ECON1132 Lecture Notes - Lecture 25: Rational Expectations, Retained Earnings, Stock Market
4 May 2015
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Rational expectations: holds that when people make forecasts, or predictions, they use all available information and they make unbiased forecasts. When we say forecasts are unbiased we don"t mean they are necessarily correct, but rather that they are not consistently too high or too low. Minsky believed that there are times that we get carried away and form expectations that are quite irrational that we occasionally get caught up in waves of exuberance in which almost all of us overestimate gains and underestimate risks. He believed that market economies are inherently unstable that they are prone to waves of speculative boom and then collapse. It is not clear we can recognize bubbles except by hindsight, but we can observe patterns of price increases. Stock market wealth rose much faster than income in the late nineties and then collapsed. The value of common stocks, as measured by a broad index, tripled over the five-year period 1995-1999.
