Rational Expectations

Rational expectations is an economic theory suggesting that people base their decisions on the best available information and past experiences. When making choices—like spending, saving, or investing—they form expectations about the future that are, on average, accurate. This means that individuals won't consistently be surprised by economic changes because they consider factors that could affect outcomes. As a result, economic policies are often less effective than intended, since people adjust their behavior in anticipation of these policies, making it crucial for policymakers to understand how expectations influence economic outcomes.