Homogeneous Expectations

Categories: Trading, Banking

"Homogeneous expectation" is the assumption that all investors will have the same expectations (and thus, make the same decisions as each other) given the same information and circumstances.

It’s an assumption talked about in the “Modern Portfolio Theory” where investors are all trying to create balanced and efficient portfolios with the highest returns and lowest risk.

While homogeneous expectations makes sense with simple examples...for instance, most people will probably pick portfolio A over B and C if portfolio A has both the highest returns and lowest risk...yet, we know that, if this was the case in real life, things would look a lot different.

Homogeneous expectations implies that investors are rational actors, which is not always the case. For instance, many investors jump ship, selling their stocks in a panic when it’d be most rational to weather the storm. Keynes himself called this kind of impulse “animal spirits”: the irrational emotions that drive us in addition to our rationality.

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