The price of a stock is the discounted value of expected future cash flows. Not actual flows. Not past flows. The flows the market anticipates. The present price is a function of the imagined future.
The discounted cash flow formula is a financial variational principle. The price $P$ of an asset is given by
where $E[CF_t]$ is the expected cash flow at time $t$ and $r$ the discount rate. The present price is a weighted sum of all anticipated futures. It is not determined by the company's past. It is determined by what the market believes it will become.
Doctrine
A price is a future compressed into a number. It acts on the present with the force of a fact, even though it is merely an expectation. When the expectation is sufficiently shared, the distinction between expectation and fact disappears.
Keynes (1936) names the mechanism. When a sufficient number of actors share the same anticipation, the anticipation alters behaviours, capital flows, investment decisions, and ultimately produces the very conditions it anticipated. The self-fulfilling prophecy is not a market pathology. It is its normal mode of operation.
Soros (1987) draws the consequence: market participants are not passive observers of an external reality. Their perceptions alter the reality they perceive. The price is not a reflection. It is an act. MacKenzie (2006) confirms it empirically: the Black-Scholes model did not describe the options market. It created it. Prices conformed to the model after its adoption, not before.
Merton (1948) had laid out the general structure long before finance. The self-fulfilling prophecy is a false definition of the situation that provokes a new behaviour, which in turn makes the originally false conception come true. Causality runs from belief to fact.
Vecteur ouvert
The anticipated future constrains the present. The constrained present produces the anticipated future. The loop does not close. It sustains itself.
Any organisation that publishes forecasts participates in the construction of what it claims to foresee. Any specification produces the conditions of its own realisation. The question is not whether the future acts on the present. In finance, that is an accounting fact. The question is where finance ends and where physics begins.
