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

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