[308] Rational Expectations

The rational expectations theory is a concept and modeling technique that is used widely in macroeconomics. The theory posits that individuals base their decisions on three primary factors:

[1] Their human rationality,
[2] the information available to them, and
[3] their past experiences.

It suggests that people’s current expectations of the economy (or of an asset price) are, themselves, able to influence what the future state of the economy (or asset price) will become. This precept contrasts with the idea that government policy influences financial and economic decisions.