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

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EXPECTATIONS AND STOCK MARKET PRICESdiversity of opinion about equity values. Two important featuresof his analysis are that it applies to a share with severely restrictedshort-selling opportunities and that the number of potentialholders of the share substantially outnumber the shares offered bythe company. Miller s central result is as follows: only in thespecial case of the absence of any diversity of opinion about thevalue of the share will its market price correspond to the averageevaluation. In all other cases the share will tend to be held by thatproportion of potential investors who hold particularly optimisticviews about its value. 10 He derives this result from elementarydemand and supply analysis. The vertical axis measures the‘estimates of value’ per share made by heterogeneous investors, thehorizontal axis the number of shares demanded and supplied ateach estimate of value. 11 The equilibrium price is given as usual bythe intersection of the demand and supply schedules. Withrestricted short selling, the supply curve is vertical at the number ofshares outstanding. Furthermore, in the absence of diversity ofopinion, the demand curve is horizontal. In this case, and in thiscase only, will the equilibrium price reflect the average of theinvestors’ evaluations. A diversity of opinion, in contrast, will bereflected in a downward sloping demand schedule, that is, thenumber of investors willing to hold the share will rise as the pricefalls. Here the price of the share will be higher than in the formercase, reflecting the views of the more optimistic segment of themarket rather than the average evaluation. The point is that theslope of the demand curve depends on the diversity of opinion. Thegreater the prevailing uncertainty, and hence the greater thediversity of opinion about the value of the share (and the steeperthe demand curve), the higher its price will be.What can be said about the impact of changes in the diversity ofopinion on the price of a share? First, we must stress that theconception of an ‘equilibrium’ share price implies nothing about itsstability. In the present setting the price of the share will alterwhenever its supply, the demand for it, or both, change. 12 A changein supply (a shift of the vertical supply curve) will occur as the resultof the company issuing new shares or buying back existing ones,and the effect on the price of such activity will be greater the greaterthe diversity of opinion in the market. 13 But this is probably the lessimportant case and we shall concentrate on the demand for theshare, taking its supply as given. We have already seen that the sharewill tend to be more ‘overpriced’ relative to the average evaluationthe higher the diversity of opinion in the market. The question then189
JOCHEN RUNDE AND JÖRG BIBOWis, starting from a given state of diversity of opinion in the market,what the impact of new information will be.There are a number of possibilities. First, new information mayreduce the diversity of opinion about its value. 14 The optimistsbecome less optimistic and the pessimists less pessimistic, so that, inthe aggregate, the share price comes closer to the averageevaluation. In graphical terms, the demand curve would flatten outand the price of the share would fall. Since the share can only be heldby a small proportion of the optimistic investors, it is the sellingpressure of former optimists who have become less optimistic thatleads the price to fall until it is again in line with their new opinionsabout what the share is worth (clearly this includes the possibilitythat some former non-holders change their minds sufficiently tobecome holders). Conversely, it is possible that new informationmay lead to an increase in the diversity of opinion in the market. Inthis case, by parallel reasoning, the demand schedule steepens andthe price rises.A second possibility is that the new information may leadoptimists to become more (less) optimistic and pessimists to becomeless (more) pessimistic. In the limiting case individual investors’opinions about the value of the share would neither diverge fromnor converge towards the average evaluation, but the averageevaluation would itself shift. Recall that the price is alwaysdetermined by the optimists in the market and will always exceedthe average evaluation by a greater or lesser amount. A thirdpossibility is that the new information may affect neither the slopenor the position of the demand schedule and hence leave the priceunaffected, but that some trading nevertheless occurs. Such tradingwill either be between holders who want to change the amount ofthe share that they hold in their portfolio or between holders andnon-holders who have changed camps. Clearly both sorts of tradesmay also occur in the cases already mentioned above. 15Miller mentions a fourth channel through which newinformation may impact on price by affecting the diversity ofopinion, the possibility that new information may affect the numberof potential investors who are paying attention to the relevant share.This possibility is related to the number of potential investorsexceeding the number of shares available, and draws attention tothe fact that information is not without cost. The new informationmay then affect the ‘overhang’ of investors over the number ofshares, thereby possibly affecting the diversity of opinion and,accordingly, the share price.190
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SUBJECTIVISM ANDECONOMIC ANALYSISTh
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SUBJECTIVISM ANDECONOMICANALYSISEss
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CONTENTSNotes 57References 594 Lach
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CONTENTS10 Expectations and stock m
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1INTRODUCTIONRoger Koppl and Gary M
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INTRODUCTIONdirection of Israel Kir
