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.
Gordon Menzies & Daniel John Zizzo, 2005.
"Inferential Expectations,"
Research Paper Series
159, Quantitative Finance Research Centre, University of Technology, Sydney.
[Downloadable!]
Gordon D. Menzies & Daniel John Zizzo, 2005.
"Inferential Expectations,"
CAMA Working Papers
2005-12, Australian National University, Centre for Applied Macroeconomic Analysis.
[Downloadable!]
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
References listed on IDEAS 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.:
Gordon Menzies & Daniel John Zizzo, 2005.
"Inferential Expectations,"
Research Paper Series
159, Quantitative Finance Research Centre, University of Technology, Sydney.
[Downloadable!]
Gordon D. Menzies & Daniel John Zizzo, 2005.
"Inferential Expectations,"
CAMA Working Papers
2005-12, Australian National University, Centre for Applied Macroeconomic Analysis.
[Downloadable!]
Bossaerts, Peter & Bodarenko, Oleg, 1997.
"Expectations and Learning in Iowa,"
Working Papers
989, California Institute of Technology, Division of the Humanities and Social Sciences.
[Downloadable!]
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.)
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:
Gordon Menzies & Daniel John Zizzo, 2005.
"Inferential Expectations,"
Research Paper Series
159, Quantitative Finance Research Centre, University of Technology, Sydney.
[Downloadable!]