Reflexivity, financial markets, and economic theory
Soros' writings focus heavily on the concept of reflexivity, where the biases of individuals enter into market transactions, potentially changing the perception of fundamentals of the economy. Soros argues that different principles apply in markets depending on whether they are in a "near to equilibrium" or a "far from equilibrium" state. He argues that, when markets are rising or falling rapidly, they are typically marked by disequilibrium rather than equilibrium, and that the conventional economic theory of the market (the 'efficient market hypothesis') does not apply in these situations. Soros has popularized the concepts of dynamic disequilibrium, static disequilibrium, and near-equilibrium conditions.
He has stated that his own financial success has been attributable to the edge accorded by his understanding of the action of the reflexive effect.
Reflexivity is based on three main ideas:
Reflexivity is best observed under special conditions where investor bias grows and spreads throughout the investment arena. Examples of factors that may give rise to this bias include (a) equity leveraging or (b) the trend-following habits of speculators.
Reflexivity appears intermittently since it is most likely to be revealed under certain conditions; i.e., the character of the equilibrium process is best considered in terms of probabilities.
Investors' observation of and participation in the capital markets may at times influence valuations and fundamental conditions or outcomes.
George Soros not a "macro-trader", he is "equilibrium trader". Soros has popularized the concepts of dynamic disequilibrium, static disequilibrium, and near-equilibrium conditions.
By: Johanes L. Sitanggang
