ТЕОРИЯ ОПТИМИСТИЧЕСКИХ ОЖИДАНИЙ Л.И.ПЕТРАЖИЦКОГО
4th Global Conference on Business & Economics. Proceedings. Oxford University,
Oxford, UK. June 26-28, 2005. ISBN:0-9742114-3-5.
THE THEORY OF OPTIMISTIC EXPECTATIONS BY L. I.
PETRAZHITSKY. 100 YEARS AFTER.
Dr. Siarhei Lukin.
University of Entrepreneurship. Minsk. Belarus
Professor of Saint-Petersburg University L.I. Petrazhitsky1 was one
of the most acknowledged researchers of the stock enterprising in Russia.
Unfortunately, his extensive work, published in 19112 still waits to be
properly assessed by economists, psychologists and lawyers.
The research of Petrazhitsky is directed against classic liberal
paradigm of abstract “homo economicus” behavior, which integral part is
rational behavior. «All this work, - points out Petrazhitsky, - serves as an
evidence of necessity to put theory and history of economic (and politic)
processes on scientifically-psychological ground... instead of using all kinds
of psychological fictions and naiveties, like the assumption of total egoism
combined with omniscience about present and future, used as a basis for
economic laws in modern economic publications»3. As applied to the stock
business, Petrazhitsky puts his theory of optimistic expectations and
optimistic increase in opposition to the concept of rational behavior. One of
the basic ideas in his argumentation is the statement, that the economical
activity of the joint-stock enterprise is not originated from the stockholders.
The stockholders are, in the essence, not the entrepreneurs, but the
«creditors», whose profit is not of the businessmen’, but of the investors’
nature4.
The second assumption, developed in other Petrazhitsky researches,
is the psychological law on the possibilities of emotions to control intellectual
processes and force them into single direction, force false conceptions, «all
the way to illusions and hallucinations» and eliminate contradicting ideas and
considerations. «This psychological feature can be seen especially clear and
graphic, if the estimated chances can be accessed by mathematically precise
calculations, and the results of this calculations shows prevalence of the
negative chances, when this negative prevalence can be uniformly applied to
every person, taking risks... This psychological feature of the citizens... is a
source of sure advantage of the governments, earning money on lotteries»5.
That is, the influence of emotions, namely the optimism, exaggerates the
possibility to win, and the rational reasoning on the extremely small chances
to win is not taken into consideration.
Supported by this two basic ideas, Petrazhitsky makes following
conclusions on the motives of the investor’s behavior. Certain vagueness of
the future profit addresses the «lottery» motive of this behavior, leading to
optimistic profit expectations, «optimistic increase» (Petrazhitsky’ term) to
the future income. The more is the uncertainty in the aims and the results of
the joint-stock company, the bigger is the optimistic increase. In normal
situation, the optimistic increase enables the joint-stock enterprises to exist,
allowing the founders to gather funds to start business activities. In cases of
stock boom, the rapid growth of the optimistic increase gives dubious
businessmen a chance to acquire substantial resources in short time, without
real intention to use them for any activities. We should note, that Petrazhitsky
didn’t equate stocks and lottery game, but thought of the optimistic
expectations as of important, often determinating psychological factor,
influencing the demand and, respectively, the market price of the stocks.
Optimistic increase, according to Petrazhitsky, gives a possibility to
gather funds and invest them into business, giving, for example, 5% of the
profit, when the public is interested in at least 10% of the profit. The missing
5% is the size of optimistic increase, which is added by the public to the
«internal value» of the share. Petrazhitsky sees here a resemblance with a
Ricardo rent law, because the rise of the demand in the stocks market creates
the conditions to involve less «fruitful enterprises»6.
