A tweet thread on rational and irrational expectations
Rational expectations of something being risky, simply makes most stay away from it.
Irrational expectations of something being risky, though certainly not presenting a danger to our bank systems, might sadly means lost opportunities to grow the real economy.
Rational expectations of something being safe, does of course not hurt the economy nor the banking system.
Irrational expectations of something being safe can easily bring down our bank system, and our real economy with it.
But with their risk weighted capital bank requirements, much lower for what was perceived ex ante as safe, than for what was perceived as risky, the Basel Committee bank regulators, de facto, irrationally based it all on rational expectations.
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