Why does price differ from value?
Fundamental and market value: a dualism – from the analytical ideal and efficient markets to behavioural finance and reflexivity.
Rolandas Rakštys · Lecturer · Vytautas Magnus University, Agriculture Academy · Faculty of Bioeconomy Development, Department of Business and Rural Development · [email protected] · ORCID 0000-0003-0299-9930
Chapter 1 “Foundations of Business Value”, section 1.1.3 · English translation of v0.16.5 (2026-10-15) · set v1.0.2 · 16 slides, ≈ 32 min
Rakštys, R. (2026). Chapter 1. Foundations of Business Value (English translation of v0.16.5, 2026-10-15). Verslo planavimas ir vertinimas [Business planning and evaluation]. Vytautas Magnus University, Agriculture Academy. https://rakstys.eu/studijos/verslo-planavimas-ir-vertinimas/en/skyriai/ch01/ · CC BY-NC-ND 4.0
An objective property or a social construct?
Not a technical nuance of valuation but a deep philosophical disagreement – the dualism between fundamental (intrinsic) and market value.
The analytical ideal
Fundamental (intrinsic) value
The present value of expected future cash flows discounted at a rate that accurately reflects the systematic risk of the asset.firm foundation theory“Economic gravity” – the true, long-run capacity of an asset to generate economic benefit, independent of short-term market fluctuations. An analytical judgment: the properties of the asset, not investors’ moods (Hardin et al., 2025).
Formally – the discounted cash flow (DCF) formula (1.1, see section 1.2). In practice – a great many judgments:
Each parameter carries substantial uncertainty.
Empirical reality
The price at which an asset is actually sold (or could be sold) in secondary markets – the intersection of supply and demand through the price mechanism.
The collective judgment of heterogeneous, boundedly rational market participants.
Fundamental value
An analytical judgment grounded in the properties of the asset.Market value
The International Valuation Standards (IVS) define it as “the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion” (IVSC, 2022).Fair value (IFRS 13)
International Financial Reporting Standard (IFRS) 13 defines it as the exit price in an orderly transaction between market participants (IFRS Foundation, 2013).Switch on all three assumptions
The efficient market hypothesis (EMH): market prices reflect all available information fully and immediately, so that systematically “beating the market” on a risk-adjusted basis is impossible (Fama, 1970).
A benchmark, not a guarantee
Grossman and Stiglitz (1980)
Even within the EMH literature it is accepted that information and trading are costly, so the “extreme” version of efficiency is too strong as an empirical description of reality.Fama (1991)
Market efficiency as a benchmark against which real deviations are measured.Complete efficiency is an ideal benchmark, not a guarantee.
Why may price deviate systematically?
Overconfidence
Investors overestimate the accuracy of their information and the reliability of their forecasts.Loss aversion
Losses are felt more strongly than an equivalent gain (Kahneman & Tversky, 1979).Anchoring
Valuations “attach themselves” to essentially arbitrary reference points – historical prices, round numbers.Herding
A tendency to follow the majority, encouraged by informational cascades and social pressure.Narrative effect
Compelling stories about technologies or leaders influence decisions independently of the data (Shiller, 2017).The biases do not operate in isolation; they interact and produce cumulative effects.
What inflates the price?
The example from the section: overconfidence + herding + a compelling narrative can create a speculative bubble in which market price exceeds fundamental value many times over.
Why does divergence persist?
Classical theory: rational arbitrageurs will exploit deviations quickly and return prices to fundamentals.
In reality arbitrage is risky, costly and limited:
Short-selling constraints
It is not always possible to “bet” against an overvalued asset.Margin requirements
An arbitrageur may be forced to close a position before the price converges.Model risk
The estimate of fundamental value may itself be wrong.Noise trader risk
Irrational investors may keep pushing the price in the “wrong” direction for longer than the arbitrageur’s capital allows them to wait.“Markets can remain irrational longer than you can remain solvent.”A phrase attributed to John Maynard Keynes
Divergence may be structural rather than merely temporary.
What pulls together, what pulls apart?
The relation is not static – it shifts continuously with institutional, informational and psychological conditions.
Convergence P ≈ V
- High information transparency
- Strong liquidity and competitive arbitrage
- Stable expectations and institutional trust
- Long time horizon
Divergence P ≠ V
- Information asymmetry and unreliable signals
- Arbitrage constraints and shortage of capital
- Spread of narratives and emotion
- Regime shift: speculation > fundamentals
Over what horizon are you looking?
Albuquerque et al. (2016); Hardin et al. (2025)
Both phenomena are compatible: over the long run – gravitation, over the short run – sentiment and momentum.
When price changes the fundamentals
The expectations of market participants not only reflect reality but also change it – creating a feedback loop.
Market value is not a passive “reflection” of fundamental value but an active agent.
Valuation is at once descriptive (it describes a present state) and performative (it acts on a future one).
