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“On Wall Street, there are many copies, few originals. Woody Dorsey is an original par excellence.”
Grant’s Interest Rate Observer
Economic research has long assumed that markets are in equilibrium, and that investors act on similar motives and knowledge. The revolution of behavioral finance recognizes that markets are actually in perpetual disequilibrium.
The market reflects the behavior of investors. And while they may all wish to make money, how they act on that goal is often irrational. Just the way people see and understand the market is influenced by cultural biases, emotions and behavioral patterns.
As Woody Dorsey explains in Behavioral Trading: Methods for Measuring Investor Confidence, Expectations and Market Trends –
“This perpetual error-making process, or inherent participant bias, is the central symptom, but least studied area, of the market. Doesn’t it seem logical to try to measure this bias or mood?… In fact, identifying the degree of disequilibrium between market prices and participant bias is the best way to infer the market’s next move. We can make money precisely by estimating the errors of others in the market.”
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