The strongest part of the Petrazhitsky research is the analysis of the
investors’ psychology in the stocks boom situation. He starts the analysis
from distinguishing the uncertainty factor, «factor X», that plays important
role in strengthening the «lottery» part of «eventual wins» and, respectively,
in the rise of optimistic increase. When establishing of the enterprise, that
aims for producing and marketing well known goods, with predictable
expenses and market price, the stock exchange fluctuations and rapid growth
of stock prices are not to be expected. The «lottery» element will be minimal
for such stocks. The influence of the optimistic increase, respectively, will be
insignificant too. «On contrary, for the enterprise with «big expectations»... if
the features of the new enterprise, it’s technical results, market demand for
this results are in general the «X», so the big bonuses as well as big losses can
be equally expected... our law because of it’s own nature finds favorable
conditions to fully and sharply manifest itself. This deductive conclusion from
our theory finds lots of evidence in the history of the stocks market. This
history constantly repeats the fact that the disproportionally big… stock price
usually seen in different countries... first, in the cases of distanced, abroad
enterprises, that are a big Ex for the common people because of the distant
location and unexplored status of that lands (John Low) second, for the
enterprises of a new type before they ceased to be «new» (railways, asphalt,
credits mobiliers). In its essence, every story of the stock epidemic describes
almost exclusively «the life of the enterprises of this kind»7. We can add to
this the example from the modern history, namely stock boom of the middle
1990-ties. Stock business and stock market in Russia in general was big «X»
for the potential stockholders. From the theory of the optimistic expectations
perspective it’s easy to understand the enthusiasm and optimism, which
helped to sell stocks of «МММ», «Hermes», «Hopr» etc. with very little
information on the purpose of these companies. By the way, when analyzing
the influence of factor «X», Petrazhitsky made a conclusion about stock
policies, stating that «...as far as it’s possible to do tuning existing legislation,
we shouldn’t allow this X-es to exist in emission prospects etc. if it’s possible
to replace them with certain information»8. In Russian Empire, due to
licensing system in stock policies, these X-es were largely reduced. In
Russian Federation of the middle 1990-ties, the government showed passivity
and policy of non-intervention, thus only increasing X-es, steaming up the
market and pushing stock business of the liberation revolution era to the
inevitable collapse.
Thanks to the uncertainty factor, which influence is greatly multiplied during
«stock frenzy», the investor (stockholder), according to Petrazhitsky, is
mostly driven in his actions by emotions, then by consciousness, and «...every
emotional force in its ultimate power can lead to ugly and destructive
manifestations, that can make a accidental observer to question intellectual
development and even mental health of an actor»9. In support of this idea,
Petrazhitsky cites many authentic examples of establishing of joint-stock
enterprises for clearly absurd purposes. Capital stock of such enterprises had
been gathered surprisingly fast. It’s important no note, that these examples
cover sober-minded and cautious Englishmen. One of the companies set its’
purpose the merging of races…, another one was going to manufacture iron
wares from saw dust (after the subscription for «saw dust company» covered
the stock capital, the founders announced, that the subscription for the stocks
was opened to learn the quantity of fools in London), another subscription
was opened «for one perspective enterprise, which aim is yet to be
announced...» We can find even more colorful examples, proving
Petrazhitsky theory, in the modern history of Russia. It’s enough to recall the
episodes of TV commercials of МММ, «Hopr» etc.. However, unlike the
Russian, some British companies of XVIII – XIX centuries (mentioned before
«saw dust» one, for example) were voluntary giving subscription money back.
This particular feature of investors’ behavior during stock boom,
highlighted by Petrazhitsky, received attention of other researchers as well.
W. Zombart, analyzing the same phenomena in his 1913 work, wrote: «people
are spontaneously caught by frenzy, passion, intoxication, negating any
rational thought. By reciprocal suggestion, any object… is wrapped by
exaggerated conceptions of value and becoming able to continuously rise in
price. This rise is a stimulating power, awakening the gambling passion. This
passion consequently overgrows primary greed and becomes a single driving
source of the mind»10. At stock market, the greed of the stockholder is
multiplied by gambling passion, as denoted by both Zombart and
Petrazhitsky.
Petrazhitsky extended the influence of the optimistic expectations
law during «stock frenzy» on the founders of joint-stock enterprises, which
are often subject to common optimism and, like John Lo, expecting
miraculous profits from the companies they are founding11. Being sure of the
flawlessness of their projects, they perceive themselves as stockholders
benefactors. The facts of deliberate deceiving, obvious mystification, which
are quite often on stock market, are described by Petrazhitsky as an indirect
results of the optimistic expectations of the people. Due to this optimism, the
shareholders are ready to be cheated, and swindlers are fast to use this
situation.
