# What is pure expectancy (expectation) theory?

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### 2 Answers

There is some **ambiguity** in your question. You ask about "pure" expectancy theory, which relates to motivation behind actions and might be categorized as a legal concept, yet your Topic selection relates to investing. Assuming that your question relates to microeconomics and investing, I'll provide an answer relevant to **investment expectation theory** and *contrast it with motivational expectancy theory.*

**Investment expectation theory** **relates to** **investing in the debt market** also called **the bond market.** The expectation theory relates to *expectation of bond yields over time.* This theory is **controversial** as the predicted results of the theory do not match the real-world outcome of bond investment results.

**Critics** of expectation theory posit that the reason for its real-world returns failure is that it assumes investors in the bond market are interested only in **yield** on bond investments. **Critics** further posit that investors are, in fact, interested in *both* **maturity and yield.** This position is put forth by the competing theory of *"habitat theory."*

**Investment expectation theory holds** that short-term bond market interest rates can be predicted by long-term bond market interest rates. It further holds that investing in a two-year bond would gain no more advantage in returns results than investing in consecutive one-year bonds. Expectation theory **postulates** that (1) since long-term interest rates (e.g., two-year bond) predict or foretell short-term interest rates (e.g., one-year bond) and that (2) since investor motivation and investor interest lies exclusively with yield on bond investments and that (3) consecutive one-year bond roll-overs are predicted to yield the same as a single two-year bond investment, then the investor can expect to be benefited by consecutive short-term investments, thus taking advantage of unpredicted rises in interest and thus hedging against unpredicted falls in interest rates.

Aside from the *habitat theory criticism* already noted, bond investment **expectation theory** seems to also hold** internal contradiction,** namely the contradiction between (a) the expectation of long-term interest rates predicting short-term rates versus (b) the hedging function of short-term roll-overs: if a return is truly predicted, a hedging function (though wise) is not required.

**Motivational "expectancy theory" differs** from investment expectation theory in that* motivational expectancy theory* asserts a motivational impetus (i.e., source of action) based upon a hope or unstated promise of a future action or good occurring. In law, a common **example** of expectancy theory describes how it is often applied to heirs named (or not named) in a will: though there is no firm commitment made to the delivery of future good, the heirs have an expectation of good based upon present circumstances. The expectancy is *not rooted in vested* commitment because circumstances can change resulting in change(s) to the expected terms of the will, potentially even right up until the day of death.

Though there are * similarities between bond investment expectation and motivational expectancy theories*, which are based upon the

*nature of expectation,*there are significant

**differences.**The

**primary difference**being, of course, the concrete application of one to real-world investment and investment returns versus the theoretical hope of material future good based upon hypothetical and changeable life circumstances. These two theoretical applications of

*expectancy*are very different theories in material terms, one having near-immediate

**material results**in an ill-defined future.

*versus*hypothetical potential material results**Sources:**

A good summary of expectancy theory is that the motivation to do something is based on the desirability of the expected outcome. More formally, motivational force (MF) = Expectancy * Instrumentality * Valence.

Terms Defined:

Expectancy- the probability that the effort will yeild the expected result

Instrumentality- the probability that the expected result is desirable

Valence- the personal value of the reward

Example

If I work harder, will my plant produce more? -Expectancy

If the plant produces more, will I make more money?- Instrumentality

Is it worth it to me to work harder so the plant produces more?- Valence

Importantly, the motivation to pursue a course of action is not solely dependant on the outcome. Other factors play into decision-making.

**Sources:**