In an article for CFA Institute, Thomas Mayer, CFA, PhD (founding director of the Flossbach von Storch Research Institute) proposes an approach to explain price movements in financial markets.
The key points of the approach, called the “Discovering Markets Hypothesis,” are summarized as follows:
- “When investors act or observe action in the market, they can improve their knowledge by comparing theirs to others.’
- While investors can share and compare their subjective knowledge and cause prices to move by acting on this knowledge, Mayer writes, “In turn, the movement of prices feeds back into the narratives.”
- New and old investor narratives may compete for a time, Mayer argues, but eventually “the argument will be settled, and a new narrative will rule.”
The article concludes that, although we shouldn’t expect to be able to predict market outcomes, “by understanding how markets move, we can better focus on what is important for the result. Identifying and observing the drivers of market developments can help us narrow down the range of outcomes.”