Topic: Expectations

Quotes

Oliver Hart, Firms, Contracts, and Financial Structure (1995)

• Bankruptcy is a situation in which existing claims are inconsistent.#

Nicholas Barberis, Robin Greenwood, Lawrence Jin, & Andrei Shleifer, “Extrapolation and Bubbles” (2018)

• Models of rational bubbles assume homogeneous investors and therefore cannot explain any volume, let alone highly specific patterns of volume documented in the literature.#

Michael Bordo & Anna Schwartz, “Monetary Policy Regimes and Economic Performance” (1999)

• The cooperation that did occur [during the classical gold standard] was episodic, ad hoc, and not an integral part of the operation of the gold standard. Of greater importance is that, during periods of financial crisis, private capital flows aided the Bank. Such stabilizing capital movements likely reflected market participants’ belief in the credibility of England’s commitment to convertibility.#

Gerald O'Driscoll & Mario Rizzo, The Economics of Time and Ignorance (1985)

• While it may not be appealing to assume that individuals make errors that they themselves could have predicted (ex ante error), it is not obviously wrong to suppose that others could have predicted the errors of the first group. Any act of entrepreneurship or speculation involves trying to outguess the market, to do better than the crowd or the median asset-holder. Entrepreneurs and speculators are constantly taking actions that assume that most people make “predictable” errors (predictable by entrepreneurs).#
• Data on forecasts that were correct, ex post, tell us little about the optimality or rationality of these forecasts.#
• The existence of purely speculative markets requires the divergence of expectations.#

Ludwig Lachmann, Capital, Expectations, and the Market Process (1940)

• Whenever we observe large transactions taking place at little price change this indicates a case of conflicting expectations.#
• In a world of change no one type of expectation [elastic or inelastic] can be relied upon to provide stability. Neither a gullible capital market nor an obstinate one, nor, we may add, any intermediate variety is in itself a bulwark against crises of every kind. They each provide us with protection against some afflictions while leaving us unprotected against others.#
• It is not the subjective nature of expectations, any more than that of individual preferences, which makes them such unsuitable elements of dynamic theories, it is the fact that time cannot pass without modifying knowledge which appears to destroy the possibility of treating expectations as a data of a dynamic equilibrium system.#
• The stock exchange may be viewed as the central forward market for future capital yields of indefinite horizon. Buyers and sellers on the exchange express their expectations about the chances of various plans, and thereby also evaluate the underlying capital combinations.#
• The [economic] problem is usually stated in terms of (objective) “resources” and (subjective) “wants.” In a stationary world these terms may have an unambiguous meaning, but in a dynamic world what is a resource depends on expectation, and so does what constitutes a want worth satisfying.#

Ludwig Lachmann, Capital and Its Structure (1956)

• Idle capacity is economically a form of scrap kept in physical existence by optimistic expectations of future value which may or may not be fulfilled. To understand why this capacity is kept in existence we need to understand, not merely why the original plans failed, but why no alternative use for it has been found.#
• The business man who forms an expectation is doing precisely what a scientist does when he formulates a working hypothesis. Both business expectation and scientific hypothesis serve the same purpose; both reflect an attempt at cognition and orientation in an imperfectly known world, both embody imperfect knowledge to be tested and improved by later experience.#Quoted in Steven Horwitz, “From The Sensory Order to the Liberal Order: Hayek’s Non-rationalist Liberalism” (2000)
• The two greatest achievements of [economic] science within the last hundred years, subjective value and the introduction of expectations, became possible only when it was realized that the causes of certain phenomena do not lie in the ‘facts of the situation’ but in the appraisal of such a situation by active minds.#
• Expectations, [as opposed to preferences], always embody problematical experience, i.e. an experience which requires interpretation.#

Joseph Schumpeter, Business Cycles (1939)

• Expectations cannot be used as part of our ultimate data in the same way as taste for tobacco can. Unless we know why people expect what they expect, any argument is completely valueless which appeals to them as causae efficientes.#Quoted in Ludwig Lachmann, Capital, Expectations, and the Market Process (1940)

Roger Garrison, Time and Money: The Macroeconomics of Capital Structure (2001)

• Expectations can be regarded as endogenous in a special sort of way when the market process has been set against itself by policies that affect the intertemporal allocation of resources.#
• The adjective “rational” [in rational expectations] refers neither to a characteristic of the market participant whose expectations are said to be rational nor to a quality of the expectations per se. It refers only to the relationship between the assumption about expectations and the theory in which it is incorporated. #
• Expectations are not rational in the strong sense of that term, but they do become more rational with increased levels of policy activism and with cumulative experience with the consequences of it.#
• If we think in terms of market solutions to economic problems, we must accord expectations a crucial role. But that role is overplayed if it is assumed that expectations come ready-made on the basis of information that is actually revealed only as the market process unfolds; it is underplayed if it is assumed that expectations are and forever remain at odds with economic realities despite the unfolding of the market process. Either assumption would detract from the equally crucial role played by the market process itself, which alone can continuously inform expectations. #

F.A. Hayek, Individualism and Economic Order (1949)

• The real content of the assertion that a tendency toward equilibrium exists… can hardly mean anything but that, under certain conditions,… the expectations of the people and particularly of the entrepreneurs will become more and more correct.#Quoted in Israel Kirzner, How Markets Work (1997)

Steven Horwitz, “From The Sensory Order to the Liberal Order: Hayek’s Non-rationalist Liberalism” (2000)

