal. Hilary Putnam has claimed that the existence of linguistic division of labor can be eliminated.
George Soros provides concrete arguments that clarify the metacognition and linguistic division of labor elimination arguments with reference to Karl Popper, in his The Crisis of Global Capitalism: Open Society EndangeredSoros, George (1998): The Crisis of Global Capitalism: Open Society endangered. Little, Brown and Company. (pp. 30–31):
::No amount of testing will verify a hypothesis, but as long a hypothesis has not been falsified, it can be interpreted as valid.
This Soros' argument mixes to different things. The citation makes sense, but it does so in the context where the falsification is not known. It is two different things to (1) have a hypothesis that is not falsified and (2) have a hypothesis with the knowledge that it can be falsified. Soros continues:
:: We do not need to insist that the sun will always rise in the east just because it has done so every day, it's enough if we accept the hypothesis provisionally, until it is falsified.
This citation shows that Soros refers to falsifiable hypotheses. It is again two different things to (1) know that the hypothesis can be falsified and (2) not to know if the hypothesis can be falsified. The example he has chosen reflects the fundamental idea of legitimizing falsifiable hypotheses. Soros defends this methodological stance the following way:
::It allows unverifiable hypotheses to provide determinate predictions and explanations.
The three words "allows unverifiable hypotheses" with the word "unverifiable" in between shows the stance clearly. He also states that:
::The asymmetry between verification and falsification is, in my opinion, Popper's greatest contribution not only to the philosophy of science but to our understanding of the world.
The possibility of the falsification of the hypothesis is shown also in the following:
::But reflexivity gives rise to irreversible, historical processes and therefore it does not lend itself to timelessly valid generalizations. More exact, the generalizations that can be made about reflexive events cannot be used for determinate predictions and explanations.
This part of Soros' explanation deals not only with events but also the so-called full-blown Rational Expectations. To the last of these sentences he has attached a footnote with a sentence:
::It will be noted that the generalization I have just made is meant to be timelessly valid but it cannot be used for explaining and predicting reflexive events in a deterministic fashion.
This raises of course the question what are "reflexive events". Here, it has been mentioned that it deals with the full-blown Rational Expectations. He continues:
::This contention does not invalidate Popper's model of scientific method in any way. The model remains as elegant and as close to perfection as before; it merely fails to apply to reflexive phenomena. The contention does, however, create a cleavage between the natural and the social sciences, because reflexivity occurs only when a situation has thinking participants.
The last sentence shows that Soros differentiates between natural and social sciences, and puts "a situation" under the social sciences. Thus there is a hidden class of unevents and unsituations, which are placed under the natural sciences. The sentence with "thinking participants" is the opposite of unconscious. This shows that the Popperian Open Society is constructed on a basis that can be eliminated. It also shows that Soros sees the hypothesis as connected to a historical phase, as the word "provisionally" shows. The sentence "But reflexivity gives rise to irreversible, historical processes" is striking, since it shows that reflexive events, based on the hypothesis that can be falsified, causes "irreversible, historical processes". Soros describes that these are fruitful misconceptions.
George Soros' description shows that Karl Popper's idea about the validity of the hypothesis is essentially the same which is described by Milton Friedman in Essays in Positive Economics. Soros' and Friedman's claims are game-theoretic. Thorstein Veblen has written about these what became known as game-theoretic operations in his 1919 essay The Intellectual Pre-Eminence of Jews in Modern Europe.:Veblen, Thorstein (1919): The Intellectual Pre-Eminence of Jews in Modern Europe. Political Science Quarterly. Vol.34, No.1 (March 1919) pp. 33-42
::It is not only that men of Jewish extraction continue to supply more than a proportionate quota to the rank and file engaged in scientific and scholarly work, but a disproportionate number of the men and to whom modern science and scholarship look for guidance and leadership are of the same derivation.  Particularly is this true of the modern sciences, and it applies perhaps especially in the field of scientific theory, even beyond the extent of its application in the workday detail. So much is notorious.
