Imperfect Market

And finance Allah Shmoop what is perfect foresight Will you

step into Madame Symbols House of augers and you ask

her about your future She looks into her crystal ball

Suddenly she's in a trance She sees she sees long

hours sitting around in pajama pants eating the crumbs from

the bottom of a Doritos bag and watching the love

Actually director's cut on a continual loop goes four hours

All right At first you're skeptical leaving her parlor You

scoff You figure it's all a scam Then comes the

weekend Well at some point as you brushed Dorito treatise

from Europe pajama pants there and tear up the extended

version of the doorway Cue card senior Remember that you

realized it all came true Madam Sibyl saw the future

That's perfect foresight The complete accurate knowledge of what's gonna

happen Well obviously it's not something many people have Madame

Civil might have the gift Or maybe she just took

one look at you and kind of made a good

educated guess But generally speaking perfect foresight does not exist

Need evidence Well just go to a racetrack or the

stock market But the idea of perfect foresight plays a

role in some economic discussions Will economics in real life

is complicated to look at the total economy of a

big country like the United States You're really looking at

the day today individual decisions of hundreds of millions of

people were talking billions of small transactions happening all the

time Each one a complicated tangle of motivations and incentives

will modeling that kind of thing financially with one hundred

percent accuracy is impossible So to make any type of

prediction about the future economists have to make assumptions Will

economists generally have to start by simplifying Okay answer perfect

foresight It describes the ideal situation for an economic act

or a person with perfect foresight knows exactly what will

happen when they make an economic decision like buy a

car or invest in the stock or purchase the softest

most durable pajama pants They confined well because they have

perfect foresight They will always do the thing that benefits

them the most Making this assumption allows economist to at

least determine how certain scenarios should unfold It allows them

to model economic behavior Think of how a physicist can

predict what will happen if you dropped a pea Kenny

off a tall building they can take into account the

distance it's falling the gravitational constant of things like air

resistance and so on And from that well they can

tell you with certainty whether the penny is going to

kill someone on the street if it hits them square

on the head Well that physicist has perfect foresight of

the movement of that penny Thank you physics Unfortunately E

con doesn't play out like physics Economics deals with the

decisions of people and people are Yes we're just saying

weird So as a result E Con involves all sorts

of uncertainties and psychology and other quirks that make it

much harder to model in the any falling from the

sky Well in practice perfect insight doesn't come into play

For most economic models a slightly less strict assumption is

made We're going to assume rational expectations like instead of

assuming people have perfect knowledge of the future The theory

of rational expectations proposes that people act on their most

reasonable guesses about the future The expectations are based on

things like while the current situation and their experience about

what's happened in the past then apply this model to

your trip to Madame Sibyl She didn't need perfect insight

A rational expectation about your weekend leads to the same

conclusion Yeah Madame Sibyl can take one look at you

and reasonably predict that Doritos and couch potato time Our

Oh so much in your future Sorry Maybe you could 00:03:46.783 --> [endTime] get a job Something