Expectations refer to what individuals or firms anticipate will happen in the future regarding prices, incomes, or other economic factors. These expectations influence their current decisions and behavior.
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Rational Expectations: Rational expectations theory assumes that individuals make predictions about the future using all available information and past experiences.
Adaptive Expectations: Adaptive expectations theory suggests that individuals base their predictions of future events on past trends or experiences.
Anchoring Bias: Anchoring bias is a cognitive bias where individuals rely too heavily on initial information when making judgments or decisions. It can affect how people form their expectations in economic situations.