Adaptive expectations is an economic theory that posits that people form their expectations based on past experience and learning. The theory is used to help explain why people might make different decisions even when given the same information.
The adaptive expectations theory has been used to help explain a wide range of economic phenomena, including inflation, unemployment, and interest rates. The theory has been particularly influential in the field of macroeconomics.
The adaptive expectations theory was first proposed by John Muth in 1961. Muth’s work was built upon by other economists, including Robert Lucas and Thomas Sargent.
The basic idea behind adaptive expectations is that people learn from experience and adjust their expectations accordingly. For example, if prices have been rising steadily for the past few years, people will expect prices to continue to rise in the future.
The adaptive expectations theory has a number of implications for economic policy. For example, if policymakers want to reduce inflation, they need to do more than simply announce their intention to do so. They also need to take steps to change people’s expectations about inflation.
The adaptive expectations theory is not without its critics. Some economists have argued that it is too simplistic and does not take into account all of the factors that influence people’s expectations. Nevertheless, the theory remains an important part of economics and continues to be used by economists today.