Editing Rational expectations (section)

==Theory==
The key idea of rational expectations is that individuals make decisions based on all available information, including their own expectations about future events. This implies that individuals are rational and use all available information to make decisions. Another important idea is that individuals adjust their expectations in response to new information. In this way, individuals are assumed to be forward-looking and able to adapt to changing circumstances. They will learn from past trends and experiences to make their best guess of the future.<ref name=":0" />

It is assumed that an individual's predicted outcome do not differ systematically from the market [[economic equilibrium|equilibrium]] given that they do not make systematic errors when predicting the future. 

In an economic model, this is typically modelled by assuming that the expected value of a variable is equal to the expected value predicted by the model. For example, suppose that ''P'' is the equilibrium price in a simple market, determined by [[supply and demand]]. The theory of rational expectations implies that the actual price will only deviate from the expectation if there is an 'information shock' caused by information unforeseeable at the time expectations were formed. In other words, ''[[ex ante]]'' the price is anticipated to equal its rational expectation:

::<math>P=P^*+\epsilon</math>
::
::<math>E[P]=P^*</math>

where <math>P^*</math> is the rational expectation and <math>\epsilon</math> is the random error term, which has an expected value of zero, and is independent of <math>P^*</math>.