Question

Suppose you flipped an honest coin ten times and heads came up eight times. You are about to toss the coin another ten times. Using adaptive expectations, how many heads do you expect? Based on rational expectations, how many heads do you expect?

Answer 1

In economics, adaptive expectation refers to the expectation of the future on the basis of one's experience of the past. Here, my experience is that in the previous ten flips, the head came up 8 times. So, my adaptive expectation will be that in the next ten flips also, there will be eight heads.

According to rational expectations, previous coin tosses do not have any effect on the probability of head or tail in the future coin tosses. For each coin toss, there is 50% probability of head and 50% probability of tail. Therefore, out of 10 tosses, I will rationally expect 5 heads.