ABSTRACT
The primary evidence of disequilibrium is the actual imperfect behavior and resulting errors that might be observed. Specifically, neoclassical theorists wish to assume ‘rational’ decision-makers do not in equilibrium make errors and thus the ultimate explanation for the errors in this case will have to be imperfect knowledge. This chapter is concerned more with the errors that result from alleged imperfect knowledge including ‘expectational errors’ — in particular, those errors resulting from false knowledge — rather than with imperfect behavior such as trembles. It is all too easy to explain away imperfect behavior as being the result of necessarily imperfect knowledge since all knowledge is about the probabilities of the truth of certain propositions or the likelihood of certain events. The presumption of subjective expected utility maximization combined two separate ideas: expected utility based on probability assessment and subjective probability as an expression of the individual consumer’s imperfect knowledge that has been arrived at in a Bayesian manner.
