Real Prices and Ideal Prices - FASB and The Epistemology of Prices

FASB and The Epistemology of Prices

The Financial Accounting Standards Board makes it very explicit that accounting measures for price information may not not be completely exact or fully accurate, and that they may not be completely verifiable or absolutely authoritative. They may only be an approximation or estimate of a state of affairs. A price aggregate may be made up from a very large number of transactions and prices, which cannot all be individually checked, and the monetary value of which may involve a certain amount of interpretation. For example, a price may be set but we may not know for sure whether a good or asset actually traded at this price, or how far exactly the actual price paid diverged from the ordinary set price. However, the Board argues that, within certain acceptable limits of error, this is not a problem, so long as we bear in mind the practical purpose of the measures:

"In summary, verifiability means no more than that several measurers are likely to obtain the same measure. It is primarily a means of attempting to cope with measurement problems stemming from the uncertainty that surrounds accounting measures and is more successful in coping with some measurement problems than others. Verification of accounting information does not guarantee that the information has a high degree of representational faithfulness, and a measure with a high degree of verifiability is not necessarily relevant to the decision for which it is intended to be useful."

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In other words, an approximate estimate of magnitudes may be sufficient, with a margin of error which can be statistically computed. Provided several measurers obtain the same result following a standard procedure, the price information can be trusted. If price information is challenged in a court of law, different authorities may be called on to provide evidence to show that the information is either true or false.

Banks normally ensure that accounting information about deposit accounts is absolutely exact (apart from the occasional, unintended bank error). If a bank would make errors in accounting for transactions, people would no longer trust the bank, and take their money elsewhere. With the aid of computers, errors can usually be prevented or else quickly identified; as against that, the more markets expand, the larger the total volume of transactions, which statistically means that the possibility of error increases. Technically it also means, that price information about large transaction volumes becomes highly dependent on the efficient functioning of computer technology, and if computer systems crash or the electricity supply lapses, it may be that large amounts of price data are suddenly not available anymore.

Quantitative accuracy is always of prime importance in the banking industry. Nevertheless, in their commercial policy, banks also use price information which is much more approximate or anecdotal, insofar as it refers to conditions which are "likely" or "probably the case" - there may be no readily available means of verification. To some extent, therefore, the banking industry also relies on trust that the price information provided is accurate and correct. If people's own money is at stake, they are of course highly motivated to ensure that this accuracy and trust is preserved. But usually there are also legally enforced rules governing trade. Already in the earliest states in societies where substantial trade occurred, the state appointed supervisory authorities to combat cheating with measurements of traded goods and services, imposing legal penalties for fake measures. Nowadays, false measurement in trading practices is often considered a crime.