Rational Expectations and Learning from Experience

I. Introduction, 47.—II. The model, 49.—III. Conclusions, 54. The universal form of conscious behavior is thus action designed to change a future situation inferred from a present one. It involves perception and, in addition, twofold inference. We must infer what the future situation would have been without our interference, and what change will be wrought in it by our action. Fortunately or unfortunately, none of these processes is infallible, or indeed ever accurate and complete (Knight, 1921, pp. 201–02). The correspondence of expectations that makes it possible for all parties to achieve what they are striving for is in fact brought about by a process of learning by trial and error which must involve a constant disappointment of some expectations. The process of adaptation operates, as do the adjustments of any self-organizing system, by what cybernetics has taught us to call negative feedback: responses to the differences between the expected and the actual results of actions so that these differences will be reduced (Hayek, 1976, pp. 124–25).