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Econ: What is Perfect Foresight? 4 Views
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Description:
What is Perfect Foresight? In the study of probability theory, perfect foresight is a hypothetical and unrealistic stated assumption in which someone could ostensibly forecast prices with 100% accuracy. As there would be no uncertainty regarding future variables, perfect foresight poses that this individual’s expectations and forecasts would always be correct.
Transcript
- 00:00
And finance Allah Shmoop what is perfect foresight Will you
- 00:07
step into Madame Symbols House of augers and you ask
- 00:11
her about your future She looks into her crystal ball
- 00:14
Suddenly she's in a trance She sees she sees long
- 00:18
hours sitting around in pajama pants eating the crumbs from
Full Transcript
- 00:23
the bottom of a Doritos bag and watching the love
- 00:26
Actually director's cut on a continual loop goes four hours
- 00:30
All right At first you're skeptical leaving her parlor You
- 00:34
scoff You figure it's all a scam Then comes the
- 00:36
weekend Well at some point as you brushed Dorito treatise
- 00:41
from Europe pajama pants there and tear up the extended
- 00:44
version of the doorway Cue card senior Remember that you
- 00:48
realized it all came true Madam Sibyl saw the future
- 00:52
That's perfect foresight The complete accurate knowledge of what's gonna
- 00:57
happen Well obviously it's not something many people have Madame
- 01:01
Civil might have the gift Or maybe she just took
- 01:04
one look at you and kind of made a good
- 01:06
educated guess But generally speaking perfect foresight does not exist
- 01:10
Need evidence Well just go to a racetrack or the
- 01:12
stock market But the idea of perfect foresight plays a
- 01:16
role in some economic discussions Will economics in real life
- 01:19
is complicated to look at the total economy of a
- 01:22
big country like the United States You're really looking at
- 01:24
the day today individual decisions of hundreds of millions of
- 01:28
people were talking billions of small transactions happening all the
- 01:32
time Each one a complicated tangle of motivations and incentives
- 01:36
will modeling that kind of thing financially with one hundred
- 01:39
percent accuracy is impossible So to make any type of
- 01:42
prediction about the future economists have to make assumptions Will
- 01:46
economists generally have to start by simplifying Okay answer perfect
- 01:50
foresight It describes the ideal situation for an economic act
- 01:55
or a person with perfect foresight knows exactly what will
- 01:58
happen when they make an economic decision like buy a
- 02:01
car or invest in the stock or purchase the softest
- 02:04
most durable pajama pants They confined well because they have
- 02:09
perfect foresight They will always do the thing that benefits
- 02:12
them the most Making this assumption allows economist to at
- 02:14
least determine how certain scenarios should unfold It allows them
- 02:18
to model economic behavior Think of how a physicist can
- 02:21
predict what will happen if you dropped a pea Kenny
- 02:24
off a tall building they can take into account the
- 02:26
distance it's falling the gravitational constant of things like air
- 02:30
resistance and so on And from that well they can
- 02:33
tell you with certainty whether the penny is going to
- 02:36
kill someone on the street if it hits them square
- 02:38
on the head Well that physicist has perfect foresight of
- 02:41
the movement of that penny Thank you physics Unfortunately E
- 02:45
con doesn't play out like physics Economics deals with the
- 02:48
decisions of people and people are Yes we're just saying
- 02:51
weird So as a result E Con involves all sorts
- 02:55
of uncertainties and psychology and other quirks that make it
- 02:59
much harder to model in the any falling from the
- 03:01
sky Well in practice perfect insight doesn't come into play
- 03:05
For most economic models a slightly less strict assumption is
- 03:09
made We're going to assume rational expectations like instead of
- 03:13
assuming people have perfect knowledge of the future The theory
- 03:16
of rational expectations proposes that people act on their most
- 03:21
reasonable guesses about the future The expectations are based on
- 03:25
things like while the current situation and their experience about
- 03:28
what's happened in the past then apply this model to
- 03:31
your trip to Madame Sibyl She didn't need perfect insight
- 03:34
A rational expectation about your weekend leads to the same
- 03:37
conclusion Yeah Madame Sibyl can take one look at you
- 03:40
and reasonably predict that Doritos and couch potato time Our
- 03:44
Oh so much in your future Sorry Maybe you could 00:03:46.783 --> [endTime] get a job Something
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