A Game of Sentiment
November 3, 2013·0 comments
Markets don't reward what's true. They reward what everyone believes everyone else believes. Investors aren't analyzing companies or economic data. They're calculating what millions of other investors will think other investors think, creating nested loops of speculation that have almost nothing to do with fundamental value. This mechanism, buried beneath the language of efficiency and reason, is what actually moves prices.
- The game isn't about picking winners. It's about predicting what the crowd will decide is a winner. Your personal judgment of a stock's merit is useless. What matters is calculating which way the crowd will move before it moves there.
- A signal only has power when everyone knows that everyone else heard it. A brilliant insight shared privately changes nothing. The same insight broadcast on CNBC makes markets move, not because investors agree with it, but because they know everyone else heard it too.
- The Big Four media channels (Wall Street Journal, Financial Times, CNBC, Bloomberg) aren't reporting market news. They're the infrastructure that creates synchronized belief. Once a signal appears prominently in one, it cascades through all four, and every professional investor must assume every other investor got the message.
- Time and ambiguity determine how quickly the game reaches its conclusion. When a signal is clear and the number of outliers is small, consensus forms fast. When messages are fuzzy or many players don't conform, the cascade takes longer to equilibrate.
- The traders who generate alpha aren't smarter analysts. They're the ones who hear signals before sentiment hardens and can predict the crowd's direction before the crowd arrives there. The edge isn't information. The edge is speed and pattern recognition in how crowds move.
The Why of Epsilon Theory
- Make more informed decisions as an investor and citizen.
- See through the nudges of Big Politics and Big Media.
- Become a better consumer of news.
- Maintain your autonomy of mind in a swarm of narratives.
- Join a community of more than 100,000 truth-seekers.
Unlock instant access to this and hundreds of other evergreen essays that explore the world of narrative through hard science and human wisdom.
Looking for Deeper Insights?
Unlock exclusive market intelligence, trade ideas, and member-only events tailored for investment professionals and active investors with Perscient Pro.
VISIT PRO
DISCLOSURES
This commentary is being provided to you as general information only and should not be taken as investment advice. The opinions expressed in these materials represent the personal views of the author(s). It is not investment research or a research recommendation, as it does not constitute substantive research or analysis. Any action that you take as a result of information contained in this document is ultimately your responsibility. Epsilon Theory will not accept liability for any loss or damage, including without limitation to any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Consult your investment advisor before making any investment decisions. It must be noted, that no one can accurately predict the future of the market with certainty or guarantee future investment performance. Past performance is not a guarantee of future results.
Statements in this communication are forward-looking statements. The forward-looking statements and other views expressed herein are as of the date of this publication. Actual future results or occurrences may differ significantly from those anticipated in any forward-looking statements, and there is no guarantee that any predictions will come to pass. The views expressed herein are subject to change at any time, due to numerous market and other factors. Epsilon Theory disclaims any obligation to update publicly or revise any forward-looking statements or views expressed herein. This information is neither an offer to sell nor a solicitation of any offer to buy any securities. This commentary has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. Epsilon Theory recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.