The second last sentence with "scientific theory, even beyond the extent of its application in the workday detail" refers exactly to the fundamental question what is scientific and what is not. The question which Soros and f.e. Popper and Friedman before him have equipped with claims. SorosSoros, George (1998): The Crisis of Global Capitalism: Open Society endangered. Little, Brown and Company. (p. 90) suggests:
::We have now lived the Age of Reason for the past 200 years - long enough to discover that reason has its limitations. We are ready to enter the Age of Fallibility. The results may be equally exhilarating and, having learnt from the past experience, we may be able to avoid some of the excesses characteristic of the dawning of a new age.
The words "equally exhilarating" refer to the preceding page (p. 89):
::The Enlightenment did not spring into existence out of nowhere: It had its roots in Christianity, which in turn built on the monotheistic tradition of the Old Testament and on Greek philosophy. It should be noted that all of these ideas were couched in in universal terms, with the exception of the Old Testament, in which a great deal of tribal history is mixed with monotheism. Instead of accepting tradition as the ultimate authority, the Enlightenment subjected tradition to critical examination. The results were exhilarating. The creative energies of the human intellect were unleashed. No wonder that the new approach was carried to excess!
There first of these citations here (and vice verse in the book) has "we may be able to avoid some of the excesses of the dawning of the new age" and the second has "No wonder that the new approach was carried to excess!". It should be noted that the first of these has the word "may", referring to the full-blown Rational Expectations like the "Age of Fallibility" declaration. Notice also the words "Greek philosophy" and the usage of the relatively rare word "couched". Alisa Rosenbaum's a.k.a Ayn Rand's book Atlas Shrugged has a following scene:
::Ragnar Danneskjöld lay stretched on a couch, reading a volume of the works of Aristotle: "... for these truths hold good for everything that is, and not for some special genus apart from others. And all men use them, because they are true of being qua being. ... For a principle which every one must have who understands anything that is, is not a hypothesis ... Evidently such a principle is the most certain of all; which principle this is, let us proceed to say. It is, that the same attribute cannot at the same time belong and not belong to the same subject in the same respect...."
::The rectangle of light in the acres of a farm was the window of the library of Judge Narragansett. He sat at a table, and the light of his lamp fell on the copy of an ancient document. He had marked and crossed out the contradictions in its statements that had once been the cause of its destruction. He was now adding a new clause to its pages: "Congress shall make no law abridging the freedom of production and trade ...".Rand, Ayn: Atlas Shrugged. Penguin Books. pp. 1167-1168
Soros continues (p. 90):
::As fallibility and reflexivity are universal concepts, they should provide common ground for all the people living in the world.
So there is the universality claim that is included in Ayn Rand's most famous work, in the sentence "'for these truths hold good for everything that is, and not for some special genus apart from others'", and his words "common ground" carries the idea included in Rand's citation with "'such a principle is the most certain of all'".
According to Soros (p. 90):
::More precisely, the concept [Open Society] is too general to provide a recipe for specific decisions. This is self-consistent and leaves ample scope for trial and error. It will be a sound foundation for the kind of global society we need.
According to Soros (p. 90):
::The ideas of Enlightenment permeate our view of the world and its noble aspirations continue to shape our expectations, but the prevailing mood is one of disenchantment.
::It is high time to subject reason, as constructed by the Enlightenment, to the same kind of critical examination as the Enlightenment inflicted on the dominant external authorities, both divine or temporal.
The metacognitive mind's expectations differ from the non-metacognitive, which is discussed shortly above. Since Rational Expectations method can be applied to different economic models, the emphasis is on the interest of the actors. Alan A. Walters has described this clearly but at the same time connects it to the quantity theory in his (1971) article Consistent Expectations, Distributed Lags and the Quantity Theory. The applicability to different models leads to the possibility of an alternative Age of Fallibility as well, but it is constrained by the difference in the resources of the actors. The application of quantity theory in monetary policy is a prime example of and inseparable from the workings of the metacognitive interest-based actors. It should be noted that the Phillips curve debate in which John Hicks was involved, was essentially an internal debate of the New Classical Economics, which affected to its outcome. One of the key moments was Milton Friedman's (1976) Nobel memorial prize lecturehttp://www.nobelprize.org/nobel_prizes/economic-sciences/laureates/1976/friedman-lecture.pdf Inflation and Unemployment including f.e. this short sentence (p. 270):
::Empirical estimates of the Phillips curve relation were unsatisfactory.
