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

JOCHEN RUNDE AND JÖRG BIBOWis, starting from a given state of diversity of opinion in the market,what the impact of new information will be.There are a number of possibilities. First, new information mayreduce the diversity of opinion about its value. 14 The optimistsbecome less optimistic and the pessimists less pessimistic, so that, inthe aggregate, the share price comes closer to the averageevaluation. In graphical terms, the demand curve would flatten outand the price of the share would fall. Since the share can only be heldby a small proportion of the optimistic investors, it is the sellingpressure of former optimists who have become less optimistic thatleads the price to fall until it is again in line with their new opinionsabout what the share is worth (clearly this includes the possibilitythat some former non-holders change their minds sufficiently tobecome holders). Conversely, it is possible that new informationmay lead to an increase in the diversity of opinion in the market. Inthis case, by parallel reasoning, the demand schedule steepens andthe price rises.A second possibility is that the new information may leadoptimists to become more (less) optimistic and pessimists to becomeless (more) pessimistic. In the limiting case individual investors’opinions about the value of the share would neither diverge fromnor converge towards the average evaluation, but the averageevaluation would itself shift. Recall that the price is alwaysdetermined by the optimists in the market and will always exceedthe average evaluation by a greater or lesser amount. A thirdpossibility is that the new information may affect neither the slopenor the position of the demand schedule and hence leave the priceunaffected, but that some trading nevertheless occurs. Such tradingwill either be between holders who want to change the amount ofthe share that they hold in their portfolio or between holders andnon-holders who have changed camps. Clearly both sorts of tradesmay also occur in the cases already mentioned above. 15Miller mentions a fourth channel through which newinformation may impact on price by affecting the diversity ofopinion, the possibility that new information may affect the numberof potential investors who are paying attention to the relevant share.This possibility is related to the number of potential investorsexceeding the number of shares available, and draws attention tothe fact that information is not without cost. The new informationmay then affect the ‘overhang’ of investors over the number ofshares, thereby possibly affecting the diversity of opinion and,accordingly, the share price.190