The Effect of Knowledge on Testing the Rational Expectations Hypothesis

The lasting popularity of the rational expectations hypothesis has driven a growing experimental literature on the rationality of expectation formation. This experiment examines the effect of providing information on an agent\u27s ability to forecast an exogenously generated series in a lab setting. Subjects are divided into informed and uninformed treatment groups and subject deviation from a predetermined rational strategy is measured. I use a random effects model to identify factors in irrational forecasting behavior arising from characteristics of the underlying series. Information is not found to exert a large effect on subject behavior, while deviations from rational expectation formation are found to decrease across iterations within the experiment. These findings support the results of previous studies that have not controlled for subject knowledge