Introduction

In discussions around finance and economics, we often speak of the market as if it were an amorphous or mystical entity with a mind and will of its own. Conventional financial theory reinforces this tendency, often describing markets as neutral arenas where information enters, liquidity flows, and prices emerge. More recently, the rise of AI, LLMs, and NLP has shifted the focus to technology-driven analysis; these newer approaches assume measuring market outcomes is nearly deterministic, treating quantified data as the truth. But, in reality, a market is a structured forum where individuals meet to pursue their own economic ends. Whether these individuals cooperate as partners or operate as adversaries, the market remains nothing more (and nothing less) than the aggregate result of their choices.

The focus of this essay is to reframe the conversation around these choices, moving beyond conventional frameworks, to better understand the impulse behind market action. Markets, by their nature, are future-oriented, seeking to “price in” what has not yet occurred rather than valuing what has already happened. This quality is not semantic, and calls into question whether asset prices can ever be “correct” in any absolute sense, or whether “correctness” itself is a product of the beliefs that aggregate through positioning and settle via price.

A “good” earnings call is irrelevant if the consensus anticipated something better and “bad” financials are trivial if the world already expected a disaster. Markets do not simply react to facts; they respond to the disillusionment with, or fulfillment of, expectations. However nebulous or transient those expectations may be. Price movements therefore are not solely driven by data, but by the gap between what was predicted (or assumed) and what actually occurred. The cause of this disparity, how it is expressed in the market, and the foundation upon which we interpret it, is what is commonly known as sentiment.

When we discuss sentiment, we are not referring to a single emotion or individual stance. It is an intersubjective experience, providing us with our interpretive lens, one whose influence on price formation proves far more consequential than facts and “fundamentals” alone. This process of interpretation never occurs in a vacuum and every observation is filtered through a priori assumptions, incentives, and temperaments. Thus, we are not merely participants in the market; we are the essential catalyst, whose perception creates the market in the first place.

What follows is not an empirical study but a conceptual, abstract piece that establishes a philosophical schema for investigating sentiment’s role in price formation. Testable implications that follow from this endeavor, including predictions about valuation convergence, multiple heterogeneity, or the sentiment-dependence of corrections, are reserved for future supporting work. The overall thesis presented applies across asset classes, though it was developed primarily through equity market examples. Conclusions remain valid regardless of investment horizon, as short-term traders and long-term allocators alike address ambiguity with judgment, even though the tenor of that judgment and what informs it can change.

I write from the perspective of an investor with over 20 years in the market, first having witnessed the effects of the Dot-com Bubble as a teenager; then the Sub-Prime Mortgage Meltdown and the resulting Great Financial Crisis, the subsequent rise of Bitcoin | Crypto, and now the emergence of Artificial Intelligence. These experiences have shaped the observation presented here: that capital markets are collective manifestations of human experience, resolved via trading and settlement, and best understood through the lens of the human actor, not the idealized rational agent of traditional financial and economic theory.¹

If this argument holds, the search for objective value is not just challenging, but irrational, as it pursues something that cannot exist in the form traditional theory assumes. Risk cannot be measured against a “true” baseline that does not exist, which reduces investment decisions to a contest for durable consensus instead of a discovery of hidden truth. The investor who recognizes this would not abandon analysis, but redirect it from the impossible task of discovering intrinsic worth to a disciplined understanding of which narratives can attract and retain capital. The resulting causal chain is simple: 1. Sentiment Initiates. 2. Price Records. 3. Valuation Rationalizes.

Although existing theories acknowledge the influence of sentiment on markets, they differ in how they conceptualize that influence. Some interpret sentiment as a deviation from rationality, others as a feedback mechanism, and still others as an exogenous force affecting otherwise rational markets. A common thread among these perspectives assumes the existence of an objective baseline, independent of sentiment, to which prices and valuations could (theoretically) converge. This essay unravels that thread.

Footnotes

1. Thaler, Richard H. Misbehaving: The Making of Behavioral Economics. W. W. Norton & Company, 2016. ↩