The theory of rational expectations and its applications in accounting / BEBR No. 482

Includes bibliographical references (leaves 37-38)The Theory of Rational Expectation assumes all information relevant to an economic decision is compounded into the market. The information set is assumed to be comprehensive, extending well beyond traditional accounting information. Holding that price is set by the interaction of all public information available in any point in time, the Rational Expectation Hypothesis questions traditional accounting time series analyses that predict future prices by extrapolating from past accounting data. The implications of the Rational Expectation Hypothesis (REH) to accounting are as follows: (1) An expanded income statement should be provided. (2) Accounting information systems should cover larger data base systems. (3) The cost and value of alternative accounting information should be provided. (4) The general price level adjustment should be made. (5) Accounting information should assume that governmental policies cannot control the economy as precisely as desired. (6) Detailed information on risk alternatives should be disclosed. (7) Research is needed to determine the circumstances under which a larger information set will be relevant for forming rational expectations