Abstract:
We propose that the formation of beliefs be treated as statistical hypothesis tests,
and we label such beliefs inferential expectations. If a belief is overturned
through the build-up of evidence, agents are assumed to switch to the rational
expectation. Thus, rational expectations is a special case of inferential
expectations if agents are unconcerned about mistakenly changing their beliefs
(the test size a equals unity), or if there is so much information available about a
parameter that it is known with certainty (the sampling distribution of the
estimator collapses to a point). We.pr~~ent the results of an individual choice
experiment showing preliminary support for inferential expectations, in
comparison
to either rational expectations, or adaptive expectations with one
degree of freedom. Least-squares estimates for a are less than unity for over
40% or over 60% of experimental participants. The impact of inferential
expectations is illustrated by showing how it alters a simple model of the
exchange rate and a Lucas supply function.
