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

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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
JOCHEN RUNDE AND JÖRG BIBOWparticular when the possibility of short selling is taken into account.It appears, then, that Miller’s framework provides a possibleexplanation of the relative pricing of non-blue chips on the onehand, and blue chips and bonds on the other (bonds serve as abenchmark in Miller’s portfolio investment decision).This brings us to the temporal features of Miller’s analysis and, inparticular, that his share-issuing company has a very short life with adefinite terminal date at which assets are liquidated. In practice, ofcourse, equity investment differs from this in two important ways.In the first place, shares have an indefinite life-expectation. Andsecond, shares are traded on liquid securities markets, institutionsthat serve to provide liquidity to the (portfolio) investor. Theseinstitutional factors have wide-ranging implications. First off, theypermit the investment horizon of the individual portfolio investor todepart from the life span of the particular company involved. Thetype of commitment that the portfolio investor enters into whenbuying shares is therefore very different from the range ofcommitments that the management of the firm is setting up in orderto generate the cash flows that represent what the portfolio investoris ultimately interested in. Whereas the firm is to some extent stuckwith its physical capital once this has been acquired and/orproduced (and has many other commitments that cannot be easilydissolved), investment in equities is liquid from the viewpoint of theinvestor and may be dissolved at any time. It follows that theportfolio investor is generally not concerned with the proceeds ofliquidating the company, but with the possible proceeds of sellinghis or her stake in the company as an ongoing concern. And this inturn means that the investor also has to take into account what thelikely price of the share will be in the future.An important consequence of all this is that market participantsmay rationally show little concern with attempting to assess the‘real’ prospects of the share. Instead they might try to anticipatehow new information may affect other investors’ evaluations of theshare, and what the likely effect on the price will be. It is of courseKeynes, more than anyone else, who stresses that securities marketsorganised to provide liquidity provide an incentive—undesirablefrom the social point of view—for investors to focus less on thefactors that govern the yield of the real investment over its wholelife, than on anticipating changes in the share price before themarket. Keynes’s famous beauty contest parable describes theoutcome of behaviour directed at anticipating ‘what averageopinion expects the average opinion to be’. The notion of the192
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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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RADICAL SUBJECTIVISMoutcomes of the
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Page 156 and 157: 8HIERARCHICALMETAPHORS IN AUSTRIANI
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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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