The “efficient markets” theory is half right. The market’s mechanism for allocating prices is extremely fair. It’s a simple two-way auction process by which price moves over time to facilitate trade either up or down-an extremely rational, efficient process. The other half of the efficient market equation, however, is often wrong; people are seldom rational when they make financial decisions. The first step toward more profitable investing is to accept that market irrationality is due to the fact that people make decisions based on (unavoidably) incomplete information, which often results in the worst decisions being made when it is most important to be right.

Human nature is such that we tend to overweight information that supports our presupposed inclinations. We seek out a few pieces of the bigger
picture that make us feel confident in our decisions. This recurring overconfidence is behind the idea that markets are “irrational in a redictable manner,” a landmark theory put forth by Nobel Prize-winning psychologists Daniel Kahneman and Amos Tversky.
But Kahneman and Tversky didn’t take this information to the next level. They didn’t explore how to take advantage of that fact. All markets alternate between periods of stability and crisis. By monitoring market structure in real-time context, it is possible to recognize paradigm shifts in equilibrium. Market indicators such as excess make it possible to identify when the status quo is changing, which results in opportunities to distinguish favorable (and unfavorable) investment opportunities. In other words, it is possible to ameliorate risk by recognizing imbalances caused by irrational human behavior such as the herd instinct, which pushes price away from value.
Everyone talks about the problems of investing and market behavior. One must be proposing a solution, a means of interpreting market behavior through the lens of human consciousness, and then quantifying that information in a way that enables investing on a more probabilistic basis.
Welcome to the new world 🙂