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

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EXPECTATIONS AND STOCK MARKET PRICESequities generally depends on considerations over and aboveanticipated future prices and/or yields.These factors make it difficult to say much that is definite aboutthe relation between expectations and the course of equity prices. Infact, on the argument we have been developing, it is possible thatdivergent expectations about the future price of a share may lead toa corresponding reduction in the diversity of opinion about its‘correct’ value (if, for example, the impact of such expectations onequity valuations are offset by changes in perceptions of, andattitudes towards, risk and ambiguity, liquidity, confidence and soon). We have accordingly proposed that attention be directed athow heterogeneous market participants value a share, beginningwith the situation in which both holders and non-holders arecontent with their current position on that share. This provides asensible point of entry for the explanation of equity prices, that is,for an analysis that proceeds by beginning with existing equityprices and spelling out the possible factors that give rise to andgovern them. 18 One of these factors, clearly an important and oftendominant one, is the divergence of expectations in Lachmann’ssense. We have merely taken the opportunity to draw attention to afew more.Notes1 Lachmann (1977:72). Clearly the definiteness, scope and detail of the‘mental pictures’ he has in mind will depend on the situation in whichthey are arrived at, the relative importance of the ‘plan’ in the actor’sscheme of things, as well as the information available to and thepowers of imagination of the actor concerned. In the context of stockmarket transactions, and as the passage quoted in the introductionsuggests, the focus of attention will generally be on the return onequities, which depend on estimates and assessments of the possiblefactors that may affect the future flow of dividends and future prices.2 Lachmann is curiously reticent as regards the nature and structure ofthe expectations he has in mind even in his important essay on ‘Therole of expectations in economics as a social science’ (reprinted inLachmann 1977).3 Lachmann does not specify what he means by ‘forces’. We shallsubstitute the term ‘tendency’ where this will be understood as a causalpower that would bring about some specified phenomenon undercertain conditions (Lawson 1994a).4 Lachmann considers and rejects the main alternatives then available:Shackles (1949) theory of ‘potential surprise’ and the practice ofreducing well-defined probability distributions to certaintyequivalents. He would therefore presumably also reject the modern197
JOCHEN RUNDE AND JÖRG BIBOWversion of the certainty equivalent assumption: the practice of reducingexpectations to the expected value of some utility function, where thebeliefs about future ‘states of the world’ are represented by aconditional probability measure that corresponds either to anobjective probability law (rational expectations) or to a subjectiveprobability measure.5 Lachmann points out that prices that move into the outer range willattract the attention of the ‘more thoughtful’ market operators:The mere fact that in spite of heavy ‘speculative’ pressureencountered near the limits of the inner range, and engenderedby inelastic expectations and the sense of the ‘normality’ of theinner range, price could pass these limits at all is a pointer of thestrength of the forces which must have carried it past suchformidable obstacles. Such a move can hardly be due to randomcauses.(Lachmann 1978:31)6 For example:To coordinate bullish and bearish expectations is, as Keynesshowed, the economic function of the Stock Exchange and ofasset markets in general. This is achieved because in suchmarkets the price will move until the whole market is dividedinto equal halves of bulls and bears. In this way divergentexpectations are cast into a coherent pattern and a measure ofcoordination is accomplished.(Lachmann 1976:59)7 Lachmann does not say anything about how the actor may respond todifferences in the width of the imagined price intervals (the analogue,in the present context, to the actor’s attitude towards risk in expectedutility theory). In general it seems that shares that are perceived asmore risky in the present sense will be discounted relative to those thatare perceived as less risky, that is, that actors are generally risk averse.8 The boundary between the inner and outer intervals is seldom likely tobe a hard-and-fast one, for example, and is likely to be more or lessvague at different times. As in the case of differences in perceived riskand risk aversion, differences in ambiguity and attitudes to ambiguitymay affect the value investors attach to shares. It is interesting to note inthis context that Shackle’s theory of potential surprise may be regardedas a generalisation of the Practical Range approach. The difference isthat on Shackle’s theory there is a continuous gradation of intervals, theouter limits of each bearing some degree of ‘potential surprise’.9 The average evaluation need not be the ‘correct’ evaluation in the senseof being that which corresponds to the ‘fundamentals’ of the economy(if such things as fundamentals exist).10 This is no more than the familiar ‘winner’s curse’, an informaldiscussion of which appears in Kreps (1990:83–7).11 Putting it another way, the share will always be held by a smallfraction of the potential investors in the market. Miller simplifies the198
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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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RADICAL SUBJECTIVISM——(1990)
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8HIERARCHICALMETAPHORS IN AUSTRIANI
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HIERARCHICAL METAPHORScoordination
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Page 166 and 167: HIERARCHICAL METAPHORSMany of these
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Page 172 and 173: HIERARCHICAL METAPHORS(eds) (1993);
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Page 176 and 177: 9LACHMANN’S POLICYACTIVISMAn Aust
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Page 182 and 183: LACHMANN’S POLICY ACTIVISM‘plan
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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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