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Uncertainty, Expectations, and Financial InstabilityReviving Allais's Lost Theory of Psychological Time$
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Eric Barthalon

Print publication date: 2014

Print ISBN-13: 9780231166287

Published to Columbia Scholarship Online: November 2015

DOI: 10.7312/columbia/9780231166287.001.0001

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Expectations Before the Rational Expectations Revolution

Expectations Before the Rational Expectations Revolution

(p.3) Chapter One Expectations Before the Rational Expectations Revolution
Uncertainty, Expectations, and Financial Instability

Eric Barthalon

Columbia University Press

This chapter reviews a number of expectations theories that preceded the rational expectations hypothesis (REH). It first considers R. Cantillon's views on the role of expectations in economics, especially with respect to the augmentation and diminution of coins in denomination. It then examines the perceived role of expectations in human psychology, expectations models liable to be confronted with empirical data, and the REH's proposal that economic agents form their expectations rationally, that is, by using “the” one and only correct (neoclassical) model of the economy. It also explores the arguments advanced by economists such as Knut Wicksell, John Maynard Keynes, Frank Knight, and Friedrich Hayek, who stressed the importance of expectations explicitly, as regards cyclical fluctuations, be it in economic activity or in financial markets. The chapter concludes by discussing early attempts to quantify expectations.

Keywords:   expectations, rational expectations hypothesis, R. Cantillon, economics, coins, human psychology, John Maynard Keynes, Friedrich Hayek, cyclical fluctuations, financial markets

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