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Digest
Bayes-Nash equilibria explain how investors make optimal decisions in markets where information is unevenly distributed. Every participant operates with a mix of private insights and market-wide signals, adjusting their expectations based on what others are likely to do.
The result is a dynamic pricing process rather than an instant equilibrium.
For a value investor, this means more than just fundamental analysis—it’s about understanding how and when the market will recognize a mispricing. If an investor identifies an undervalued stock but expects broader adoption of that thesis to take time, their strategy must account for both financials and market psychology. Institutional flows, sentiment shifts, and liquidity constraints all play a role in shaping when and how price discovery unfolds.
In this framework, markets don’t instantly converge to “true” value. Instead, prices adjust as rational investors update their beliefs in response to both fundamentals and observable behavior. The edge comes from positioning ahead of those adjustments—exploiting inefficiencies that persist precisely because others have yet to update their models accordingly.
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