There are two kinds of reality. One kind is into influenced by what human beings think, desire, wish for, or expect. There is an independent reality out there when you are a Pilot deciding whether to fly during a thunderstorm. There is an independent reality out there when you are deciding which graduates school to attend: how well you will get along with the professors, whether there is adequate laboratory space, whether you can afford the cost. There is the reality of her rejecting you when you propose marriage. In all of these, your thinking and your wishes do not influence the reality, and I am all for keen realism in these circumstances.
The other kind of reality ( George Soros, the business man and philanthropist, calls it, "reflexive reality") is influenced and sometimes even determined by expectations and perceptions. Market price is a reflexive reality that is strongly influenced by perception and expectations. Realism about the price of a stock is always invoked after the fact. ( The price crashed, so you are now labelled an over confident optimist. the price zoomed up, so you are now a genius, and I, who sold too early, I am labelled an under confident pessimist.) How much you are willing to pay is not just a judgement of the real value of stock, you are also judging the markets perception of the future value of the stock. When investors are optimistic about the market perceptions about the stocks furuture price, its price goes up. When investors are vary dillusionaly optimistic about the markets perception of the stock further price, its price goes way up. When investors are very pessimistic about the market's perception of the future price of a stock, the price of the stock or the derivatives crashes, and the economy melts down.
I hastened to add that optimism and pessimism are not the whole story; some investors are still concerned with fundamentals. In the long run, fundamentals anchor the range of the price a stock brings, with the price functurating around the blue of the fundamentals , but with the short run price heavily influenced by optimism and pessimism but even hereI believe that " reality" is reflexive and the value of fundamentals is influenced - even if it is not determined - by the market expectations of the future value of the fundamentals.
