23 Aug 09 Theory of Reflexivity : George Soros
George Soros, who is popularly known as the man who broke the Bank of England and as the man who was responsible for a large number of stock market and currency market crashes (including the asian currency crisis) had operated by focusing heavily on the theory of reflexivity. The theory of reflexivity is very interesting and helps investors and speculators in identifying phases of market disequilibrium and helps him/her profit from such phases of market disequilibrium. The theory of reflexivity acts in sharp contrast to the Efficient Market Theory which states that the market is perfect and the stock prices will discount/factor-in all known and unknown (insider) information. The theory of reflexivity states that any significant events / developments can disrupt the market equilibrium and the market becomes a victim of irrational exuburence. When there is a bad news people start selling and hence prices tumble. Looking at the stock prices tumbling, people start selling more because of fear, stock prices fall further and the viscious circle continues. Similarly, when there is a good news stock prices increase. People become excited, buy more stock and the stock prices rise even further and thus the chain continues. This is where a rational economic man / value investor would identify the opportunity. Though stock prices might temporarily behave irrationally, research has proved that over the long term, stock prices reflect a company’s performance. Hence it is important that an investor enters the market and takes positions when the market is in disequilibrium and waits patiently for the markets to return to their equilibrium state and then reverse the positions taken. Possible causes of inequilibrium are favourable or unfavourable political development (SUN TV/RAJ TV scrips after the DMK-Marans family feud), corporate announcements (bonus, stock split, rights issue, new orders and so on). In such cases stock prices may move irrationally because of reflexivity.
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hi friends, can any body help me find a good book on this topic. thanks.
[...] Theory of Reflexivity : George Soros [...]
Thanks for the post. This is an interesting theory from an interesting person. I think the theory has validity and is reinforced by the idea of fat tails.
[...] the economy is vibrant. Indian markets have overreacted due to global panic. George Soros’ theory of reflexivity offers a good explanation on the market overreactions and is a “must read” for [...]
The Alchemy of Finance by George Soros
Even though its quite an interesting concept. People have very little idea how he and what he does. He is a person who can recall an entire matrix just by looking at it for few seconds. Hardly we can put in theories his trading concepts. Most of the traders don’t follow what they preach anyway.
( I know people who worked with him very closely)