• Changes in the prices of capital goods signal changes in the knowledge that underlies entrepreneurial plans and expectations.#

Harold Demsetz, “Toward a Theory of Property Rights” (1967)

• Property rights are an instrument of society and derive their significance from the fact that they help a man form those expectations which he can reasonably hold in his dealings with others.#

F.A. Hayek, The Fatal Conceit (1988)

• Relations between individuals can exist only as products of their wills, but the mere wish of a claimant can hardly create a duty for others. Only expectations produced by long practice can create duties for the members of the community in which they prevail, which is one reason why prudence must be exercised in the creation of expectations, lest one incur a duty that one cannot fulfill. #

Peter Lewin, Capital in Disequilibrium (1999)

• Production plans, considered as a whole, are typically in disequilibrium—are based, at least in part, on inconsistent expectations, not regarding the “rules of the game,” but regarding the viability of the product or the productive technique. There is no way to derive an aggregate measure of capital in this situation. The net present values as (assumed to be) computed by each individual planner are based on inconsistent futures.#

Roger Koppl, Big Players and the Economic Theory of Expectations (2002)

• Big Players divert each trader’s attention from underlying conditions of supply and demand towards the personality of the Big Player. It is hard to know what a Big Player will do. Market participants must base their expectations on a picture of the market in which a highly non-anonymous ideal type is prominent. But this picture is always more or less dubious. Thus, the overall reliability and prescience of economic expectations is reduced.#
• Cognitive expectations are our ideas about the future. They are “subjective.” The “long-term expectations” of the General Theory are cognitive expectations. In this meaning, the economic concept of “expectation” is about the same as the common-sense meaning of “expectation.” Cognitive expectations emerge from processes of learning. Acognitive expectations [on the other hand] are implicit in our actions. They are “objective.” Rational expectations are acognitive, at least in some interpretations. In this meaning, the economic concept of “expectation” differs from the common-sense meaning of “expectation.” Acognitive expectations emerge from natural selection.#

Jeffrey Frankel & Andrew Rose, “Empirical Research on Nominal Exchange Rates” (1995)

• Positive U.S. money surprises [in the early 1980s] were associated with appreciations of the dollar at the same time that they were associated with increases in interest rates, leading the authors to conclude that: (1) during this period the Federal Reserve was expected to correct any deviations of the money supply from its target path; and (2) expectations of monetary contraction tend to raise real interest rates and cause the currency to appreciate . . . [But] the money announcements lost much of their impact later in the 1980s, after the Fed began to put less emphasis on its M1 targets.#
• Expectations can be described as stabilizing when the effect of an appreciation today – relative to some long-run path or mean – is to induce market participants to forecast depreciation in the future. . . . Expectations can be described as destabilizing, on the other hand, when the effect of an appreciation is to induce market participants to forecast more appreciation in the future.#

Milton Friedman & Anna Schwartz, A Monetary History of the United States, 1867-1960 (1963)

• Silver agitation had its major economic impact through this effect on expectations rather than through the direct contribution that silver purchases made to the expansion of the money stock.#
• A rise in prices can have diametrically opposite effects on desired money balances depending on its effect on expectations. If it is interpreted as the harbinger of further rises, it raises the anticipated cost of holding money and leads people to desire lower balances relative to income than they otherwise would. In our view, that was the effect of price rises in 1950 and again in 1955 to 1957. On the other hand, if a rise in prices is interpreted as a temporary rise due to be reversed, as a harbinger of a likely subsequent decline, it lowers the anticipated cost of holding money and leads people to desire higher balances relative to income than they otherwise would. In our view, that was the effect of the price rises in 1946 to 1948. #
• There is a long lag between the occurrence of substantial price rises and the development of widespread expectations of further price rises.#

Axel Leijonhufvud, “Costs and Consequences of Inflation” (1975)

• The Law seeks to provide a stable framework of social interaction within which people can form expectations about the outcomes of their actions sufficiently firm, if not precise, to allow them to plan their conduct accordingly.#

Nicholas Kaldor, “The Irrelevance of Equilibrium Economics” (1972)

• What differentiates a merchant from other economic agents (such as a “producer”) is that his natural response to “outside” influences is to vary the size of his stock—to absorb stocks in the face of excess supplies and to release stocks in the face of excess demand. The merchants’ function in other words is to create and preserve an “orderly” market which they can only do through their willingness to act as a shock-absorber: through their readiness to enlarge their commitments when prices are sagging and to curtail commitments when they are rising. The very notion of “merchanting” or “commercial” activities involves therefore the assumption that there is a certain elasticity of demand for holding stocks by the traders: an elasticity which is ultimately governed by the traders’ expectations concerning prices and selling opportunities in the future.#

Jason Potts, The New Evolutionary Microeconomics (2000)

• The way in which expectations are treated is not an addendum to an otherwise well-defined analytical framework, but effectively determines the ultimate nature of that framework.#
• [Rational Expectations] is not a theory of how expectations are formed, but rather is the theoretical conjecturing of an ex ante data set consistent with the assumption of an exhaustive list of possible outcomes, each, ultimately, correctly weighted.#

Israel Kirzner, “Entrepreneurial Discovery and the Competitive Market Process” (1997)

• The economic problem facing any society . . . is primarily that of how, in a world of incessant changes in tastes, resource availabilities, and technological possibilities, to generate mutually sustaining expectations on the part of agents in the economy, such that (a) the series of actions taken are in fact able to be completed as planned, and (b) that that series of actions tends to reveal and exhaust all the available opportunities for social economic gain.#