Adaptive expectations

Adaptive expectations is like guessing what might happen in the future, based on what you've seen happen in the past. Think of it like this - when you're playing with your friends, you might notice that when you throw a ball, it takes a certain amount of time to come back to you. So, the next time you throw the ball, you expect it to take the same amount of time to come back to you.

The same thing happens with adaptive expectations in economics. People use information from the past to make predictions about what might happen in the future. For example, if you've noticed that prices always go up at certain times of the year, you might expect them to do the same thing this year.

This is important because it helps people make decisions about things like saving money, buying a house or starting a business. If people have an idea of what might happen in the future, they can plan ahead and make better choices.

However, sometimes people's expectations don't match up with what actually happens. For example, if prices don't go up when people expect them to, they might change their expectations for the future.

So, in summary, adaptive expectations is like guessing what might happen in the future based on what's happened in the past. It helps people make decisions and plan ahead, but sometimes their expectations don't match up with reality.