This hypothesis is important in decision making and a common example is when predicting inflation. According to this Friedman’s theory of adaptive expectations, there may be a tradeoff between rates of infla­tion and unemployment in the short run, but there is no such trade off in the long run. A common example is for predicting inflation. People Change To Rational Expectations. Thus, current expected inflation reflects a weighted average of all past inflation, where the weights get smaller and smaller as we move further in the past. According to this Friedman’s theory of adaptive expectations, there may be a trade-off between rates of inflation and unemployment in the short run, but there is no such trade-off in the long run. Adaptive Expectations The adaptive expectations approach dominated work on inflation and macro economics in the early 1960s.The adaptive expectation hypothesis is based on the assumption that the best indicator of the future is what happened in the past. Adaptive Expectations hypothesis theory states that people adjust their expectations on what the future will be based on experience and events of the recent past. B. The adaptive expectations in economics is a theory in which forecasting of future values of an item and variable is done by utilizing the past values of that item. The theory of adaptive expectations can be applied to all previous periods so that current inflationary expectations equal: = ∑ = ∞ ((−)) where equals actual inflation years in the past. Some authors even argue that adaptive formalization of expectations contradicts the very purpose of building a theory of expectations because according to this attitude what influences the future is affected by history only, not by expectations; forward-looking attitude of agents is completely lost (Gertchev 2007). Adaptive expectations state that if inflation increased in the past year, people will expect a higher rate of inflation in the next year. A new principle known as rational expectations became popular as adaptive expectations fell out of fashion. The view of Friedman and his follower monetarists is illustrated in Figure 21.6. Economist John Muth was one of the primary figures involved in creating this theory in the early 1960s. C. People Underestimate Inflation. The view of Friedman and his follower monetarists illustrated in Figure 25.6. Adaptive expectations is an economic theory which gives importance to past events in predicting future outcomes. Expectations Adaptive: Gordon rejects the logic of the Ratex hypothesis entirely. Adaptive Expectations Hypothesis Definition. Thus, current expected inflation reflects a weighted average of all past inflation, where the weights get smaller and smaller as we move further in the past. Unemployment Must Increase. According to Bowlby, it isn't just attachment that is innate and adaptive but also the drive to provide caregiving. 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