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INTRODUCTIONand revising plans, det
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INTRODUCTIONAs the language of Lach
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INTRODUCTIONits deep insight and me
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INTRODUCTIONthe frontispiece to thi
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SUBJECTIVISM IN ECONOMICS AND THE E
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3MISES AND LACHMANNON HUMAN ACTIONS
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MISES AND LACHMANN ON HUMAN ACTIONM
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MISES AND LACHMANN ON HUMAN ACTIONm
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MISES AND LACHMANN ON HUMAN ACTIONA
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MISES AND LACHMANN ON HUMAN ACTIONt
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MISES AND LACHMANN ON HUMAN ACTIONH
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MISES AND LACHMANN ON HUMAN ACTIONa
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MISES AND LACHMANN ON HUMAN ACTIONa
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MISES AND LACHMANN ON HUMAN ACTIONc
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MISES AND LACHMANN ON HUMAN ACTIONH
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MISES AND LACHMANN ON HUMAN ACTION2
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MISES AND LACHMANN ON HUMAN ACTIONW
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MISES AND LACHMANN ON HUMAN ACTIONT
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MISES AND LACHMANN ON HUMAN ACTIONA
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MISES AND LACHMANN ON HUMAN ACTIONc
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4LACHMANN ON THESUBJECTIVISM OF ACT
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THE SUBJECTIVISM OF ACTIVE MINDSThe
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THE SUBJECTIVISM OF ACTIVE MINDSsho
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THE SUBJECTIVISM OF ACTIVE MINDStha
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THE SUBJECTIVISM OF ACTIVE MINDSour
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THE SUBJECTIVISM OF ACTIVE MINDSor
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THE SUBJECTIVISM OF ACTIVE MINDSa p
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THE SUBJECTIVISM OF ACTIVE MINDSact
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THE SUBJECTIVISM OF ACTIVE MINDSexp
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THE SUBJECTIVISM OF ACTIVE MINDSLan
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SUBJECTIVISM AND IDEAL TYPESthis or
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SUBJECTIVISM AND IDEAL TYPESof Gott
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SUBJECTIVISM AND IDEAL TYPESIn the
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SUBJECTIVISM AND IDEAL TYPESsuffici
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SUBJECTIVISM AND IDEAL TYPESAccordi
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SUBJECTIVISM AND IDEAL TYPESto his
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SUBJECTIVISM AND IDEAL TYPESEconomi
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SUBJECTIVISM AND IDEAL TYPESanswer
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SUBJECTIVISM AND IDEAL TYPES1 B wan
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SUBJECTIVISM AND IDEAL TYPESconclus
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SUBJECTIVISM AND IDEAL TYPESOn the
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SUBJECTIVISM AND IDEAL TYPES——(
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ENDOGENOUS CHANGEIntroductionAmong
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ENDOGENOUS CHANGEconsequences. If,
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ENDOGENOUS CHANGEHahn’s notion of
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ENDOGENOUS CHANGEentertain theories
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ENDOGENOUS CHANGEwords, is it possi
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ENDOGENOUS CHANGEX=X (L*,X*) [1]w=X
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ENDOGENOUS CHANGEP=Wa 0+rP(K/X)wher
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ENDOGENOUS CHANGEThere is no room i
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ENDOGENOUS CHANGEmodel that Dutt ha
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ENDOGENOUS CHANGE3 The difficulty i
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7RADICAL SUBJECTIVISMAND AUSTRIANEC
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RADICAL SUBJECTIVISMdecisions under
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RADICAL SUBJECTIVISMconsidered as
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RADICAL SUBJECTIVISMnot simply enta
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RADICAL SUBJECTIVISMperformed by th
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RADICAL SUBJECTIVISMeconomic theory
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RADICAL SUBJECTIVISMAustrian resear
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Page 156 and 157: 8HIERARCHICALMETAPHORS IN AUSTRIANI
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Page 166 and 167: HIERARCHICAL METAPHORSMany of these
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Page 176 and 177: 9LACHMANN’S POLICYACTIVISMAn Aust
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Page 192 and 193: LACHMANN’S POLICY ACTIVISMKnowled
Page 194 and 195: LACHMANN’S POLICY ACTIVISMinvestm
Page 196 and 197: 10EXPECTATIONS ANDSTOCK MARKET PRIC
Page 198 and 199: EXPECTATIONS AND STOCK MARKET PRICE
Page 214 and 215: INDEXaction: individual 32-3, 38-9,
Page 216 and 217: INDEXefficient allocation/co-ordina
Page 218 and 219: INDEXmarket 119-20; theory of value
Page 220 and 221: INDEX19; stock market expectations1
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