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Econ Videos 79 videos

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Econ: What is Perfect Foresight? 4 Views


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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.

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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

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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