Talk:Rational expectations

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Is it plagiarism?[edit]

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)

rational expectations is a hypothesis or modeling technique, not a theory[edit]

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)

'Equilibrium' can mean steady state, or can mean mutual consistency of decisions[edit]

No equilibrium means that nothing changes with time in a deterministic system. This is simply time translational invariance. In stochastic dynamics equilibrium, time translational invariance, means that the 1-point density, hence all 1-point averages (the mean, variance, any moment) are constants independent of time t. For higher order densities and correlations it means independence of the present time t, and dependence only on the lag time T. all other 'definitions' of equilibrium are wrong, are simply fudges invented to try to save the face of neo-classical econ and ratex. — Preceding unsigned comment added by 70.138.104.246 (talk) 17:59, 13 May 2012 (UTC)


I am removing (for the second time) a sequence of assertions by user jmccauley, who claims that rational expectations involves a misunderstanding of the concept of equilibrium. The text I removed is shown below:

The basis for the rational expectations model is based on a mathematical inconsistency (in Muth, 1961): a time varying price is derived from the assumption of market equilibrium. Equilibrium means time translationalinvariance, simple averages cannot change with time. Muth's (and Lucas's and Sargent's) violation of the definition of equilibrium is common in the economics and finance literature. For the correct definition of equilibrium (dynamic or statistical) see texts on ordinary diffeential equations, dynamical systems, statistical physics, or stochastic processes. Lucas tried to maintain the essence of neo-classical ideology by attempting to define away nonstationary processes, but this resulted only in self-organized confusion, not understanding of markets. Finance markets (and presumably all other markets) are nonstationary, are far from equilibrium, and all attempts by economists to understand and explain markets have failed.
References:
1. J.L. McCauley, K.E. Bassler, and G.H. Gunaratne, Martingales, Detranding Data, and the Efficient Market Hypothesis, Physica A37, 202, 2008.
2. K.E. Bassler, J. L. McCauley, & G.H. Gunaratne, Nonstationary Increments, Scaling Distributions, and Variable Diffusion Processes in Financial Markets, PNAS 104, 17297, 23 Oct. 2007.

This text asserts that 'equilibrium' refers to a system which is not changing over time. Many years ago, this was indeed the usual meaning of equilibrium in economics. But today, most economists use the word 'equilibrium' in a different sense, essentially the same way it is used in game theory: mutual consistency between agents' decisions. Economists do not claim to use the word in the same way statistical physicists use it.

The whole point of the rational expectations revolution was that some earlier adaptive expectations models implied behavior that was far from optimal. Imposing rational expectations means that agents know how the economy behaves, and make their decisions optimally taking this knowledge into account. In other words, the expectations on which agents base their decisions are consistent with the actual behavior of the economy. That is equilibrium in (roughly speaking) the sense of Nash. It is NOT equilibrium in the sense of statistical physics: there is no assumption that the economy is behaving in a constant way over time. An economic situation that is unchanging over time is nowadays usually called a 'steady state', which is NOT a synonym for 'equilibrium' in the Nash sense of the word. --Rinconsoleao (talk) 14:42, 26 December 2007 (UTC)


   The basis for the rational expectations model is based on a mathematical inconsistency (in Muth, 1961): a time varying price is derived from the assumption of market equilibrium. Equilibrium means time translationalinvariance, simple averages cannot change with time. Muth's (and Lucas's and Sargent's) violation of the definition of equilibrium is common in the economics and finance literature. For the correct definition of equilibrium (dynamic or statistical) see texts on ordinary diffeential equations, dynamical systems, statistical physics, or stochastic processes. Lucas tried to maintain the essence of neo-classical ideology by attempting to define away nonstationary processes, but this resulted only in self-organized confusion, not understanding of markets. Finance markets (and presumably all other markets) are nonstationary, are far from equilibrium, and all attempts by economists to understand and explain markets have failed.
   References:
   1. J.L. McCauley, K.E. Bassler, and G.H. Gunaratne, Martingales, Detranding Data, and the Efficient Market Hypothesis, Physica A37, 202, 2008.
   2. K.E. Bassler, J. L. McCauley, & G.H. Gunaratne, Nonstationary Increments, Scaling Distributions, and Variable Diffusion Processes in Financial Markets, PNAS 104, 17297, 23 Oct. 2007.

First sentence[edit]

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)

Definition now in first sentence. Nurg (talk) 04:24, 30 January 2010 (UTC)
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)

Look out for possible copyright violations in this article[edit]

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)