Irrational Expectations

Completion Date: 18 Jan 2019
Medium: Paint & ink on cardboard
Dimensions: 30 x 40 inches

The name of every single company in the S&P500 Index is included in this piece.

Irrational Exuberance + Rational Expectations = Irrational Expectations

The S&P 500 Index (Standard & Poor’s 500 Index) is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies by market value, The index is widely regarded as the best single gauge of large-cap U.S. equities.

Irrational exuberance refers to investor enthusiasm that drives asset prices up to levels that aren’t supported by fundamentals. The term is believed to have been coined by Alan Greenspan in a 1996 speech, “The Challenge of Central Banking in a Democratic Society.” The speech was given near the beginning of the 1990s dotcom bubble, a textbook example of irrational exuberance. “But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they have in Japan over the past decade? And how do we factor that assessment into monetary policy?” asked Greenspan.

In economics, Rational Expectations are model-consistent expectations, in that agents inside the model are assumed to “know the model” and on average take the model’s predictions as valid. Rational expectations ensure internal consistency in models involving uncertainty. To obtain consistency within a model, the predictions of future values of economically relevant variables from the model are assumed to be the same as that of the decision-makers in the model, given their information set, the nature of the random processes involved, and model structure. The rational expectations assumption is used especially in many contemporary macroeconomic models.