[FOUNTAIN]Irrational expectations

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[FOUNTAIN]Irrational expectations

Led by Robert E. Lucas Jr., a professor at the University of Chicago in the United States, the concept of rational expectations became a sensation in the field of economics during the 1970s. The theory suggests that any kind of stimulative measure proposed by the government is useless because the decision makers use all the information that is accessible and make rational expectations before acting. To mainstream economists who believed in the government’s strong ability to control the economy, the theory was like a bolt out of the blue.
According to this theory, people that have rational expectations recognize even the slightest hint of a new incident and prepare for it, just as a skilled gambler can know what kind of card an opponent is holding just by watching his or her face when playing poker.
Quickly, a counterattack by mainstream economists began. They argued that the rational expectations theory is too unrealistic to be used in economics.
They said that it is unrealistic to say that all decision makers have the power of collecting information and anticipating events as in the theory of rational expectations. Most people adjust to their situation progressively according to their past experiences. In other words, people have adaptive expectations. In the human world, the law of inertia is widely known.
For nine days recently, Pohang construction union workers illegally occupied the Posco headquarters. These union workers valued their experience from the past so much that they failed to acknowledge the changes that have occurred. Since the government was very friendly toward labor unions in the past and did not make a big deal over their illegal acts, but let them go many times, they expected the same thing to happen this time.
Frankly, hasn’t this government emphasized conversation and compromise more than laws and principles? The government’s confusing message, saying that if you end the strikes, we will mediate negotiations, raised the labor union’s adaptive expectations. When the union members on strike realized that something was going wrong, it was already too late and the price was too high.
In the real world, it is hard to expect anyone to have rational expectations. However, if they cannot accept changes even when there is clear evidence of them, that is also far from adaptive expectations.
Making one mistake is fine, but repeating the same mistake is neither rational expectation nor adaptive expectation. It’s just an irrational expectation.

by Kim Jong-soo

The writer is an editorial writer of the JoongAng Ilbo.
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