Understanding First Cause in Markets

Modern financial theory is best conceptualized as a meticulous study of ripple effects: how information flows, how prices adjust, and how risk is distributed. Yet this often ignores that for a ripple to occur, someone first threw a stone. Before any trade is executed, before any model is consulted, before any price is quoted, someone must decide to act. The discipline’s conversations are surprisingly lacking on this essential act of human volition, almost as if the human catalyst were a mere footnote.

As a result, financial analysis typically proceeds from first principles, in which we identify foundational truths and derive conclusions from them. With this perspective, it is easy to understand why financial commentary treats the market as though it possesses agency, actively “digesting” information or “pricing in” expectations. But this language obscures a fundamental question, one that appears uncomplicated, only because the framing is usually implicit: what actually moves the market? In order to answer that question, the arguments presented here take a different approach, one focused on first cause, that asks not what truths we can reason from, but what serves as the impetus for action in the first place.

The traditionalist view is epistemological, centered on what we know (the nature and scope of knowledge), while the view of this essay is ontological, concerned with the necessary conditions for action (what exists and the conditions for existence). This dichotomy leads us to ask whether or not the market is an entity that acts, or a system that reacts? With an ontological view, the logical conclusion is that the market has no independent agency or volition of its own. The market has no hands, no brain, no activity and no liquidity independent of its participants; by its very nature, it cannot act. Thus markets do not act; they react, with the human actor serving as the necessary conduit and condition in every market, at every moment.

This conclusion will elicit a natural, visceral, reaction from the entrenched, orthodox finance academics. In response, advocates of the Efficient Market Hypothesis¹ may claim that competition forces prices to reflect available information, but that does not avoid the interpretive step that leads to action after information gains meaning, nor explain why identical information produces divergent conclusions. Behavioral Finance² practitioners would emphasize systematic departures from rational expectations, but must still begin with human agency that seeks to transform uncertainty into choice. Reflexivity³, in theory, could provide the best retort by asserting that expectations shape the very conditions they must then respond to, treating belief as both input and output. Even here, feedback loops cannot self-initiate; someone must assess the market and commit capital before feedback occurs.

Models, metrics, and valuation methodologies have their purposes, but they inevitably measure what they assume. This shows that characterizing markets as autonomous and inherently efficient systems is a conceptually incoherent stance. If we ignore the question of who or what instigates market action, we mistake the effect for cause, treating price as an explanation when it would be more accurately viewed as an outcome.

Footnotes

1. Fama, Eugene F. 1970. “Efficient Capital Markets: A Review of Theory and Empirical Work.” The Journal of Finance, Papers and Proceedings of the Twenty-Eighth Annual Meeting of the American Finance Association, vol. 25 (2): 383-417. ↩

2. Kahneman, Daniel, and Amos Tversky. 1979. “Prospect Theory: An Analysis of Decision Under Risk.” Econometrica 47 (2): 263-92. ↩

3. Soros, George. 2013. “Fallibility, Reflexivity, and the Human Uncertainty Principle.” Journal of Economic Methodology 20 (4): 309-29. ↩