Take my advice and live for a long, long time. Because the maddest thing a man can do in this life is to let himself die. (Miguel de Cervantes)

The Madness of Market Sanity

Why Our Logical Minds Fail in the Face of Reality

We often enter the markets armed with a blueprint: spreadsheets, economic theory, and the serene, logical belief that price should follow value. We construct models of what the world should look like—a world where the fundamental strength of a company dictates its stock price, where central banks behave predictably, and where crises are met with rational collective action.

Yet, this is where the profound, slightly ironic wisdom of Miguel de Cervantes cuts deepest: “Too much sanity may be madness—and maddest of all: to see life as it is, and not as it should be!”Although this quote is not originally from Cervantes, but generated from the quote at the title above, the 1965 Broadway musical Man of La Mancha, written by Dale Wasserman with lyrics by Joe Darion

In the realm of finance, our «sanity» is our belief in predictable order; the «madness» is clinging to that order when the market delivers chaos. We are all, at times, financial Quixotes, tilting at the windmills of irrationality, convinced that our logical lance will surely pierce the delusion of the crowd.

The Delusion of Expectation

The greatest source of pain for any trader or investor is not unexpected news, but the conflict between expectation and reality.

Think about a major crisis. The fundamentals scream «sell!» The logical mind dictates that liquidity will vanish, and the economy will enter a multi-year recession. This is the world as it should be according to the rulebook. But then, the market does something absurd: it rallies on «less bad» news, defying gravity and punishing those who maintained a sane short position based purely on economic dogma.

This is the moment where seeing the market as it should be becomes a self-destructive form of madness. The market is not a classroom; it is a human institution, a volatile blend of fear, hope, and forced liquidations. It operates on present cash flows, anticipated future sentiment, and raw psychology, not just historical P/E ratios.

The true sanity—the one that leads to profit—lies in accepting the world as it is.

The Profound Leap

For the market professional, the transition from academics to application requires a crucial, philosophical leap: embracing the temporary insanity of price action.

This means:

1. Accepting the Absurd: Acknowledging that the price you see is the only true price, regardless of how much it deviates from your model. If a stock is trading at a grossly overvalued multiple (as it shouldn’t), but the technical and momentum signals are screaming «buy,» the truly sane action is to respect the momentum until the market’s internal narrative changes.
2. Trading Reality, Not Theory: Differentiating between the «narrative» (the media story, the analyst’s forecast) and the «data» (the price action, volume, and volatility). The first is how the world should work; the second is how it is working.

Cervantes teaches us that sanity, when rigidly applied, blinds us to the beautiful, terrifying truth of human nature. The best traders are not those with the highest IQ, but those with the highest degree of humility—those who can set aside their perfect mental model and trade the world as it presents itself, however mad the price action may seem.

Only by shedding the desire for order can we master the chaos.