theory of rational expectations

economics

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July 13, 2026

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The theory of rational expectations in economics posits that individuals and investors use all available information about the economy and economic policies to make financial decisions, always acting in their best interest. This concept, developed in the early 1970s, suggests that people anticipate the consequences of policy changes and adjust their actions accordingly, which can sometimes weaken or undermine the intended outcomes of those policies.12

Essentially, it's believed that economic actors are forward-looking and will adapt their behavior to take advantage of new information or regulations, making economic models that don't account for this adaptive behavior less effective.2

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business cycle
Rational expectations theories
In the early 1970s the American economist Robert Lucas developed what came to be known as the “Lucas critique” of both monetarist and Keynesian theories of the business cycle. Building on rational expectations concepts introduced by the American economist John Muth, Lucas…
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In the early 1970s the American economist Robert Lucas developed what came to be known as the “Lucas critique” of both monetarist and Keynesian theories of the business cycle. Building on rational expectations concepts introduced by the American economist John Muth, Lucas…
Read More

Robert E. Lucas, Jr.
…for developing and applying the theory of rational expectations, an econometric hypothesis. Lucas found that individuals will offset the intended results of national fiscal and monetary policy by making private economic decisions based on past experiences and anticipated results. His work, which gained prominence in the mid-1970s, questioned the conclusions…
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…for developing and applying the theory of rational expectations, an econometric hypothesis. Lucas found that individuals will offset the intended results of national fiscal and monetary policy by making private economic decisions based on past experiences and anticipated results. His work, which gained prominence in the mid-1970s, questioned the conclusions…
Read More

economics
Macroeconomics
This concept of “rational expectations” means that macroeconomic policy measures are ineffective not only in the long run but in the very short run. It was Lucas’s concept of “rational expectations” that marked the nadir of Keynesianism, and macroeconomics after the 1970s was never again the consensual corpus…
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This concept of “rational expectations” means that macroeconomic policy measures are ineffective not only in the long run but in the very short run. It was Lucas’s concept of “rational expectations” that marked the nadir of Keynesianism, and macroeconomics after the 1970s was never again the consensual corpus…
Read More