In practice we have tacitly agreed, as a rule, to fall back on
what is, in truth, a convention. The essence of this
convention-though it does not, of course, work out quite so
simply-lies in assuming that the existing state of affairs
will continue indefinitely, except in so far as we have specific
reasons to expect a change. This does not mean that we really
believe that the existing state of affairs will continue
indefinitely. We know from extensive experience that this is most
unlikely. The actual results of an investment over a long term of
years very seldom agree with the initial expectation. Nor can we
rationalise our behaviour by arguing that to a man in a state of
ignorance errors in either direction are equally probable, so that
there remains a mean actuarial expectation based on
equi-probabilities. For it can easily be shown that the assumption
of arithmetically equal probabilities based on a state of ignorance
leads to absurdities. We are assuming, in effect, that the existing
market valuation, however arrived at, is uniquely correct
in relation to our existing knowledge of the facts which will
influence the yield of the investment, and that it will only change
in proportion to changes in this knowledge; though, philosophically
speaking, it cannot be uniquely correct, since our existing
knowledge does not provide a sufficient basis for a calculated
mathematical expectation. In point of fact, all sorts of
considerations enter into the market valuation which are in no way
relevant to the prospective yield.
Nevertheless the above conventional method of calculation will
be compatible with a considerable measure of continuity and
stability in our affairs, so long as we can rely on the
maintenance of the convention.
For if there exist organised investment markets and if we can
rely on the maintenance of the convention, an investor can
legitimately encourage himself with the idea that the only risk he
runs is that of a genuine change in the news over the near
future, as to the likelihood of which he can attempt to form
his own judgment, and which is unlikely to be very large. For,
assuming that the convention holds good, it is only these changes
which can affect the value of his investment, and he need not lose
hiS sleep merely because he has not any notion what his investment
will be worth ten years hence. Thus investment becomes reasonably
'safe' for the individual investor over short periods, and hence
over a succession of short periods however many, if he can fairly
rely on there being no breakdown in the convention and on his
therefore having an opportunity to revise his judgment and change
his investment, before there has been time for much to happen.
Investments which are 'fixed' for the community are thus made
'liquid' for the individual.
It has been, I am sure, on the basis of some such procedure as
this that our leading investment markets have been developed. But
it is not surprising that a convention, in an absolute view of
things so arbitrary, should have its weak points. It is its
precariousness which creates no small part of our contemporary
problem of securing sufficient investment.
Some of the factors which accentuate this precariousness may be briefly mentioned.