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Beyond Rational Expectations: A Constructive Interpretation of Keynes's Analysis of Behaviour under Uncertainty

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  • Gerrard, Bill

Abstract

This paper suggests that behavior under uncertainty depends not only on rational expectations but also the agent's evaluation of the adequacy of the available evidence on which the expectations are based. It is argued that behavioral functions need to be augmented by a credence variable. This proposition is derived from Keynes's argument in the 'General Theory' that investment depends on both the most probable forecast and the state of confidence, reflecting the distinction between probability and weight in his 'A Treatise on Probability.' The research implications of the proposed model are indicated. Copyright 1994 by Royal Economic Society.

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  • Gerrard, Bill, 1994. "Beyond Rational Expectations: A Constructive Interpretation of Keynes's Analysis of Behaviour under Uncertainty," Economic Journal, Royal Economic Society, vol. 104(423), pages 327-337, March.
    • Handle: RePEc:ecj:econjl:v:104:y:1994:i:423:p:327-37
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    Cited by:

    1. Richard Arena & Eric Nasica, 2021. "Keynes's Methodology and the Analysis of Economic Agent Behavior in a Complex World," GREDEG Working Papers 2021-10, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), Université Côte d'Azur, France.
    2. Fontana, Giuseppe & Gerrard, Bill, 2004. "A Post Keynesian theory of decision making under uncertainty," Journal of Economic Psychology, Elsevier, vol. 25(5), pages 619-637, October.
    3. Ana Cristina Pereira Das Neves, 2018. "The Mass Media Transmission Of Central Bank Communication Under Uncertainty," Anais do XLIV Encontro Nacional de Economia [Proceedings of the 44th Brazilian Economics Meeting] 54, ANPEC - Associação Nacional dos Centros de Pós-Graduação em Economia [Brazilian Association of Graduate Programs in Economics].
    4. Michaël Lainé, 2016. "Uncertainty, Probability and Animal Spirit [Incertitude, probabilités et esprits animaux]," Post-Print hal-02942874, HAL.
    5. Katzenstein, Peter J., 2022. "Of Gardens, Forests, and Parks," EconStor Open Access Book Chapters, in: Uncertainty and Its Discontents: Worldviews in World Politics, pages 279-352, ZBW - Leibniz Information Centre for Economics.
    6. Giuseppe Fontana & Bill Gerrard, 2006. "The future of Post Keynesian economics," BNL Quarterly Review, Banca Nazionale del Lavoro, vol. 59(236), pages 49-80.
    7. Michelle Baddeley, 2017. "Keynes’ psychology and behavioural macroeconomics: Theory and policy," The Economic and Labour Relations Review, , vol. 28(2), pages 177-196, June.
    8. Michaël Lainé, 2016. "Uncertainty, Probability and Animal Spirit: The Ontology, Epistemology and Microeconomics of Investment of Keynes’s Theory [Incertitude, probabilités et esprits animaux]," Post-Print hal-04265018, HAL.
    9. S Chetty & Lorraine Greyling, 2001. "Uncertainty And Expectations In Fixed Investment Behaviour1," South African Journal of Economics, Economic Society of South Africa, vol. 69(2), pages 218-242, June.
    10. Marcello Basili, 2013. "Ellsberg Rules and Keynes’s State of Long-Term Expectation: More Than an Accordance," Department of Economics University of Siena 685, Department of Economics, University of Siena.
    11. Marcello Basili & Carlo Zappia, 2018. "Ellsberg’s Decision Rules and Keynes’s Long-Term Expectations," Department of Economics University of Siena 777, Department of Economics, University of Siena.
    12. Ekaterina Svetlova & Matthias Fiedler, 2011. "Understanding Crisis: On the Meaning of Uncertainty and Probability," Chapters, in: Óscar Dejuán & Eladio Febrero & Maria Cristina Marcuzzo (ed.), The First Great Recession of the 21st Century, chapter 3, Edward Elgar Publishing.
    13. Gabe J. Bondt & Stefano Schiaffi, 2015. "Confidence Matters for Current Economic Growth: Empirical Evidence for the Euro Area and the United States," Social Science Quarterly, Southwestern Social Science Association, vol. 96(4), pages 1027-1040, December.

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