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In effect, we have - gasp - a social agreement of how we play the market game.

Keynes called it a "convention":

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. ...

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 investments markets and if we can rely on tthe maintenance of the convention, an investor can legitimately engourage 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 judgement, and which is unlikely to be very large. ... 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 of the convention and on his therefore having an oportunity to revise his judgement and change his investment, before there has een time for much to happen. ...

... But it is not surprisingthat a convention, in  an absolute view of things so arbitrary, should have its weak points. ...

"It's the statue, man, The Statue."
by Migeru (migeru at eurotrib dot com) on Tue Mar 27th, 2007 at 06:46:26 AM EST
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