Hayekian expectations: Theory and empirical applications

We show that the orderliness of market processes and outcomes, and hence the realization and coordination of individuals' plans, are dependent on the social environment in which individuals function. In specific, when atomicity and stable (social) rules are compromised in the case of Big Players, markets are less orderly despite the fact that individuals are behaving rationally.—The paper provides an account of individual rationality by generating a theory of expectations based on Hayek's cognitive theory. Hayekian expectations are coherent, competitive, and endogenous. This suggests that expectational analysis must take account of the context of constraint—the “environment” or what we call “filtering conditions”—within which individuals function and to which they must adapt. The paper provides a theoretical analysis of expectations at the individual level and shows that the particular behaviors stemming from those expectations require a specification of the rules governing social and market activities. Copyright George Mason University 1993