What economic theory describes individuals acting according to their expectations based on available information?

The Rational Expectations theory is a key concept in economics that posits individuals make decisions based on their expectations about the future, which are informed by all available information. This theory suggests that people do not simply react to changes or new information but instead form expectations that are mathematically unbiased and consistent with the underlying economic model.

Under this theory, individuals and firms anticipate future economic policies and conditions, allowing them to adjust their behavior accordingly. For instance, if people expect inflation to rise, they may alter their spending habits now to mitigate its impact later. This ultimately means that economic agents utilize all the information at their disposal effectively, which leads to outcomes that can be predicted based on their expectations.

This framework differs from behavioral economics, which focuses more on psychological influences affecting economic decision-making, and from Keynesian and Classical economics, which deal with aggregate economic dynamics and policies without emphasizing the role of expectations in the manner that Rational Expectations theory does.