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And finance Allah Shmoop what is perfect foresight Will you

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step into Madame Symbols House of augers and you ask

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her about your future She looks into her crystal ball

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

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hours sitting around in pajama pants eating the crumbs from

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the bottom of a Doritos bag and watching the love

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

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

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

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weekend Well at some point as you brushed Dorito treatise

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from Europe pajama pants there and tear up the extended

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version of the doorway Cue card senior Remember that you

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realized it all came true Madam Sibyl saw the future

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

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

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Civil might have the gift Or maybe she just took

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one look at you and kind of made a good

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educated guess But generally speaking perfect foresight does not exist

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Need evidence Well just go to a racetrack or the

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stock market But the idea of perfect foresight plays a

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role in some economic discussions Will economics in real life

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is complicated to look at the total economy of a

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

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the day today individual decisions of hundreds of millions of

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people were talking billions of small transactions happening all the

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time Each one a complicated tangle of motivations and incentives

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will modeling that kind of thing financially with one hundred

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percent accuracy is impossible So to make any type of

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prediction about the future economists have to make assumptions Will

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economists generally have to start by simplifying Okay answer perfect

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foresight It describes the ideal situation for an economic act

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or a person with perfect foresight knows exactly what will

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happen when they make an economic decision like buy a

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car or invest in the stock or purchase the softest

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most durable pajama pants They confined well because they have

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perfect foresight They will always do the thing that benefits

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them the most Making this assumption allows economist to at

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least determine how certain scenarios should unfold It allows them

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to model economic behavior Think of how a physicist can

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predict what will happen if you dropped a pea Kenny

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off a tall building they can take into account the

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

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resistance and so on And from that well they can

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tell you with certainty whether the penny is going to

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kill someone on the street if it hits them square

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on the head Well that physicist has perfect foresight of

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the movement of that penny Thank you physics Unfortunately E

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

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

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weird So as a result E Con involves all sorts

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of uncertainties and psychology and other quirks that make it

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much harder to model in the any falling from the

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

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For most economic models a slightly less strict assumption is

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

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assuming people have perfect knowledge of the future The theory

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of rational expectations proposes that people act on their most

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reasonable guesses about the future The expectations are based on

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things like while the current situation and their experience about

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

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

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A rational expectation about your weekend leads to the same

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conclusion Yeah Madame Sibyl can take one look at you

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and reasonably predict that Doritos and couch potato time Our

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

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