What can be explained by economics and what cannot be explained by economics? 2

I would like to continue my topic, "what can be explained by economics and what cannot be explained by economics". Today I want to talk about what can be explained by economics in the stock market.

Let's talk about the volatility in the stock market. Normally we calculate stock price as a function of the sum of all future discounted returns (dividends); however, this is not how we judge our stocks' values. Companies are growing, so their values are not constant and can change over the long run. This is a very important source of uncertainty. Once there is a source of uncertainty, then the people's expectations do not agree with each other because of their constraints to receiving sufficient information and analyzing information. Such constraint exists and it is impossible to remove such constraint, it is as natural as the production constraint (we can see the outcome of analysis is our product). Because people have different expectations, then they will sell when the market price is above their expected prices and they will buy when the market price is under their expectations. This is why trading takes place in the market. The difference between trading in the stock market and trading in the good is that traders in the stock market do not consider the cost of trading, instead they make decisions based on their expected outcomes with their expected probability distributions.

In addition, some people say it is irrational for investors to be influenced by others. However, we can explain why it is rational for investors to be influenced by others. Everyone in the stock market is potentially a buyer as well as seller. When you see a market price increase, it indicates that your potential buyers are now willing to accept higher prices, and this also increases the probability of meeting your price targets (in the case that your price target is above the current market price), as we believe price increases are caused by resolution of uncertainty. Moreover, because we know our constraints and ability limits, it is rational for us to adjust our evaluations and expectations with the professionals who have more information and are more capable of analyzing financial issues.

I will discuss it is possible for bubbles to exist in a rational market tomorrow.