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Inferential Expectations

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Author Info
Gordon Menzies
Daniel John Zizzo

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Abstract

We propose that the formation of beliefs be treated as statistical hypothesis tests, and we label such beliefs inferential expectations. If a belief is overturned through the build-up of evidence, agents are assumed to switch to the rational expectation. Thus, rational expectations is a special case of inferential expectations if agents are unconcerned about mistakenly changing their beliefs (the test size á equals unity), or if there is so much information available about a parameter that it is known with certainty (the sampling distribution of the estimator collapses to a point). We present the results of an individual choice experiment showing preliminary support for inferential expectations in comparison to either rational expectations, or adaptive expectations with one degree of freedom. Depending on how the critical region is determined, either 27-35% or 57-65% of the agents display test size á < 0.9. The impact of inferential expectations is illustrated by showing how it alters a simple model of the exchange rate and a Lucas supply function.

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Paper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 187.

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Date of creation: 2004
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Handle: RePEc:oxf:wpaper:187

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Related research
Keywords: Expectations; Macroeconomics; Rationality.;

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Find related papers by JEL classification:
C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
F31 - International Economics - - International Finance - - - Foreign Exchange

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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gordon D. Menzies & Daniel John Zizzo, 2005. "Inferential Expectations," CAMA Working Papers 2005-12, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
    Other versions:
  2. Gordon Menzies & Daniel Zizzo, 2008. "News And Expectations In Financial Markets: An Experimental Study," CAMA Working Papers 2008-34, Australian National University, Centre for Applied Macroeconomic Analysis. [Downloadable!]
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This page was last updated on 2009-11-18.

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