Rational Expectations, how people really forecast the future
Adaptive expectations look backward at past data; rational expectations use all available information, so forecast errors are random rather than systematic.
A 5 minute 3 second animated lesson on rational expectations, the assumption about how people form forecasts that sits under much of modern macroeconomics and finance. Built for students of money, banking and financial markets, and for anyone learning how expectations enter economic models.
It opens in December with a simple question, what will inflation be next year, and contrasts two ways to answer. Adaptive expectations look backward, extrapolating from what inflation has been. Rational expectations use all available information, including what is likely to happen, so forecasts are not systematically wrong. Errors still occur, but they are random rather than predictable, because a predictable error would already have been corrected.
It closes on why the idea matters. If expectations are rational, people are not fooled in the same direction again and again, which is the engine under the efficient markets hypothesis and a constraint on what monetary policy can achieve by surprise. Pair the video with the Atlas concept page for the intuition, misconceptions, a quick quiz and citations.