ABSTRACT
Investment decisions and “the state of long-term expectation” (Chapter 12) become more complicated with organized financial markets, where ownership and economic power are dissociated, and where stock prices substitute for interest rates according to a new conventional logic whereby “the existing market valuation, however arrived at, is uniquely correct,” by current knowledge of the facts influencing future returns, and that this valuation “will only change in proportion to changes in this knowledge.” Individual valuation thus becomes inseparable from the values set by the market, by “mass psychology.” Here, decisions require “a practical theory of the future,” based on “our own individual judgement,” but when speculative activity dominates, on “the judgement of the rest of the world.” It is the maintenance of a “conventional basis of valuation,” considered as “reasonably ‘safe’,” that then enables the individual to decide “with the idea that the only risk he runs is that of a genuine change in the news over the near future.” The individual's decision is then based not so much on what he thinks others think, but on what he believes to be the “conventional basis of valuation” capable of managing certain coordination and cognitive constraints that were preventing him from acting.
