Utilizing Neo-Classical Equilibrium Properties, CAPM Explains Pricing on Idealized Capital Markets

In general, an equilibrium theory only has the power to explain a rigid, irrevocable state and is useless to indicate rational resource allocation in a dynamic economy (Herbener 1996, 160; Mises [1949] 1998, 708–9; Morgenstern 1935, 353). As a result, finding an application in a dynamic reality is unlikely. CAPM [Capital Asset Pricing Model] is an equilibrium model that explains pricing in the capital market under idealized assumptions. The application of such restrictive constraints should be carefully considered, especially for the sensitive purpose of calculating a decision value. Caution is advised by neo-classical luminaries. While the CAPM builds on the assumptions of the efficient market hypothesis, which was introduced by Fama (1970, 1965), Fama and French (2004, 43–4) later refute CAPM’s practical applicability and warn of its “seductive simplicity.”

—Michael Olbrich, Tobias Quill, and David J. Rapp, “Business Valuation Inspired by the Austrian School,” Journal of Business Valuation and Economic Loss Analysis 10, no. 1 (2015): 12.

The Austrian “Subjective Business Valuation Theory” As a Rival to the Neoclassical Discounted Cash Flows Valuation Method

The significant failure rates observed in mergers and acquisitions (M&A) indicate structural deficiencies in business transactions. This paper identifies serious weaknesses in common valuation methods that play a key role in poor transaction practice. Common valuation methods are in particular discounted cash flow (DCF) methods. DCF methods are usually based on neoclassical theories that assume the existence of a perfect and complete capital market. As will be demonstrated, the underlying theoretical patchwork is contradictory and lacks utility. Therefore, utilizing DCF methods to value a business and deduce economic decisions from such a valuation is decision-making built on sand. Following a normative-deductive methodology, this paper seeks an alternative theoretical concept to build a business valuation theory on solid ground. Such an alternative is found in the Austrian School of thought. The resulting valuation concept, subjective business valuation theory, is based on the theory of marginal utility proposed by Gossen, which was rediscovered and refined by the scholars of the early Austrian School. Contrary to highly restrictive neo-classical valuation, subjective business valuation approaches reality and is therefore well-suited for practical implementation.

—Michael Olbrich, Tobias Quill, and David J. Rapp, “Business Valuation Inspired by the Austrian School,” abstract, Journal of Business Valuation and Economic Loss Analysis 10, no. 1 (2015): 1.