 If we want to know what is going to be the price of a stock, there are several theories that explain this phenomenon. So, in this section, I am going to briefly introduce you to the concept of the theory of rational expectations. So, if we look into the history in which people have come up with various explanations to describe how the stock prices can be decided or how the expectations about the stock prices are formed. In 1950s and 1960s, the economists have always considered that we need to look at the previous data, the past values, the past prices of a certain stock and that would help us in understanding how the price of this particular stock will be determined or what is going to be the price of the same stock in future. So, according to them, if we want to know what will be the expected price of a certain stock in the next year, we need to look back at the historical data to assess what the previous data is telling us was used to determine that how the stock prices will behave in future. So, this particular concept is called adaptive expectations. So, when we say adaptive expectations, it means that when we are forming the expectations about the future prices, we are looking in the previous historical evidence and that data is going to form the expectations or structure the expectations about the future prices of a specific stock. So, if we see that there is a lot of ups and downs in the price of a specific stock, let's call it the stock of stock X. So, if there were a lot of ups and downs in the past, the experts would say that they will form their expectation exactly in the same way that in the future, there are going to be ups and downs in the price of this particular stock. So, if we see that there was a consistent increase in the price of a specific stock in the past, the expectations based upon the previous data will be formed saying and everybody will expect that a similar pattern will be observed. So, if the prices have gone up in the past, they will be expected to rise in the future also. So, vice versa, if we have seen that there is a downward movement in the previous data, the expectations for the future for that particular stock will be formed in a way that we will expect that in future again there will be a downward movement. So, this phenomenon is termed as adaptive expectations. On the contrary, we have got another opinion which is the basic foundation of the theory of rational expectations. The theory of rational expectations says that the expectations are based upon the forecasted values. So, people do not consider what has happened previously or in the past. They consider how the forecasted values have been estimated and when the expectations are developed for future, they only consider the future or the forecasted values of that particular stock. This particular concept of rational expectations was developed by John Muth and according to him, the expectations are similar to the optimal forecast. That means that the analyst or the financial experts take into account all the relevant data that describe the movements of a certain financial asset and they make guesses about the future that this is how this particular asset is going to behave in the future. So, the best guesses help them in making the optimal forecasting. So, that optimal forecasting shapes the expectations of the investors about its price, about the expected rate of return of that particular asset and this is how the future expectations will be formed. So, instead of looking back at the previous data, what this theory emphasizes on is that you need to consider the best guesses or the optimal forecasting that in future this particular asset is going to behave in this specific way based upon how the company is going to move on in the future, how they are planning or they are making policies to expand or to operate in different countries or they are going to set up new plans. So, they take into account only the things that are going to help them in explaining or understanding the forecasted values. So, the forecasted values are considered and then the expectations are developed and this particular phenomenon is explained in terms of the theory of rational expectations. So, it is in contrast with the adaptive expectations which emphasizes that the experts only look at the previous data and then they form the expectations whereas in the rational expectation theory the emphasis upon is upon the forecasted values, the future values only.