Two functions, one loop
The cognitive function
Participants try to understand reality: expectations passively reflect cash flows, risk, growth.The manipulative function
Participants try to change reality: decisions actively alter the fundamentals themselves.V – value, E – expectations, D – decisions · formula 1.8 – in section 1.2
The dependent variable of one function becomes the independent variable of the other – a circular, self-referring system.
This matters especially in financially constrained environments: uncertainty shocks and financing frictions can affect investment and long-run value materially (Alfaro et al., 2024; Hartman-Glaser et al., 2025).
Which standard do you choose?
Different situations call for different standards of value, and the choice between them is not neutral. We met the bases in section 1.1.1 – here: what position does each take on the dualism?
Fair market value
FMVThe transaction price between hypothetical informed parties; permits control and liquidity discounts.Taxation, inheritance of propertyInvestment value
Value to a specific buyer, including that buyer’s synergies and strategic advantages (with assumptions specific to the buyer).Mergers and acquisitions (M&A), strategic decisionsFair value (IFRS 13)
The exit price in an orderly transaction between market participants; a 3-level hierarchy.Financial reporting, asset impairment testingThe dualism is persistent, not accidental
Convergence is possible, but divergence is structurally explicable:
Value management must take account not only of “true” value but also of how market perception acts on the fundamentals themselves.
For discussion · Question 1.11. George Soros’s concept of reflexivity holds that market price acts on fundamentals. Give an example from a Lithuanian or Baltic business where this might occur, and identify the channel through which the feedback would operate.
References
Albuquerque, R., Eichenbaum, M., Luo, V., & Rebelo, S. (2016). Valuation Risk and Asset Pricing. Journal of Finance, 71(6), 2861–2904. https://doi.org/10.1111/jofi.12437
Alfaro, I., Bloom, N., & Lin, X. (2024). The Finance Uncertainty Multiplier. Journal of Political Economy, 132(2), 577–615. https://doi.org/10.1086/726230
Fama, E. F. (1970). Efficient Capital Markets: A Review of Theory and Empirical Work. The Journal of Finance, 25(2), 383–417. https://doi.org/10.2307/2325486
Fama, E. F. (1991). Efficient Capital Markets: II. The Journal of Finance, 46(5), 1575–1617. https://doi.org/10.2307/2328565
Freeman, R. E. (1984). Strategic Management: A Stakeholder Approach. Pitman.
Graham, B., & Dodd, D. L. (1934). Security Analysis. McGraw-Hill.
Grossman, S. J., & Stiglitz, J. E. (1980). On the Impossibility of Informationally Efficient Markets. The American Economic Review, 70(3), 393–408.
Hardin, W. G., Jiang, X., Wu, Z., & Zhang, Q. (2025). Intrinsic Value, Transaction Price Movement, and Cointegration. Financial Management. https://doi.org/10.1111/fima.12496
Hartman-Glaser, B., Mayer, S., & Milbradt, K. (2025). A Theory of Cash Flow-Based Financing with Distress Resolution. Review of Economic Studies. https://doi.org/10.1093/restud/rdaf009
IFRS Foundation. (2013). IFRS 13 Fair Value Measurement. https://www.ifrs.org/issued-standards/list-of-standards/ifrs-13-fair-value-measurement/
International Valuation Standards Council [IVSC]. (2022). International Valuation Standards. IVSC.
Kahneman, D., & Tversky, A. (1979). Prospect Theory: An Analysis of Decision Under Risk. Econometrica, 47(2), 263–291. https://doi.org/10.2307/1914185
Shiller, R. J. (2017). Narrative Economics. American Economic Review, 107(4), 967–1004. https://doi.org/10.1257/aer.107.4.967
Shleifer, A., & Vishny, R. W. (1997). The Limits of Arbitrage. The Journal of Finance, 52(1), 35–55. https://doi.org/10.1111/j.1540-6261.1997.tb03807.x
Soros, G. (1987). The Alchemy of Finance: Reading the Mind of the Market. Simon & Schuster.
Soros, G. (2014). Fallibility, Reflexivity, and the Human Uncertainty Principle. Journal of Economic Methodology, 20(4), 309–329. https://doi.org/10.1080/1350178X.2013.859415
Williams, J. B. (1938). The Theory of Investment Value. Harvard University Press.
Rakštys, R. (2026). Chapter 1. Foundations of Business Value (English translation of v0.16.5, 2026-10-15). Verslo planavimas ir vertinimas [Business planning and evaluation]. Vytautas Magnus University, Agriculture Academy. https://rakstys.eu/studijos/verslo-planavimas-ir-vertinimas/en/skyriai/ch01/ · CC BY-NC-ND 4.0
These slides are based on the textbook Verslo planavimas ir vertinimas [Business Planning and Evaluation]. The text was translated, structured and visually laid out with the help of artificial intelligence tools (Claude), following the protocol for working with AI and the verification procedures set by the author.