Rational Expectations – The Concept of Reach

Rational Expectations is a theory developed by John Muth in 1961 as an alternative to the then widely used theory of adaptive expectations. While adaptive expectations states that a person’s expectations is formed based on past information, rational expectations argues that people do not rely solely on past information to form their expectations.

Expectations should then be the optimal forecast or the best guess of the future using all available information. But why do people form rational expectations? The answer to that is that it is costly for people not to do so. If you estimate that you could reach school in 30 minutes, you would obviously hope your expectation is accurate. Reaching school early would mean waiting in boredom for school to start. On the other hand, reaching school late may result in you being penalized.

In the same way, we form rational expectations in our everyday life whether during work or play. However, a person’s rational expectations might not seem rational from another person’s point of view. Yet this is common because each and everyone of us have our own benchmark relative to our various capabilities, talents, and skills. Nonetheless, rational expectations normally defines the fundamental reasoning for many human actions (and reactions).

Victor Vroom shows us the role of expectations in motivating or demotivating an individual. A person would be highly motivated to achieve his/her goals when he/she is confident to be able to achieve it and is certain that the attainment of the goals would result in an outcome that is desirable. In other words, our expectations plays an important role in our working performance.

The limits to which our goals remain rational depends on an individual’s own perspective and perception. Napoleon’s goals would obviously have been at a much higher level than a peasant’s goals. Nevertheless, goal setting for an individual is crucial for self development. Even Robin Hood would have failed to hit his target if the target itself does not exist. Yet, it is important that we set our goals within our reach, preferably not too near to be attained too easily and not too far that our inner conscience deem impossible.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: