Home » Eng Finance » S » Self-fulfilling expectations

Self-fulfilling expectations

Expectations which induce people to take actions which bring about the situation that is expected. This is the case, for example, with expectations about the future prices of assets and durable goods. If prices are expected to rise, this gives an incentive to bring forward purchases and to postpone sales, which tends to produce excess demand and leads to price increases.

If prices are expected to fall, this gives an incentive to bring forward sales and postpone purchases, which leads to excess supply and price cuts. Thus, in the short run prices in speculative markets are dominated by expectations. If a shortage of a good is anticipated, this gives an incentive to lay in stocks while they are available, so that rumours of a shortage tend to produce one. Self-fulfilling expectations are contrasted with self-frustrating expectations: for example, producers who expect a high price increase output, which tends to drive the price down, and producers who expect a low price cut output, which tends to drive the price up.

Reference: Oxford Press Dictonary of Economics, 5th edt.