“Market observers often divide investors into “smart money” and “dumb money.” Our researchshows there may be a way to figure out which group you are in.
The first place to look is prices, which reflect the interaction of smart money and dumb money and may contain valuable information about the proportion of either in the market. In other words, the price knows which category we belong to. The trick is to extract that information.
Consider a simple example of a simple market: betting on a horse race. Say there are two horses, A and B. And there are two types of bettors, smart money and dumb money. We place our bet on horse A because we think it is more likely to win. It turns out that 75 percent of the money is on horse B, and 25 percent is on A. These “prices” can help us learn whether we are more likely to be the dumb money or the smart money.”Twitter