Who Is On the Other Side? A Framework for Understanding Market (In)Efficiency

January 21, 2026

Who Is On the Other Side? A Framework for Understanding Market (In)Efficiency

Consilient Observer

Who Is On the Other Side? A Framework for Understanding Market (In)Efficiency

January 21, 2026

We explain the factors that determine market efficiency and offer a taxonomy of the sources of inefficiency.
Markets cannot be fully informationally efficient because there is a cost to gather information and reflect it in asset prices.
We review how markets have changed, including flows from active to passive funds, more short-term focus within active, and the rise of retail.
The main goal of this report is to encourage active investors to ask and formulate an informed answer to the question of “Who is on the other side?”
We categorize market inefficiencies into four areas: behavioral, analytical, informational, and technical.

Download PDF

Counterpoint Global’s culture fosters collaboration, creativity, continued development, and differentiated thinking.

Related Insights

Consilient Observer

Capital Allocation

Nov 05, 2025

Counterpoint Global discusses their guide for thinking about value creation and how to assess a company’s capital allocation skills.

Consilient Observer

Cash Holdings: Data, Theory, and Alternatives

Aug 05, 2025

Consilient Research's report examines the optimal amount of cash to hold for maximizing value, covering trends, theories, and capital deployment strategies.

Consilient Observer

Base Rates for Bottoms and Bounces

May 21, 2025

Consilient Research’s study of drawdowns for stocks and mutual funds yields provocative results.

DEFINITIONS

Return On Invested Capital (ROIC) represents the rate of return a company makes on the cash it invests in its business.

The Russell 3000® Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. The Russell 3000 Index is constructed to provide a comprehensive, unbiased and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected.

IMPORTANT INFORMATION

The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers.

This material is for the benefit of persons whom the Firm reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of the Firm. It is not addressed to any other person and may not be used by them for any purpose whatsoever. It is the responsibility of every person reading this material to fully observe the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country.

This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. Information does not address financial objectives, situation or specific needs of individual investors.

Any charts and graphs provided are for illustrative purposes only. Any performance quoted represents past performance. Past performance does not guarantee future results. All investments involve risks, including the possible loss of principal.

Prior to making any investment decision, investors should carefully review the strategy’s relevant offering document. For the complete content and important disclosures, refer to the article pdf.