Uncertainty and the Rational Expectations Hypothesis - Financial Theory - John Geanakoplos - Lecture 15 of 26 - Video-lecture

Video-lecture, Financial Theory

Description: According to the rational expectations hypothesis, traders know the probabilities of future events, and value uncertain future payoffs by discounting their expected value at the riskless rate of interest. Under this hypothesis the best predictor of a firm's valuation in the future is its stock price today. In one famous test of this hypothesis, it was found that detailed weather forecasts could not be used to improve on contemporaneous orange prices as a predictor of future orange prices, but that orange prices could improve contemporaneous weather forecasts.