Why Markets are Inefficient: A Gambling "Theory" of Financial Markets\n For Practitioners and Theorists

The purpose of this article is to propose a new "theory," the Strategic\nAnalysis of Financial Markets (SAFM) theory, that explains the operation of\nfinancial markets using the analytical perspective of an enlightened gambler.\nThe gambler understands that all opportunities for superior performance arise\nfrom suboptimal decisions by humans, but understands also that knowledge of\nhuman decision making alone is not enough to understand market behavior --- one\nmust still model how those decisions lead to market prices. Thus are there\nthree parts to the model: gambling theory, human decision making, and strategic\nproblem solving. A new theory is necessary because at this writing in 2017,\nthere is no theory of financial markets acceptable to both practitioners and\ntheorists. Theorists' efficient market theory, for example, cannot explain\nbubbles and crashes nor the exceptional returns of famous investors and\nspeculators such as Warren Buffett and George Soros. At the same time, a new\ntheory must be sufficiently quantitative, explain market "anomalies" and\nprovide predictions in order to satisfy theorists. It is hoped that the SAFM\nframework will meet these requirements.\n