And that’s a wrap.

There’s a lot more in the article. It’s dense, and I strongly encourage you to read it.

If you found this thread useful, please repost and follow @TheTimeInvestor for more investing insights.

Have a plan, and stick to it.

3. Design the trade

- Which bias is creating the inefficiency?
- What mechanism will make price converge to value?
- What horizon/scenario set?

Exploiting behavioral inefficiencies is about not thinking differently, but thinking clearly when everyone else is thinking the same.

2. Spot the mispricings

- Visible behavioral biases
- Bubble signs
- Distal beliefs dominating the narrative

Confront price → value.

The question that haunts us now: how do you exploit these inefficiencies?

1. Diagnose the crowd

- Who is on the other side of my trade?
- How diverse are the opinions?
- How, and how fast, do beliefs spread?

No diagnosis → no edge.

3. Bubbles

Driven by extreme sentiment rather than cash flows.

You have to learn to distinguish between:
- testable beliefs → Crocs $CROX are shoes = fact
- distal beliefs → They’re super stylish = narrative (better be so)

Markets pay a lot for narratives… until the facts punch them in the face.

Look at financial magazine covers: they’re often already late to reality and completely ignore mean reversion.

2. Extreme sentiment

Optimism and pessimism are often contrarian signals.

Especially when they’re tied to speculative names: young companies, small caps, unprofitable… Basically, where uncertainty is at its peak.

Here’s a list of key behavioral biases:

1. Recency bias

Humans tend to project the recent past into the near future.

Reality is often very different:
- After big run-ups → high valuations → low future returns
- After big drawdowns → low valuations → high future returns

Prices don’t always follow cash flows; they regularly get tempted by human psychology.

Mauboussin & Callahan insist on the need for diverse opinions.

Contagious idea → highly connected network → the idea spreads like a virus → diversity takes a hit → inefficiencies grow.

Behavioral biases alone are not enough to create inefficiencies → the crowd stays wise as long as opinions are diverse.

The real danger comes when everyone starts thinking and acting by imitation.

Prices disconnect from value all at once.

He shows up every day and quotes a price, usually fairly stable.

But sometimes his extreme moods take over: he becomes euphoric or depressed.

Mr. Market is human.

If you want to win at a game, you should start by understanding the rules…

Behavioral inefficiency =
- investor behavior tends to make price ≠ value
- drivers: extreme emotions, herding
- persistence: human nature doesn’t change (easily…)

Think about Mr. Market, Benjamin Graham’s imaginary personification of the market.

Most market inefficiencies don’t come directly from a lack of information.

They come from human behavior (and even more so from social behavior).

Prices start to diverge from value when everyone starts seeing the world the same way as everyone else.

- the rise of tech brought stock-based comp everywhere → Buybacks help offset dilution and support per-share metrics.

That's all folks!

Follow me @TheTimeInvestor so you don’t miss what’s next.

If you found this thread useful, feel free to share it.

Take care.

In short: don’t just ask “is this a good business?”

Focus instead on:
- where it sits in the cycle
- how fast returns are likely to normalize
- whether the market is already pricing in your scenario

Write down your assumptions, have a plan, and stick to it with patience.