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

EXPECTATIONS AND STOCK MARKET PRICES‘average evaluation’, far from reflecting the wisdom of the market,then takes on an entirely different hue. Keynes refers to securitiesprices so determined as the ‘conventional valuation’. In situations inwhich everyone is trying to anticipate the anticipations of others,new information, which might have precious little to do with thereal prospects of the investment, may cause violent changes in theconventional valuation.We have taken Miller’s framework as a general starting point inour discussion. How does what we have said so far relate toLachmann’s notion of equity prices emerging out of a balance ofdivergent (bulls’ and bears’) expectations? Clearly we cannot domuch more than scratch the surface of the issue in the spaceavailable. Accordingly, we shall simply remark on some of therelevant issues, drawing on Keynes’s analysis of the ‘two views’ or‘bull-bear’ position in his Treatise on Money (1971) and hisconcepts of the own rate of interest and ‘liquidity premium’ in theGeneral Theory (1973). We begin with investors’ beliefs aboutfuture price movements, keeping questions about the diversity ofopinion in the background. We then briefly return to the diversity ofopinion in the section on own rates of interest.The bull-bear positionKeynes defines a ‘bear’ as one ‘who prefers at the moment to avoidsecurities and lend cash, and correspondingly a “bull” {as} one whoprefers to hold securities and to borrow cash—the formeranticipating that securities will fall in cash value and the latter thatthey will rise’ (Keynes 1971:224). In his Treatise on Money, theportfolio decision is simplified to a choice between bank deposits (ormore precisely, ‘savings deposits’) and securities (where no furtherdistinction is made between shares and bonds). As in the laterGeneral Theory (Keynes 1973), the portfolio decision is not an ‘allor nothing’ choice. Rather, investors tend to hold a proportion oftheir wealth in the form of ‘savings deposits A, which are not highlyunstable over the short period. The bear position shows up in theform of the proportion of wealth held in ‘savings deposits B’, whichare unstable. However, as Keynes points out, bearish beliefs do notnecessarily have to be expressed through the banking system, butmay be expressed outside it (through direct lending to the moneymarket or the Stock Exchange, for instance, or through shortselling). The point to note here is that Keynes allows bearish beliefsto be reflected in changes in the size and possibly the composition of193