2023 FUTURE OBSERVATORY

5198 RATIONAL EXPECTATIONS AND LIMITED INFORMATION

Rational expectations is based upon the actions of the informed actors (who are usually quite limited in number) most directly influencing macro-economic outcomes, where the new hypothesis typically looks to the very much larger number of uninformed, though not necessarily irrational, participants throughout the whole population.

In economic theory, the problem of limited information - which is seen by some economists as a limitation on rational behaviour - has been most directly addressed by the body of work which has developed - especially under the theories of transaction costs -  from Simon’s original suggestion that (economic) decisions might be based upon ‘bounded rationality’. Recently, this concept has also been applied (for instance by Sargent) to rational expectations hypothesis; to allow for multiplicity of equilibria in a dynamic environment (especially where there are regime changes). Even so, some critics have protested that the hypothesis breaks down under the complexities and uncertainties imposed by real world economics and research results indicate that managers, for instance, fail even the weakest possible tests of rationality.

Management practice, on the other hand, has taken a more pragmatic approach, looking to alternative forecasts, typically using the scenario planning processes; which derive from ‘soft’ practical judgements about the future (usually on the basis of experience) rather than the ‘hard’ theoretical equations favoured by many economists. Scenario planning techniques have been most extensively developed by Shell Oil ) with whom we worked - to develop the basic research techniques which now support this present work.

For the record, at the other extreme, the personal expectations of individuals have been examined by a number of behaviouralists working in a range of disciplines. In sociology, for example, this has been in terms of individual’s expectations of their own (personal) future circumstances - as, for instance, recorded by Andrews and Withey - and especially in the context of personal motivation (such as Homans ), or that of societal expectations - the (control) demands made by society on their personal behaviour. In the field of marketing this work has focused on consumer satisfaction. Thus, for instance, Maister summarises the theory, as the ‘first law of service’, that “Satisfaction equals perception minus expectations”. Deming  also makes a similar observation in his latest book, about quality in general. Some sociologists (for instance Taylor) have, though, disputed the validity of such theory in their own fields.

This work on personal expectations can provide indirect insights into how individuals may contribute to aggregated expectations. In particular, the ‘first law of service’ indicates why electorates are currently showing such obvious signs of frustration with their governments, when the actions of these governments result in outcomes which are perceived to fall short of those expected.

1 April 2003

Other pages you might like to consider are:

5128 WESTERN REACTIONS TO POLITICAL CHANGE, 5150 MANAGEMENT FOCUS, 5022 ESTABLISHMENT GROUPTHINK, 5088 HYPOTHESES RELATING TO EXPECTATIONS, 5138 THE SCENARIOS, 5199 SHAPING THE FUTURE, 5086 EXPECTATIONS, 5155 LEGITIMATION, 5122 ORGANIC STRUCTURES, 5224 USE OF THE AGGREGATED EXPECTATIONS HYPOTHESIS

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