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

JOCHEN RUNDE AND JÖRG BIBOWassessments of the risk attaching to those estimates and theirattitudes towards risk. This means that heterogeneous investorsmay attach the same monetary value to an asset on the basis ofquite different combinations (and values) of the terms that enterinto their calculations. As before, no general statement can bemade about how new information might affect asset prices. Takethe special case of trading at unchanged prices, for instance, whichmay occur when investors assess new information differently.These differences may impact on any of the values of the termsentering into the own rates calculus, and beliefs (and attitudes)may be diverging in one respect and converging in another. In theextreme case, prices may change without any transactions takingplace at all (which does not imply that beliefs about any of therelevant terms remain unchanged).But an additional complexity has now entered. Keynes relates theliquidity premium to the notion of confidence, uncertainty or doubtabout the general economic climate at the systemic level that mayhave no particular connection with the prospects of any particularasset concerned. Changes in the state of confidence will, he argues,be reflected in the size of the liquidity premium attaching to moneyand other relatively liquid assets (Bibow 1998). While investors mayhave very different views on the relative liquidity premia ondifferent types of assets, and may change their views in differentways in the light of new information in this respect as well, what hecalls a ‘crisis of confidence’ will be characterised by a general ‘flightinto liquidity’. Again, changes in the state of confidence, with theirassociated impact on the relative liquidity premiums attaching todifferent kinds of assets, may occur with or without changes inbeliefs in respect of any of the other elements entering into the ownrates of interest calculus.ConclusionWe have attempted to provide an interpretation of Lachmann’sdistinction between convergent and divergent expectations,building on his conception of expectations as imagined priceintervals. This interpretation was then used in a discussion of theidea that equity prices emerge out of a ‘balance’ of divergentexpectations. Two principal complications were introduced, theimpact on the price of equities of their effective supply relative tothe number of market participants (holders and non-holders)valuing them, and that the value that market participants attach to196