Explainers · frameworks
Why prices move: expectations, not events
A walkthrough of the single most misunderstood thing in markets — prices track surprises against expectations, not events themselves.
A company posts record profit and the stock falls. New investors find this maddening. The explanation is simple once you see it: markets price expectations, and they move on surprise.
If everyone already expected record profit, record profit is not news — it’s the baseline. The price moved when the expectation formed, weeks ago. What moves the price now is the gap between what happened and what was expected.
The mental model
- There is a consensus expectation, baked into today’s price.
- An event happens.
- The price moves by the difference between the event and the expectation.
Good news already expected → no move, or a fall. Bad news that’s less bad than feared → a rally. Once you internalise this, half of the “irrational” market reactions stop being mysterious.
This is why decision intelligence is about expectations management as much as information: knowing what’s already priced in is most of the edge.