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

ROGER KOPPLof a martingale in which the higher moments are not expected tochange over time. See LeRoy 1989 for a review of basic issues.)The statistical evidence for the efficiency of asset markets isstrong enough to have persuaded many serious and competentjudges. Others doubt. There are many apparent counterexamples.Evidence reviewed below suggests that observable marketconditions help determine how efficient asset markets are. Thedegree of efficiency may be an endogenous variable.According to the ‘Big Players theory’, the order-giving propertiesof the filter of profit and loss are corrupted when ‘Big Players’derange markets (Koppl and Yeager 1996; Butos and Koppl 1993).Yeager and I define a Big Player as ‘anyone who habitually exercisesdiscretionary power to influence the market while himselfremaining wholly or largely immune from the discipline of profitand loss’ (Koppl and Yeager 1996:368). An interventionist financeminister is our paradigm of a Big Player. But a Big Player may be anyactor who combines three things, namely, the power to influencemarkets, a degree of immunity from competition and use ofdiscretion in the exercise of his power. We produce qualitative andstatistical evidence that Big Players induce herding in asset marketsand thus reduce market efficiency.The point of the Big Players theory can be put in Schutzian terms.It is a matter of psychological expectations. Big Players divert eachtrader’s attention from underlying conditions of supply and demandtowards the personality of the Big Player. It is hard to know what aBig Player will do. Traders must base their expectations on a pictureof the market in which a highly non-anonymous personal type isprominent. But this picture is always more or less dubious. Traderscome to place a lower weight on their own expectations and moreweight in the opinions of other traders. The importance of thisnon-anonymous type and the ignorance and uncertainty traders feelregarding the Big Player encourage them to follow the trend. BigPlayers encourage herding in asset markets.The point may also be put in Hayekian evolutionary terms. It is amatter of dispositional expectations. The presence of Big Playersdestabilises the evolutionary environment. The disposition to followtrends is less likely to bring losses; the disposition to respond tofundamentals is more likely to produce losses. Big Players make luckcount for more, skill count for less. Traders who survive marketcompetition under Big Players will have a higher average propensityto herd. Big Players encourage herding in asset markets.In the Big Players theory psychological and dispositional76