But we'll do that using adaptive expectations okay right.

This assumption concerning the formation of expectations is called the adaptive expectations hypothesis.

Under adaptive expectations, expectations of the future value of an economic variable are based on past values.

One problem with the adaptive expectations hypothesis is that it presumes that people do not learn from their past mistakes.

Some economists now use the adaptive expectations model, but then complement it with ideas based on the rational expectations theory.

Built-in inflation is induced by adaptive expectations, and is often linked to the "price/wage spiral".

However, until the 1970s, most models relied on adaptive expectations, which assumed that expectations were based on an average of past trends.

Prior to Lucas, economists had generally used adaptive expectations where agents were assumed to look at the recent past to make expectations about the future.

The adaptive expectations mechanism was widely used as a formal representation of this process of expectations revision.

Prior to the work of Sargent and Wallace, macroeconomic models were largely based on the adaptive expectations assumption.

They will come to realize that the factor which had given rise to their positive, constant prediction errors under adaptive expectations was the excess demand component,.

Agent-based models of financial markets often assume investors act on the basis of adaptive learning or adaptive expectations.

The theory of adaptive expectations can be applied to all previous periods so that current inflationary expectations equal:

In economics, adaptive expectations means that people form their expectations about what will happen in the future based on what has happened in the past.

Under adaptive expectations, if the economy suffers from constantly rising inflation rates (perhaps due to government policies), people would be assumed to always underestimate inflation.

It was this criticism of the adaptive expectations hypothesis that led to the development of the rational expectations hypothesis.

Under adaptive expectations, agents do not revise their expectations even if the government announces a policy that involves increasing money supply beyond its expected growth level.

This can raise the normal or built-in inflation rate, reflecting adaptive expectations and the price/wage spiral, so that a supply shock can have persistent effects.

Rational expectations theories were developed in response to perceived flaws in theories based on adaptive expectations.

In "adaptive learning" or "adaptive expectations" models, investors are assumed to be imperfectly rational, basing their reasoning only on recent experience.

Nicholas Kaldor proposed a model of fluctuations in agricultural markets called the cobweb model, based on production lags and adaptive expectations.

Of course, following the generally accepted theory of adaptive expectations, such inflationary expectations arise because of persistent past experience with inflation.

You admit that the models of rational expectations and that of adaptive expectations are not 'flawless', good, as they are far from it.

Confusingly, the use of "path dependent" to describe labour market hysteresis has the 'opposite' sense to the term's meaning in the adaptive expectations model of inflation.

This has largely replaced adaptive expectations in macroeconomic theory since its assumption of optimality of expectations is consistent with economic theory.