Imperfect Knowledge

The World Economic Roundtable seeks to help the business, investment, and policy communities understand ongoing changes in the world economy and to promote a discussion of ideas that can advance the goal of a widely shared global prosperity.

Behavioral finance views stock-market investors’ expectations as largely unrelated to fundamental factors. Relying on survey data, this paper presents econometric evidence that fundamentals are a major driver of investors’ expectations.

US Military needs during the Cold War induced a mathematical modeling of rational allocation and control processes while simultaneously binding that rationality with computational reality. Modeling strategies to map the optimal to the operational ensued and eventually became a driving force in the development of macroeconomic dynamics.

We call attention to the class of models that serve as the foundation for the rational expectations hypothesis (REH). Models in this class rule out completely any structural change that cannot be fully anticipated with a probabilistic or other quantitative rule. REH models are abstractions of rational decision-making, but only in a hypothetical world in which participants can fully anticipate when and how they might revise their understanding of the process driving outcomes.

Model Ambiguity, Consistent Representations of Market Forecasts, and Sentiment

This paper analyzes what assumptions on formation of expectations are consistent with Minsky’s Financial Instability Hypothesis (FIH) and its corollaries.