Random walk hypothesis facts for kids
The Random walk hypothesis is an idea in economics that helps explain how people make decisions about spending money. It was created by an economist named Robert E. Hall. This idea helps us understand how much money people in a whole country might spend.
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What is the Random Walk Hypothesis?
This idea builds on two other important theories: the permanent income hypothesis by Milton Friedman and the rational expectation hypothesis by Robert Lucas.
How Does It Work?
The random walk hypothesis suggests that people use all the information they have right now to decide how much to spend. This means that your spending today is the best guess for how much you'll spend tomorrow.
Before This Idea: Older Theories
Before this theory, some economists thought people sometimes made decisions based on old information or got confused. They believed people might not always think clearly about the future.
The New Idea: Rational Expectations
But Robert Lucas argued that people are smart. He said that people use all the information available to them at the moment to make the best choices for themselves. They try to get the most benefit from their decisions. The permanent income hypothesis also adds that people think about how an event might affect their spending over a long time, not just right now.
Why is it "Random"?
The random walk hypothesis says that because people use all available information for their current spending decisions, any changes in future spending must be due to something completely unexpected. If something new and surprising happens, it will change how much people spend. Since these new events can't be predicted, the changes in spending also can't be predicted. They "randomly walk," like someone taking steps in unpredictable directions.
See also
In Spanish: Teoría del paseo aleatorio para niños
