Differences between adaptive expectations and Rational expectations
1. Adaptive expectations: In adaptive expectations theory, individuals form their expectations of future events based on their past experiences. They update their expectations over time as new information becomes available. On the other hand, in rational expectations theory, individuals base their expectations on all available information, including the information about how the economy operates.
2. Adaptive expectations: In adaptive expectations theory, individuals may not always correctly predict future events, leading to fluctuations in the economy. Rational expectations, on the other hand, assume that individuals are fully informed and make accurate predictions about future events, leading to more stable economic outcomes.
3. Adaptive expectations: In adaptive expectations theory, the government's policy actions may have a more significant impact on the economy as individuals may react to these changes in expectations. In contrast, in rational expectations theory, individuals anticipate the effects of government policy actions and adjust their behavior accordingly, reducing the impact of government intervention on the economy.
4. Adaptive expectations: In adaptive expectations theory, individuals may exhibit herding behavior, where they follow the expectations of others without fully considering all available information. Rational expectations, on the other hand, assume that individuals make decisions based on all available information and do not rely on the expectations of others.
5. Adaptive expectations: In adaptive expectations theory, there may be a lag between the arrival of new information and individuals updating their expectations. This can lead to short-term fluctuations in the economy. Rational expectations, on the other hand, assume that individuals update their expectations instantaneously when new information becomes available, leading to more efficient decision-making and stable economic outcomes.