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 About Market Semiotics  Our Relationship to Behavioral Finance Woody Dorsey
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Economics has long assumed that markets are in equilibrium, and that all investors act on similar knowledge and motives. The premise of Behavioral Finance recognizes that markets are actually in perpetual disequilibria. But however irrational, investor behavior isn’t necessarily random. Rather, these investing choices often follow distinct patterns that lie beneath the noise of innumerable market indicators and media commentary. Once seen, such habits may appear obvious. Yet most market people never really look for them because they’re trained to focus only on the most fashionable market story. The key to applying behavioral theory in practice is recognizing and diagnosing these behavioral tendencies. Doesn’t it make sense to measure the habits and the bias of investors? In fact, identifying the degree of disequilibria between market prices and participant bias is the best way to infer what the market will do next. We can invest profitably by estimating the errors of other investors.
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