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Beyond Mechanical Markets by Michael D. Goldberg, Roman Frydman

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3

The Orwellian World of“Rational Expectations”

THE SEARCH FOR fully predetermined accounts of individual decisionmaking and market outcomes actually predates economists' embrace of the Rational Expectations Hypothesis as the way to characterize rational forecasting behavior. Prior to this hypothesis, economists portrayed market participants' forecasting strategies with mechanical rules that made no explicit reference to how they reason about the way the economy works or how the causal process underpinning outcomes might change over time. John Muth proposed the Rational Expectations Hypothesis as a way to incorporate such considerations into models of forecasting. Criticizing pre-REH forecasting rules, he argued that

the character of dynamic ...

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