Expectations, Rationality And Economic Performance

‘To a significant extent, the book is at the cutting edge of much economic thinking in microeconomics. . . it brings together nicely material on uncertainty, expectations and cognitive limitations and relates this to recent work in experimental economics.’
– Geoffrey M. Hodgson, University of Hertfordshire, UK

‘For more than 200 years, economists have debated the microfoundations of their science. There is only one way forward and that is to carefully examine the nature and the rationality of decision processes. Professor Rötheli’s book is unique. He offers an idiosyncratic blend of theoretical analysis and experimental research that enlightens and provokes.’
– Werner F.M. De Bondt, DePaul University, US

This book offers a broad perspective on the economics of expectations. Experimental studies are used to analyse how human bounded rationality affects economic performance. The challenges posed for policy making are also addressed.

Tobias Rötheli begins by presenting the basic tools and theoretical models necessary to our understanding of rational and boundedly rational expectations and their role in economic life. Key topics discussed include expectations in general equilibrium theory, probabilities and expected utility, heterogeneity of economic agents, behavioural alternatives to forecasting and the effects of expectations heuristics, particularly in financial markets. The author then goes on to explore the fascinating insights behavioural economics – the empirical analysis of economic decision making – has to offer. Here experimental studies illustrate the effects of costly information, the role of pattern recognition as basis of expectations, anticipation and coordination failures, and the role of expectations in determining the general price level. The book also addresses the implications of the experimental findings for applied economics.

Aiming to achieve the accessibility of a textbook, this research monograph will appeal to economic researchers interested in economic behaviour and theory, as well as students taking upper-level undergraduate and graduate courses. It will also be of interest to economists working in business and government.