The speech (p. 267) contains also Friedman's definition of hypothesis validation which corresponds Popper's (and Soros') claim:
::In both [social and natural sciences], there is no 'certain' substantive knowledge, only tentative hypotheses that can never be proved, but can only fail to be rejected, hypotheses in which we may have more or less confidence, depending on such features as the breadth of experience they encompass relative to their own complexity, and relative to other alternative hypotheses, and the number of occasions on which they have escaped possible rejection.
This shows that maintaining this kind of hypotheses have, in order to escape the rejection, the tendency to lead to attacks on the alternative models, theories and hypotheses. The essential basis of what George Soros (1998) calls "market fundamentalism" has its very basis in the Popperian process of validation, both he and Milton Friedman are keen supporters of. This shows also that this kind of hypotheses have more or less transitory existence, and lead the powerholders to construct alternative bases of power.
 SPECIFICO talk  22:03, 25 September 2016 (UTC)
thread_title:  Criticisms 

message: The material deleted is now recovered. The deletion was vandalism. If the knowledge and references do not please you there should also be an argument that is valid. Is this again a trial to escape the possible rejection?
:"When Milton received his Medal of Freedom in 1988, President George H. W. Bush said jokingly in his speech that Rose was known for being the only person to ever have won an argument against her husband." (Wikipedia EN Rose Friedman)Dancing Mickey Mouse (talk) 21:01, 5 October 2016 (UTC)
thread_title:  Vandalism in deleting material from the article 

message: Re  and the sentence
"Hence, it is important to distinguish the rational-expectations assumption from assumptions of individual rationality and to note that the first does not imply the latter. Rational expectations is an assumption of aggregate consistency in dynamic models. In contrast, rational choice theory studies individual decision making and is used extensively in, among others, game theory and contract theory."
Personally, while I realize this is unsourced, I find this statement useful as a clarification. People DO in fact confuse Rational Expectations with Rational choice or Rationality as used in game theory (common knowledge of rationality etc.) or even the Independence Axiom in Expected Utility Theory. But there is indeed a couple problems with the wording.
First, rat ex isn't just about aggregate consistency though that is the most common setting. Muth's work was micro. Second, the phrase "in contrast" isn't quite appropriate as it suggests there's some kind of opposition here. But it's just different concepts and indeed they're often used together (the representative agent in most macro models has BOTH rational expectations AND satisfied the usual axioms of rationality from choice theory). Third, I'm not sure why only game theory and contract theory should be mentioned. I guess it's because those are two areas where the idea of Individual Rationality comes into play. But almost all of micro uses rational choice theory, so I don't know why these should be singled out.Volunteer Marek (talk) 00:13, 19 July 2017 (UTC)
replies: text: I'd agree with 1, strongly agree with 2. However I feel that 3 is a complex issue and that the proposed text is at best misleading. Lucas' initial thrust in the 1970s was to reject models that had agents stupidly being fooled by false "expectations" that enabled the results of the recently discredited neo-Keynesian Philips Curve models.  In the context of this article, my initial objection was that, with no RS cited, we have no touchstone to ensure that we get this right. It's the view of an active editor based on his personal understanding of the issue. My knowledge of the current literature is not good enough to suggest a proper source or to comment on all the ways RE ties to other fundamental concepts and processes casually cited in this text, but it's disturbing that the reference now offered does not seem to fully support the mooted text.  SPECIFICO talk  00:57, 19 July 2017 (UTC)
replies: text: Those neo-Keynesian Philips Curve models have rational expectations in them. Non-rational expectations was more like IS/LM or the Friedman-Phelps Philips Curve (which was pre Lucas). I'll see if I can find a source which explicitly addresses the distinction, though since RatEx have been so widely accepted nobody really writes about it anymore (aside from specialized literatures on learning dynamics and such).Volunteer Marek (talk) 03:20, 19 July 2017 (UTC)
replies: text: That's right. I think I'm sooo old that what I call "neo-" Keynesian was actually the Samuelsonized/postwar IS/LM thing. The new neo's are much better stuff.  SPECIFICO talk  12:01, 19 July 2017 (UTC)
thread_title:  Rat Ex vs Rat Choice