No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Eighteen: The “macro” view of the economy 466 For a better explanation of Lucas’s ideas on rational expectations, let’s just listen to this video fromMr. Lucas himself: On the human-interest side, Mr. Lucas and his first wife Rita unfortunately divorced in 1989. But the former Mrs. Lucas had pretty rational expectations of her own. She worked the divorce agreement to include a stipulation that if Mr. Lucas ever won the Nobel Prize, she would be entitled to one-half the monetary award. This agreement had a time limit—only if he won the award before 31 Oct 1995. And in early Oct of 1995, Mr. Lucas was awarded the Nobel Prize. Half of his $1,000,000 monetary award (before taxes) went to his first wife Rita! What are rational expectations?