Adaptive Expectations Hypothesis

Categories: Financial Theory

The Adaptive Expectations Hypothesis is a psychology-based thesis to explain how average retail investors... invest. Which is largely in driving their investing car via looking in the rear view mirror.

Or a physics problem: "things that are in motion tend to stay in motion," or something like that, with all due directionality bias included. That is, investors adapt their future view of how the world will work to their expectations of the past continuing. And yeah, it doesn't work. Which is why retail investors generally suck.

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