Given B. De Finetti’s Conclusion that 'Probability (Objective) Does not Exist', Then Rational Expectations Does not Exist Either
26 Pages Posted: 5 Dec 2018
Date Written: November 11, 2018
Rational Expectations is an approach to probability and expectations that was initiated by Muth in 1961. Muth’s concept is based on an immense muddle and confusion in his mind about subjective and objective concepts of probability that confuses subjective probability with objective probability.
Like Nelson Goodman’s Grue concept, where the color green turns into the color blue at some point in the future, at some point rational expectationists claim that subjective probabilities become true, correct, right and objective. This is what they mean by the term rational. Rational is objective and/or true probability. This is impossible and demonstrates a great lack of knowledge about basic theories of probability. There is no existing theory of probability that supports the claims made by rational expectationists. There is no right(wrong), correct, true, or objective probability, probability distribution, or expectation if you assume that you are applying the subjective theory of probability. Likewise, all objective theories of probability deny the existence of subjective probability.
This approach has infected the entire economics profession since the early 1970’s and created an even more immense muddle than was originally created by Muth in 1961.
Keywords: rational expectations, Savage, de Finetti, Ramsey proper scoring rules, elicitation techniques, Lucas
JEL Classification: B10, B12, B14, B16, B20, B22
Suggested Citation: Suggested Citation