Rational Expectations, Risk, Uncertainty, and Market Responses

The incorporation of rational expectations into economic models is widely recognized as one of the more significant advances in economic theory during the past decade. The advances are methodological—improvements in the methods economists use to derive the implications of dynamic models and the treatment of unanticipated changes. Many of the substantive benefits of the methods remain in the future, however. The reason is that the models used to illustrate rational expectations typically endow people with more information than they usually have.