For years, Jean-Philippe Bouchaud, a physicist-turned-money manager in Paris, has been trying to convince his old-school peers of a wild idea: When lots of people buy a stock, the price goes up.
Wait—that’s obvious, right? Not really. For decades, financial theory has been built on the premise that a share price reflects everything known at any moment about a company’s value. When a company announces an earnings number, some traders see it as a bullish sign, others are bearish, and they trade with each other to settle on a price. In this model, it doesn’t really matter if a million or a billion dollars flows into a stock. After all, for every buyer there must be a seller. If a flood of buyers were to push the price too high, more sellers should quickly step in to take advantage.
