The previous post introduced the concept of elasticity of
expectations as developed by Ludwig M. Lachmann and applies it to the stock
market. Lachmann added that the velocity of price change is important as well
as the practical range and break outs from the range:
“‘Explosive’ price change is seen to be the main cause of
elastic expectations, both in the sense of violent change, and in that it
destroys the existing basis of expectations, the sense of normality, which
provided a criterion of distinction between the more probable, the less
probable, and the highly improbable. It does so by demonstrating that the
highly improbable, which had been excluded from our range, is possible after
all. Now, as we saw, a price will pass the limits of the range with difficulty.
As it approaches them it encounters increasing pressure from inelastic
expectations resulting in sales at the upper and purchases at the lower limit.
To overcome the pressure of these stabilizing market forces the price movement
will most probably have to be carried by a strong ‘exogenous’ force, i.e. one
originating outside the market, unknown to it and therefore not taken into
account when expectations were formed.”[1]
