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

EXPECTATIONS AND STOCK MARKET PRICESThus far we have said nothing about individual investors’attitudes towards risk. Miller makes the novel point that in thesituation depicted above even risk-neutral investors have a reason toemploy some kind of ‘risk premium’, or better, ‘uncertaintypremium’. For risk-neutral investors who understand the impact ofthe diversity of opinion on the price of shares would aim to discountthe value of the share in order to avoid ex post disappointment. If allinvestors were risk neutral and acted in this way, share prices wouldbe brought into line with the hypothetical average evaluation (and ifthe average evaluation were ‘correct’ then neither over- nor underinvestmentwould occur). To be sure, the share would still be held bythose who are most optimistic about its value. But given thatindividual investors do not know the average evaluation, they mustall guess by how much they must discount the price of the share tocompensate for the estimated bias in the price that results from theirbehaviour in the aggregate.This brings us to the question of risk-averse behaviour. AsLachmann argues, in situations of uncertainty, expectations willgenerally not take the form of point predictions. We have alreadysuggested that expectations with relatively wider inner intervalsmight be regarded as relatively more risky, from the perspective ofthe individual investor. Differences in riskiness will generally bereflected in differences in investors’ valuations of shares, the normalcase being that risk-averse actors discount projects that involvegreater risk. What we have already said about the complexity of therelation between expectations and the price of a share, now seen toreflect rough judgement of and adjustment for risk, is given furtherforce. The proportion of risk averters and risk lovers in marketsegments may also change, moreover, again leading to changes inthe diversity of opinion. 16Yet the picture is still far from complete. In the first place, it isimportant to distinguish between what are generally regarded as‘blue chips’ on the one hand, and ‘non-blue chips’ as covering therest on the other. Miller’s framework seems to be most relevant forthe non-blue-chip category, since short selling opportunities donormally exist in the case of blue chips. Moreover, such shares arecarefully watched by large numbers of financial analysts with vastfinancial resources at their command. This is not to suggest that themarkets in such shares will not show a diversity in opinion, but thatthe possible impact of new information on the number of investorsanalysing the share relative to the number of shares outstandingappears to be much less relevant in the case of blue chips, in191