A self-fulfilling prophecy is a prediction that directly or indirectly causes itself to become true, by the very terms of the prophecy itself, due to positive feedback between belief and behaviour. Although examples of such prophecies can be found in literature as far back as ancient Greece and ancient India, it is 20th-century sociologist Robert K. Merton who is credited with coining the expression "self-fulfilling prophecy" and formalizing its structure and consequences. In his book Social Theory and Social Structure, Merton defines self-fulfilling prophecy in the following terms: e.g. when Roxanna falsely believes her marriage will fail, her fears of such failure actually cause the marriage to fail.
The self-fulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behaviour which makes the original false conception come 'true'. This specious validity of the self-fulfilling prophecy perpetuates a reign of error. For the prophet will cite the actual course of events as proof that he was right from the very beginning. In other words, a positive or negative prophecy, strongly held belief, or delusion - declared as truth when it is actually false - may sufficiently influence people so that their reactions ultimately fulfill the once-false prophecy. Merton concluded that the only way to break the cycle of self-fulfilling prophecy is by redefining the propositions on which its false assumptions are originally based.
In economic "expectations models" of inflation, peoples' expectations of future inflation lead them to spend more today and demand higher nominal interest rates for any savings, since they expect that prices will be rising. This demand for higher nominal interest rates and increased spending in the present, in turn, create inflationary pressure and can cause inflation even if the expectations of future inflation are unfounded. The expectations theory of inflation played a large role in Paul Volker's...
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