Who is on the Other Side of Your Trade?

02-16-2026

When we sit down to a chess board, we look up into another player’s eyes — unless we’re playing a computer, then we gaze at the screen. When our opponent is a human, we consider their experience level, what they know about strategy and tactics, and how they behave. But facing a screen, we may forget to scrutinize our own higher order beliefs: how what we know compares to what others know.

In a recent paper, the Daniels School’s Kaushik Vasudevan considers how higher order beliefs impact investing. In theory, investors know the financial market is populated with humans, but do they assess what other investors know and how they think accurately?

“Speculating on Higher Order Beliefs” by Vasudevan and coauthor Paul Schmidt‑Engelbertz finds that investors’ higher order beliefs motivate them to speculate in risky ways that conflict with a sound valuation of the market.

The hidden assumption behind your conviction

When you hit “buy” because you believe a market or stock is undervalued, you are implicitly assuming that:

• You see something others do not, or
• You understand how others will react better than they do themselves.

Using 20 years of evidence from the Shiller Investor Confidence survey, the research shows that most investors think other investors are mistaken — too optimistic at peaks and too pessimistic at troughs. Yet many of those same respondents say they still want to own more stocks when they believe the market is overvalued, expecting to “ride” further gains before an eventual correction. That is higher order belief in action: not just “What do I think?” but “What do I think others think — and how can I profit off of it?”

When beliefs about others drive trades

Vasudevan and Schmidt‑Engelbertz call it nonfundamental speculation: taking a position that contradicts your own valuation because you expect everyone else to push prices further away from fair value first. In the Shiller data, when investors say others are overly optimistic and the market is overvalued, they:

• Expect high returns over the next month, but
• Expect lower or even negative returns over the longer run.

They are not buying because they love the fundamentals. They are buying because they expect others to keep bidding up prices for a while. The research then tracks futures positions and finds that short‑term return expectations line up closely with investors’ positions in equity index futures, especially at 1–3‑month horizons. In other words, these beliefs about others do show up in real money trades.

On average, the investor who thinks they understand the rest of the crowd is losing value in their trades.

Remember: There is always someone on the other side

Every trade has two sides.

• If you are a retail investor clicking “buy” in your brokerage app, the aggregate seller is often a large, disciplined institution whose full‑time job is to manage risk and process information.
• If you are convinced “everyone knows this is overpriced but it will go higher,” ask who is quietly selling to you, and why they are happy to let you “ride the wave” in their place.

Because the data in the paper show that this kind of nonfundamental speculation is pervasive and unprofitable on average, the natural conclusion is uncomfortable: many households who think they are exploiting others’ mistakes are, in fact, providing profits to better‑informed counterparties.

Practical implications for individual investors

The takeaway is less about regulation and more about self‑awareness.

• You are probably not above average. In the aggregate, households misjudge how others will behave and lose money trying to time short‑run swings based on those beliefs.
• Short‑term “I know what others will do next” trades are a form of speculation, not a retirement strategy. The paper’s model shows that these higher order belief mistakes amplify overreaction and volatility — and then mean‑revert.
• Long‑horizon, diversified investing is still the workhorse. Vasudevan stands by the standard finance‑expert advice — own low‑cost index funds, stick to a long‑run allocation, and avoid frequent, sentiment‑driven shifts.

A helpful mental check before any trade is to ask: “Who is on the other side of this, and what makes me think I understand the game better than they do?” If you cannot answer that, you may be speculating on higher order beliefs rather than investing on fundamentals.