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

EXPECTATIONS AND STOCK MARKET PRICESthe interval regarded as ‘normal’ by different individuals, the morelikely it is that a significant portion of these normal intervals willoverlap. In general, however, it seems that we would want toassociate wider ‘inner’ intervals with more uncertainty, and hence,with less agreement about what the future price will be. So whetheror not the interval-based price expectations of the members of somecommunity qualify as convergent will always be relative to someprior judgement of how narrow intervals must be in order to beregarded as reflecting ‘agreement’ about future prices. This willclearly not be a hard-and-fast matter. But it does suggest a way ofcharacterising the two cases: in what follows ‘convergent’expectations or beliefs will refer to expectations held by themembers of a social group, where (i) the associated normal intervalshave a tendency to coincide more closely over time; and (ii) wherethis is not due to the intervals widening (in general, convergentexpectations would be associated with relatively narrow normalintervals that narrow further over time). ‘Divergent’ expectations orbeliefs, in contrast, will refer to expectations held by members of asocial group that are not convergent, or where (i) the degree ofoverlap between the associated normal intervals has a tendency toreduce over time; and (ii) where this is not due primarily to suchintervals narrowing (in general, divergent expectations would beassociated with relatively wide normal intervals that may widenfurther over time).As we have already noted, the notion of divergent expectationscomes to the fore in Lachmann’s writings on equity prices. The keytheme is that such prices reflect a balance of the heterogeneousbeliefs of market participants. 6 At a very general level, of course, thisis true enough. But the notion of a ‘bulls-bears’ equilibrium ofopposing expectations is more complex than it at first appears, andnot only because of the difficulties in arriving at a precisecategorisation of divergent expectations. In the first place, as weshall show, share prices reflect the ratio of holders of the share topotential holders in the market and generally do not correspond tothe ‘average expectation’ of the market. Second, expectations offuture prices and/or prospective yields are only one of the things thatdetermine the value of a share to individual investors, and whichthereby influence its market price. As Lachmann himself points out,share values depend on how prevailing prices are interpreted. Otherimportant considerations include risk, 7 ambiguity, 8 and how actorsrespond to these. Finally, there is the impact of all manner ofuncertainties that need have no particular bearing on the prospects187