We should note that Petrazhitsky is not discussing the moral
aspects, only defining deliberate deceiving and providing false information
about enterprises as definitely immoral.12 Without getting too deep into
debates on the moral aspect of using human passions for commercial
purposes, we will note, that lottery business, and exploitation of gambling
passion in general should be put close to other passion-driven businesses,
brothels and public houses etc.
A creator of a theory is often unable to limit its use to specific field.
He has an addictive tend to widen this field. We believe that Petrazhitsky
didn’t manage to avoid this path too. He clearly overestimated the influence
of the optimistic increase, using it to explain overproduction and origin of
economic crisis.13 Using optimistic increase law as a basis, Petrazhitsky
develops two theorems. The first one is about inverse negative relation
between optimistic increase and numbers of frauds in stock market crisis.
According to Petrazhitsky «the more the pressure of the psychological drive
to optimistic increase of stock profits, the lesser is real input of frauds to
emerging and explanation of stock crashes and cataclysms.»14. The second,
more sound theorem is supposing direct correlation between the optimistic
increase and shifting of the stock enterprises founders away from primary
objectives of created companies. The founders of stock enterprises are
becoming more interested in stock operations, forgetting about originally
declared objectives.
The expectations of economic subjects and its’ influence at
economic processes has been researched before Petrazhitsky (for example,
J.G.K.Wicksell)15 and after him, including J.Keynes and М. Friedman.
Specific attention to expectations was given by the researchers of the new
classic macroeconomics R.Lukas, T.Sargent16, that added rational
expectations to the classic rational behavior of homo economicus. This theory
describes passionless economic agent, acting without emotions at the
condition of many assumptions (like perfect flexibility of prices and absence
of inequality of informational flow to economic agents). As applied to
investments field, such approach can be reasonable for institutional investors.
But for describing the behavior of small investors Petrazhitsky theory looks
more convincing. Thus, the Petrazhitsky theory of optimistic expectations
should reclaim its well-deserved place in the history of economic agents’
expectations research.
The modern investment in developed countries surely differs from
that of the XVIII, XIX and even the early XX century. Institutional
investments are greatly diminishing «emotional component», revealing
commonly recognized in modern investments sciences direct correlation of
profit and risks. But natural persons, small investors didn’t leave the market
and the stock boom (though less evident) occurs occasionally. This means,
that the theory of optimistic expectations is still actual. Process of primary
accumulation of capital, situations of stock «frenzy», phenomena of arising
stock business including situation in Russia at the middle 90-ties of the XX
century are described by Petrazhitsky theory quite convincingly.
The law of optimistic expectations has also a deep theoretical
meaning, by demonstrating the limited nature of any human economic
behavior paradigm. This theory helps to understand the nature of stock
business, to realize the threats of unconstrained freedom of founding jointstock enterprises that brought such negative consequences to the stock market
and Russian economics in general at the middle 90-ties of the XX century.
1
Lev Iosifovich Petrazhitsky (1867-1931) was the head of the Saint Petersburg University chair of Law
Encyclopaedia and Philosophy for twenty years, was the representative of cadet party at the first State Duma.
From 1918 to 1931 lived and worked in Warsaw. The field of his researches was human acts motivation in
different spheres, including economic. See his works «О мотивах человеческих поступков, в особенности
об этических мотивах и их разновидностях».СПб., 1904. Введение в изучение права и нравственности.
Эмоциональная психология. Изд. 3-е. СПб., 1908.
2
Петражицкий Л.И. Акции , биржевая игра и теория экономических кризисов. Т.1. СПб., 1911.
3
ibid.-p VI.
4
ibid. pp. 24, 31, 41.
5
ibid. pp. 51-52.
6
ibid. p. 136.
7
ibid. p. 80.
8
ibid.
9
ibid. p. 91.
10
Зомбарт В. Буржуа. М., 1994. С. 43.
11
See Петражицкий. Акции, биржевая игра и теория экономических кризисов... С. 98.
12
ibid.
13
ibid. p.104.
14
ibid.
15
See. Блауг М. Экономическая мысль в ретроспективе. М., Дело. 1994. С.477-479, 596.
16
ibid. pp.632-639