The trigger of this transformation was, as is well known, the rational expectations revolution, which started with the pioneering work by Robert Lucas (1972, 1973) and Thomas Sargent and Neil Wallace (1975).1 The upshot of the Rational Expectations hypothesis is that – at least in a world in which information is largely publicly available and speedily disseminated – individuals should not make predictable errors when formulating conjectures about their future.
This does not imply that individuals will invariably forecast accurately if random movements are inevitable. But guesses about the future must be correct on average if individuals are to remain satisfied with the mechanism by which their anticipations are formulated. When agents diagnose systematic errors, they have an incentive to amend the basis of their forecasts.