Must-Read: Colin Camerer: On “Rational Expectations” and John Muth: “Rational expectations pioneer John Muth in 1984…

…”really incredible” so little attention paid to cognitive limits #behavioraleconomics <>:

He had got hold of the data from five business firms, including expectations data, analyzed it, and found that the rational expectations model did not pass the empirical test. He went on to say:

It is a little surprising that serious alternatives to rational expectations have never been proposed. My original paper was largely a reaction against very naive expectations hypotheses juxtaposed with highly rational decision-making behavior and seems to have been rather widely misinterpreted.

Two directions seem to be worth exploring:

  1. Explaining why smoothing rules work, and their limitations, and

  2. Incorporation well-known cognitive biases into expectations theory (Kahneman and Tversky). It was really incredible that so little has been done along these lines. <>