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

EXPECTATIONS AND STOCK MARKET PRICESin assessing the significance of price changes observed in thepast for future changes we shall tend to neglect those webelieve to have been due to random causes, and to confine ourattention to those we believe due to more ‘permanent’ causes.(ibid.: 24)Expected values are then compared to realised values in order toinfer whether initial assessments were correct.But even here, it is only possible to infer his views on the possiblestructure of the expectations he has in mind from his application ofLange’s (1944) theory of the ‘Practical Range’. 4 In terms of thistheory, price expectations are taken to consist of an imagined ‘inner’interval of possible prices that the actor would consider ‘normal’over some period or at some date, bounded on either side by an‘outer range’ of prices considered ‘possible’. This conception isconsistent with Lachmann’s views on expectations being subject touncertainty: it appears to permit a rough gradation of possibleprices in terms of a weak form of (comparative) epistemicprobability, while avoiding the standard assumption about beliefscorresponding to numerically definite probabilities. From theactor’s perspective, then, prices that lie within the inner price rangeare more probable than those lying in the outer ranges, and priceslying within the outer ranges are more probable than prices that fallbeyond the outer ranges. Lachmann does not say anything about thetime horizon of the expectations he has in mind.Lachmann’s advocacy of the ‘Practical Range’ conception isbound up with his views on how actors interpret the position andmovement of actual prices within the ranges and, accordingly, howthis influences the formation of expectations. There are threepossibilities. First, actual prices may vary within the normalinterval. In this case, Lachmann argues, their movement will beattributed to ‘minor’ random causes and, as such, will be interpretedas ‘functionless’ (meaningless). If a particular view of the normalrange is widely held and firmly based, moreover, prices that movetowards the limits of the inner range will tend to be brought backtowards the centre by speculative pressure (speculators selling nearthe upper limit and buying towards the lower limit).The second possibility is that prices may move into the outerrange, perhaps as the consequence of the operation of ‘major’(permanent) forces. Whether or not such price movements areinterpreted as ‘meaningful’, according to Lachmann, depends onhow long the new prices are sustained. If prices swing back into the185