Nature of expectations in keynes' theory, Microeconomics

Nature of Expectations in Keynes' Theory:

The above discussion on the nature of expectations in Keynes' theory may be summarised as follows:

1) In forming long-term expectations, there exists no basis for inferring an objective probability distribution over future outcomes on the basis of past experience.

2) In forming long-term expectations, decision makers fall back on prevailing conventions. This could, for example, include the convention of using an estimated probability distribution from historical data for forming expectations about the future. 

3) Decision makers are however aware that these methods for forming expectations I have evolved as conventions (maybe, because they have been more successful on an average in the past compared to other methods). There is no objective rationale for thinking that they would always form a more accurate basis for judgments about the future.

4) The decision on whether or not to go by these conventional judgments depends on the confidence that decision makers have in these conventions as an adequate I. basis for forming expectations about the future. The state of confidence is a volatile factor. Therefore expectations also become volatile as economic actors go by conventional judgments or discount them.

Posted Date: 11/20/2012 5:51:22 AM | Location : United States







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