--- [EMAIL PROTECTED] wrote: > But what is not so commonly realized is that the term "rational" in > "rational expectations" has a different meaning than general > "rationality" in economics. > Fred Foldvary >>
> Snowden et al did not, to my awareness, explain the difference; would you > do so Fred? > David My analysis may be idiosyncratic, but here goes: Economic rationality has two criteria: 1. Transitive preferences. 2. Optimization (economizing) action. Rational expectations is a special application of optimizing, where 1) The actors obtain and use relevant information at the amount where the marginal cost equals the marginal benefit. 2) The actors' forecasts take into account their unbiased expectations about the reactions of the other players. 3) The actors will maximize net benefits by maximizing gains relative to costs, or else minimizing costs relative to gains; this implies not having more than necessary variance, etc. 4) An implication is that the actors will not make repeated errors. If the information and expectations are extremely foggy, then rational expectations become adaptive. If the information is perfect, then rational expectations turn into foresight with certainty. It is possible for a person to behave economically rationally, yet not have rational expectations, because his preferences are such that he prefers not to reflect on the behavior of other actors, or for some reason has ends with higher priorities than obtaining and using available information. Thus it is possible for one to be economically rational yet make repeated errors, because other ends are more important than avoiding such errors. Fred Foldvary ===== [EMAIL PROTECTED]
