Adaptive vs Rational Theory

Whenever an individual needs to make some decision regarding some future event, he has to predict the effects of that decision and make some expectations about the future. So, happens in the macroeconomics, where a number of variables are required to be studied such as employment, inflation etc, and how they affect the economy as a whole, whenever government looks for ways to meet policies. So expectations play a greater role while making a decision. There are two types of expectational theories that are generally referred.

In Adaptive expectational theory, decisions are made keeping in mind the past events. Past information is more likely to act as a best predictor for an event to occur. For example, if inflation has always remain lower than normal since the past 20-30 years, it is more likely for an individual to assume that this time also, inflation will be far from normal.

Rational expectational theory makes use of all the information available in the economy. It does include all the past information, all the current information, all the variables affecting the particular variable and the effects that particular variable are likely to have on other variables. Here, people make expectations using all the relevant information.

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