Social Sentiment and Misdirection: Temporal Belief Cycles and Market Inefficiency
This paper develops a framework for analyzing how social sentiment, narrative timing, and attention allocation interact to generate persistent mispricing in financial markets. Rather than treating behavioral effects as isolated cognitive biases, the Social Sentiment and Misdirection (SSM) framework models sentiment as a dynamic field that redistributes expectations across time and assets . This process allows prices to deviate systematically from fundamentals without immediately violating classical no-arbitrage conditions. By emphasizing temporal misalignment, narrative saturation, and coordinated belief shifts, SSM offers a unified explanation for price behavior that appears inefficient in retrospect yet remains resistant to conventional arbitrage in real time.
The Efficient Market Hypothesis (EMH) posits that asset prices rapidly and accurately incorporate available information, implying that persistent mispricing should be rare. Yet decades of empirical observation reveal recurring departures from this idealized condition. Markets frequently exhibit periods of delayed adjustment, overreaction, and apparent inefficiency—often clustered around informational, structural, or behavioral inflection points.
This paper examines the apparent paradox underlying EMH: how markets can remain broadly efficient across long horizons while simultaneously allowing episodic inefficiencies that challenge strict interpretations of informational efficiency. Rather than treating efficiency and inefficiency as mutually exclusive states, the analysis frames market efficiency as conditional—varying across time, information regimes, and investor behavior.
By synthesizing traditional market theory with behavioral and structural considerations, the paper argues that EMH remains a useful organizing principle, but an incomplete one when applied without context. The findings suggest that understanding when and why efficiency temporarily breaks down is more informative than debating whether markets are efficient in absolute terms.