Adaptive Expectations Principle

Discipline: Economics

Adaptive Expectations Principle, also referred to as the error learning hypothesis, has first been used by the American economist Irving Fisher (1867-1947). However, it became popular during the 1950s in the study of hyper-inflation.

Adaptive expectations principle holds that the future values of economic variables, such as future interest rates or inflation, can be predicted on the basis of previous values and their margin of error. For example, according to the adaptive expectations principle, forecasters examine the past performance of a particular variable when predicting its future. As new current figures for the variable are released, forecasters accordingly revise their predictions.

Adaptive expectations principle underestimates or overestimates constantly changing variables, and focuses merely on past performance - which is why it was deemed unreliable, and thus abandoned in the early 1970s.

Also see: random walk hypothesis, rational expectations theory

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