Conventions as a basis for forming expectations, Microeconomics

Assignment Help:

Conventions as a Basis for Forming Expectations:

Since there is little objective basis for probability distributions about future yields, decision-makers have to act on the basis of subjective judgments. It means there must be some element of arbitrariness involved in the formation of expectations and therefore, in the decisions taken on the basis of those expectations. In such situations individual decision-makers, in forming their expectations, usually tend to fall back on practical norms or conventions generally prevailing in society. 

For example, one convention for estimating the expected rate of return on an investment project may be as follows: Assume that an objective probability distribution for future returns on an investment project can be determined from quantitative historical data. Hence, estimate regression equations which have the rate of return on such projects as the dependent variable and particular subsets of a set of variables as independent variables. Then, on the basis of some given statistical criterion (convention) choose the 'best' estimated regression equation. Use this, given values of the independent variables, to obtain an estimated probability distribution for the rate of return on the investment project. 

The tendency to rely on conventional wisdom might be due to a variety of reasons. Individuals might feel that conventions reflect the collective wisdom of others who have been in similar positions and therefore would be less arbitrary as a guide to decision-making. Besides, individual decision-makers can justify their decisions as being of the same variety as that taken by many others placed in similar position. In this, case it appears less the outcome of individual whim or sentiment or prejudice.

Moreover, in following conventions, particularly in relation to the valuation of investments or assets, the individual entrepreneur might be minimising risks. If a majority of investors follow the same conventions in calculating values then the individual entrepreneur would have a good idea about the market value of his investment over the short tern. Once the investment has been made on the basis of such valuation, the entrepreneur will be exposed to the risk of a significant loss. Since individuals have relatively greater certainty about the near future, the chance of increasing losses over a short time period is small.


Related Discussions:- Conventions as a basis for forming expectations

Competition and industry ., need to get assignment on income effect and sub...

need to get assignment on income effect and substuation effect how does increase in price of both comodity will affect the or show the new effect

Point elasticity of demand, Point Elasticity of Demand - For large pric...

Point Elasticity of Demand - For large price changes (such as 20%), value of elasticity will depend upon where price and quantity lies on demand curve. - Point elasticity me

Marginal utility, If the MU of the 1st unit consumed = 75 utils, and the TU...

If the MU of the 1st unit consumed = 75 utils, and the TU of consuming 2 units is 130 utils, what is the marginal utility of the second unit?

Theories of common property resource management, Normal 0 false...

Normal 0 false false false EN-IN X-NONE X-NONE MicrosoftInternetExplorer4

Graphical methods - trend projection methods, A trend line can be fitted th...

A trend line can be fitted through a series graphically. Old values of sales for different areas are plotted on a graph and a free hand curve is drawn passing through as many point

Explain about theoretical investigation, Assume you see that two macroecono...

Assume you see that two macroeconomic variables are correlated with each other.  But you want to know if there's an underlying or causal relationship between the two variables.  Wo

Changes in market equilibrium, Changes in Market Equilibrium Equilibriu...

Changes in Market Equilibrium Equilibrium prices are known by the associate level of supply and demand. Supply and demand are decided by particular values of supply & demand

Ridge line., what is aridge line and significance in economics.

what is aridge line and significance in economics.

Elasticities of supply and demand, ELASTICITIES OF SUPPLY AND DEMAND ...

ELASTICITIES OF SUPPLY AND DEMAND Usually, elasticity is a measure of the sensitivity of one variable to the other. It told us the percentage change in one variable in re

Demand curve for a consumer for coffee, Suppose the demand curve for a cons...

Suppose the demand curve for a consumer for coffee is: Q = 6 – 2P, where Q represents the number of cups per day and P is the price of coffee per cup.   Question: Suppose the

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd