ABSTRACT
RE models are widely thought to represent rational forecasting. Thus, when economists uncovered massive evidence that these models fail to explain outcomes, especially in financial markets, they concluded that market participants are irrational. We show in Frydman and Goldberg (2013c) that, because they rule out unanticipated changes in how market participants revise their understanding of how the economy works, RE models are abstractions of rational decision-making only in markets in which knowledge of market processes does not grow.
