Failure of the Rational Expectation: Argumentation, Logic and Suggestions on Supply-Side Management

Rational expectation is known as the sixth revolution in economics. Based on a brief review of rational expectation, this paper puts forward the proposition of failure of rational expectation. The so-called failure of rational expectation means that when the market entity predicts future events, it is impossible to form a completely accurate expectation and then adjust its actions accordingly due to incomplete information and other reasons. On the contrary, due to various irrational factors, the actions of the market entities based on individual ration sometimes may be mad and loss of control, producing devastating effects on the economic system. This paper expounds the concept and formation mechanism of the failure of rational expectation, and conducts a preliminary empirical analysis on this in combination with China’s economic practice. On this basis, it proposes that rational supply management, which the government can play a role in, should be combined to correct the failure of rational expectation and realize the dynamic balance and stability of the economic system.