Einde inhoudsopgave
The Decoupling of Voting and Economic Ownership (IVOR nr. 88) 2012/3.3.2.0
3.3.2.0 Introduction
mr. M.C. Schouten, datum 01-06-2012
- Datum
01-06-2012
- Auteur
mr. M.C. Schouten
- JCDI
JCDI:ADS600560:1
- Vakgebied(en)
Ondernemingsrecht / Rechtspersonenrecht
Voetnoten
Voetnoten
Scott Page, The Difference: How the Power of Diversity Creates Better Groups, Firms, Schools and Societies 176 (2007).
See Gilson & Kraakman, supra note 6, at 580,581 n.103 (observing that the role of price in uninformed trading 'resembles the role of consensus forecast in polls of expert opinion' and that the price mechanism 'permits prices, in some circumstances, to reflect aggregate—or consensus—forecasts that are nearly optimal over the long run than those of any individual trader'). This observation is based in part on two earlier finance works: S. Sheffrin, Rational Expectations 141-46 (1983) and Robert E. Verrechia, On the Theory of Market Information Efficiency, 1 J. Acct. & Econ. 77 (1979); see also Page, supra note 41, at 177 (noting that 'stock markets encapsulate the predictions of a crowd of people about future dividend streams'); Michael J. Mauboussin, Revisiting Market Efficiency: The Stock Market as a Complex Adaptive System, 14 J. Applied Corp. Fin. 8 (2002).
See supra note 40; see also William P. Bottom, Krishna Ladha & Gary J. Miller, Propagation of Individual Bias Through Group Judgment: Error in the Treatment of Asymmetrically Informative Signals, 25 J. Risk & Uncertainty 147,147-48 (2002) (noting that the emerging body of theory on the Jury Theorem 'is based on a model of individual judgment that recognizes limits on the information available to individuals though it does not address limitations on their ability to process information').
Condorcet, Selected Writings 62 (Keith Michael Baker ed., 1976).
For an overview and discussion of Kahneman and Tversky's work and its relevance to investor behavior, see Barberis & Thaler, supra note 7, at 12-22.
The concept of bounded rationality goes back to Herbert Simon. See, e.g., Herbert A. Simon, A Behavioral Model of Rational Choice, 69 Quart. J. Econ. 99 (1955). For a somewhat different approach to the concept than that of Kahneman and Tversky (and that of behavioral fmance generally), see Gerd Gigerenzer, Rationality for Mortels: How People Cope With Uncertainty (2008). For an explanation of the difference between the two approaches, see Barberis & Thaler, supra note 7, at 1 n. 1.
For shareholders to make the right decisions, they need to process their information rationally. When it comes to investment decisions as well as voting decisions, information processing is not just important, it is extremely important. To see why, recall that we characterized investment decisions as judgments on the net present value of a firm's future cash flows and voting decisions as judgments on the value of a real option. Both judgments involve a prediction of the future. Scott Page, who has written extensively on collective wisdom and is careful to distinguish between information aggregation and prediction, makes precisely this point when he notes that "[s]tock market prices and election outcomes are predictions by huge numbers of people."1
Thus, when it comes to making investment decisions, it is not just a matter of reading the available information to determine whether the true state of the world is A (the firrn is worth, say, more than one billion dollars) or B (the firm is worth less than one billion dollars). Rather, the available information, which will be incomplete, needs to be interpreted as part of the complicated task of predicting the probability that going forward, the firrn will be able to generate cash flows the present value of which exceeds one billion dollars.2 Similarly, when it comes to deciding whether or not to vote for a merger, it is not a matter of reading the available information to determine whether the true state of the world is A (the merger increases shareholder value) or B (the merger decreases shareholder value). Rather, the information is the starting point for an intricate assessment of the probability that, going forward, management will be able to realize the projected synergies.
In this light, it is remarkable that most scholars simply assume that when voters have no information they will vote at random, and that when they have some information they will process it rationally and therefore be better than at random.3 Condorcet himself, by contrast, acknowledged the possibility that voters may be worse than at random. The reason, he observed, "can only be found in the prejudices to which this voter is subject.4 This observation leads us to what psychologists such as Daniel Kahneman and Amos Tversky have found, namely that people do suffer from prejudices, or cognitive biases, when making decisions.5 This Onding has served as a building block for an entire discipline within the field of economics (behavioral finance), which seeks to understand how cognitive biases, or, more generally, bounded rationality, affects shareholders' investment decisions.6 Drawing on this research as well as research on political voting, the remainder of this section explores how bounded rationality may affect shareholders' voting decisions. This is done by focusing on three expressions of bounded rationality: sample size neglect, optimism, and attribution errors.