Expectations really do matter - for example, the future state of the economy (and of financial markets) depends, in part, on what people expect it will be. Understanding what expectations people have, and how and why they form and revise those expectations, is an active area of research with important implications for portfolio construction practice.

Since the 1970s, the theory of “rational expectations” (RE) has been the dominant approach to representing expectations in economic modelling and it is a building block of the traditional paradigm of portfolio construction. But...