Re: Sustainable Stock Prices

["Harry Veeder" <veed0001@xxxxxxxxxxxxxxxx>]

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>From: "J. Barkley Rosser, Jr." <rosserjb@xxxxxxx>
>To: POST-KEYNESIAN THOUGHT <pkt@xxxxxxxxxxxxxxxx>
>Subject: Re: Sustainable Stock Prices
>Date: Tue, Apr 11, 2000, 4:55 pm
>

>Harry,
>     There is a very large literature arguing that how one can
>explain why stock prices are so volatile while dividends are
>not is due to people varying the discount rates they are using
>in carrying out their implicit present value calculations.  However,
>survey and other evidence suggests that people do not in fact
>vary their subjective discount factors all that much and certainly
>not enough to justify such price volatility.  Clearly they are varying
>their expectations of future dividends or capital gains.

I am not trying explain *volatility*. I am trying to make sense
of *bubbles* or the emergence of consistently overvalued stocks
like the case of the Dutch tulip.

>From what I can gather bubbles are to economics like ball lightening
is to physics. Some economists regard the notion of overvaluation as
uneconomic or subjective fancy, some economists treat it as real
but don't really have a satisfactory explanation of how it arises,
persists and bursts. In other words bubbles are on the
fringes of economic theory.

(Personal anecdote: My mother and grandfather have both seen ball
lightening. My grandfather saw a ball of light fly down his stairs
and out his front door. My mother saw it in her kitchen in '63 or
'64 during a thunder storm. It appeared by an outlet on the counter,
a ball of white light roughly the size of an orange. It drifted a little,
and then disappeared after several seconds. At the same moment it
disappeared the vacuum tubes in the kitchen radio popped.)


>      I am in a hurry at the moment so will not provide references in
>this post, but can do so later if you really want them.  Much of this
>discussion is covered in Robert Shiller's _Market Volatility_, 1989,
>MIT Press.
>Barkley Rosser

Yes I would like to see them. The discussion on discounting would still
be interesting.

Harry Veeder