RATIONALITY IN THE MINDS EYE - AN ALTERNATIVE TEST OF RATIONAL-EXPECTATIONS USING SUBJECTIVE FORECAST AND EVALUATION DATA

The purpose of this paper is to examine if business managers' forecast s are rational in a constructionist sense. Adherents to constructivism believe that human senses do not convey ''real reality'', but rather a set of experiences that are conditioned by beliefs and differences i n innate cognitive attributes to yield a constructed and inherently su bjective perception. We examine whether managers' forecasts, when meas ured against their own perceptions of reality, are rational. The Confe rence Board provides a data base that asks managers for a subjective p rediction of the future, and a subjective evaluation of the past. Both the forecast and the evaluation are subjective, conceived in the mind of the forecaster. If rational expectations is a theory that accurate ly represents the decision process, then it should be reflected in dat a where the forecaster computes not only the prediction, but also the value of the parameter that was predicted. Thus, this data allows fore casts to be tested for rationality using managers' own perceptions as the basis for judgement. If rational expectations is an accurate repre sentation of how economic actors form forecasts, then a mind's eye eva luation should show evidence of this rationality. Yet, though the mana gers generate both the forecast and the evaluation, they failed four o f the five traditional tests for rationality.