The lost knight is not IN the villages (dont enter the village map).
He is a figure on the worldmap with 1 soldier, wating right next to of one of these villages:
Tebandra, Veidar , Abdelen or Dugan.
Notice that each one of these villages is in 1 of the 4 corners of the worldmap.
If you speak to him, always respond with "Certainly" and follow him straight without getting involved into a batlle (save before).
After the 3rd time he will give you a treasure map, which you can use to find a secret dungeon.
There you will obtain some rare loot.