Bias
As a first step, we need to spend a little time with a key assumption of the New Classical school of thought: Rational Expectations.
Most macroeconomists had agreed that expectations play a key role in major role in economic events. Certainly Keynes did: he made a simplifying assumption, for example, that the "state of long-term expectation" (about the profitability of investment) is given. He certainly didn't assume those expectations would be "rational," claiming instead that they must be irrationally optimistic, motivated by "animal spirits."
But most macroeconomists since Keynes have tried to allow for the fact that expectations do change and people learn. In the last few chapters we have made passing reference to two views on this. One, "Adaptive Expectations," holds that, on the average, people learn by experience, slowly and predictably. The other view, "Rational Expectations," holds that people learn very quickly and, by learning the patterns of economic activity, can often anticipate experience and adapt to changes in economic circumstances as they happen -- rather than after.
Of course, there is a little more to it than just that. The idea behind Rational Expectations is that if people can decide "rationally" how to divide their income between saving and consumption, and how to divide their consumption between coffee and donuts and beemers and other products, then people can determine with the same "rationality" what they expect will happen in the economic system. Thus, the basic assumption of Rational Expectations is that people make efficient use of all the information available to them.
Of course, it's a fact of life that people may not have all the information they need, in order to make the best decisions. But more information can be obtained, bought or produced. In effect, everybody acts as an economic forecaster, gathering information to judge what kinds of economic events are likely. These forecasts are the person's Rational Expectations. On the other hand, information, like other products, has costs as well as benefits. It won't be "rational" or "efficient" to use all the information that might be out there -- some of it will be too costly to pay off. So expectations may be "rational," but still quite inaccurate.
Let's summarize:
Bias
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