Subjectivism and Economic Analysis: Essays in memory of Ludwig ...

JOCHEN RUNDE AND JÖRG BIBOWinner range fairly quickly, this will confirm the conventional view ofwhat is normal. However, if prices stay in the outer range, marketparticipants will gradually come to revise their notion of the normalprice. 5 This means that speculators will seek to buy at prices atwhich they would formerly have sold (and vice versa), suggestingthat once the limits of the inner range have been breached, pricemovements may be carried further by the very speculative pressuresthat formerly resisted them. Finally, where prices move beyond thelimits of the outer range they become ‘unquestionably meaningful’and carry a definite message that cannot be disregarded. The marketwill have to revise its views on what is normal: ‘It must now becomeclear to everybody that the hypothesis about the constellation offundamental forces which formed the basis of our range structurehas been tested and failed’ (Lachmann 1978:32). But while thenegative message is clear enough, namely that the former hypothesisof what consisted as the normal is invalid, its positive content is lessso. The message still requires interpretation, the soundness ofwhich, according to Lachmann, will depend on the insight andintelligence of market participants.Divergent expectations and equity pricesWe are now in a position to say something about Lachmann’sdistinction between ‘convergent’ and ‘divergent’ expectations. Ifthe expectations in question were the point predictions of assetprices at some future date held by different individuals acting inthe context of a social group, the distinction would seem to befairly straightforward. Convergent expectations would then bepoint predictions that have a significant tendency to converge (orhave converged) on a unique value of the relevant variable overtime, perhaps because its value has been stable in the past.Divergent expectations, in contrast, would refer to the case inwhich individual point predictions of the value of some variableare not convergent, or display a tendency to diverge over sometime period.But we have seen that Lachmann rejects the assumption of pointexpectations in favour of the interval-valued conception describedabove. Now it is possible to argue that the distinction betweenconvergent and divergent expectations still applies. Convergentexpectations might then be those the ‘normal’ intervals of whichhave a tendency to coincide more closely over time, or that docoincide. But things are not that simple. The trouble is that the wider186