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MENTAL MODEL · M5812

Rational Expectations

Rational Expectations
BusinessHigh supportEconomics
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Version 1.0.0 · Updated 2026-07-28

CORE DEFINITION

Rational Expectations, or the Rational Expectations Hypothesis, is an economic hypothesis that people's expectations regarding an economic phenomenon (such as market prices) are rational. They will make full use of the information they receive to act without making systematic errors; all errors will be random. In general, people's rational expectations will equal the statistical expectation. This is an application derived from rational choice theory and is often used in macroeconomics and game theory. Rational expectations were first proposed by John Muth (1961) in response to the non-optimal characteristics of adaptive expectations. It became widely known through the promotion of Robert Lucas Jr.

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Rational Expectations, or the Rational Expectations Hypothesis, is an economic hypothesis that people's expectations regarding an economic phenomenon (such as market prices) are rational. They will make full use of the information they receive to act without making systematic errors; all errors will be random. In general, people's rational expectations will equal the statistical expectation.

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The rational expectations hypothesis holds that economic agents will make full use of all available information to form unbiased expectations about the future, with zero systematic errors. Proposed by Muth in 1961, it was developed by Lucas into a core concept in macroeconomics.

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Source support: Explicit

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