The CEU Lectures: Lecture One, George Soros on the General Theory of Reflexivity Central European University
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One is that in situations that have thinking participants the participants’ view of the world is always partial and distorted. The other is that these distorted views can influence the situation to which they relate because false views lead to inappropriate forex trading without leverage actions. That is the principle of reflexivity,” in summarizing his concept, developed after trying to apply Karl Popper’s scheme for scientific method to human affairs. After leaving the field of intelligence he went to work at a global macro hedge fund.
Michel Foucault’s The order of things can be said to touch on the issue of Reflexivity. Foucault examines the history of Western thought since the Renaissance and argues that each historical epoch (he identifies three and proposes a fourth) has an episteme, or “a historical a priori”, that structures and organises knowledge. Foucault argues that the concept of man emerged in the early 19th century, what he calls the “Age of Man”, with the philosophy of Immanuel Kant. He finishes the book by posing the problem of the age of man and our pursuit of knowledge- where “man is both knowing subject and the object of his own study”; thus, Foucault argues that the social sciences, far from being objective, produce truth in their own mutually exclusive discourses. Reflexivity presents a problem for science because if a prediction can lead to changes in the system that the prediction is made in relation to, it becomes difficult to assess scientific hypotheses by comparing the predictions they entail with the events that actually occur. Thus, for example, an anthropologist living in an isolated village may affect the village and the behaviour of its citizens under study.
- Once a change in economic fundamentals occurs, these positive feedback loops cause prices to under- or overshoot the new equilibrium.
- As evidence for his theory, Soros points to the boom-bust cycle and various episodes of price bubbles followed by price crashes, when it is widely believed that prices deviate strongly from the equilibrium values implied by economic fundamentals.
- In 1966 he started a fund with $100,000 of the firm’s money to experiment with his trading strategies.
- Without a check on rising prices, this resulted in a price bubble, which eventually collapsed, resulting in the financial crisis and Great Recession.
- In anthropology, reflexivity has come to have two distinct meanings, one that refers to the researcher’s awareness of an analytic focus on his or her relationship to the field of study, and the other that attends to the ways that cultural practices involve consciousness and commentary on themselves.
- In both cases, these two organizations have effectively reduced their cost of capital to zero due to high stock prices.
Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications. He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm. Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops.
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Despite his masterful successes, not every bet George Soros made worked in his favor. His fund lost $300 million during the crash, although it still delivered low double-digit returns for the year. George Soros (Trades, Portfolio) has a fantastic reputation of being one of the greatest investors. He has attributed his success to a theory he started developing back in the 1950s. This theory helped him build a framework to navigate macroeconomic environments.
- Soros’ ideas about reflexivity have important methodological significance, and his chapter in this book summarizes and clarifies his arguments.
- Eventually, the trend reverses once market participants recognize that prices have become detached from reality and revise their expectations (though Soros does not recognize this as negative feedback).
- More money in the hands of borrowers results in rising demand for homes, and an upward spiraling cycle that results in housing prices that have been bid up way beyond where economic fundamentals would suggest is reasonable.
- In theory, the company could try and reduce its debt down to zero by issuing new shares.
It was in London, after reading Karl Popper’s tome, “The Open Society and Its Enemies,” where Soros first combined the concepts of science and politics. Soros never abandoned that concept, and relied on it again and again as he championed individual mean reversion trading strategy rights over the collective. Where things get interesting is when these biases have an effect on the markets. Not only will markets do some really strange things, like produce the dot-com bubble, but these beliefs change our behaviors forever.
What Are Subjective Realities?
But they represent, economists say, a useful way of making sense of a complex world. WASHINGTON — For most people, being known as a fabulously wealthy investor, prominent global philanthropist and outspoken critic of the current occupant of the White House would constitute sufficient acclaim. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer. He also took a $2 billion hit during the Russian debt crisis in 1998 and lost $700 million in 1999 during the tech bubble when he bet on a decline. Governments lived in fear that Soros would take an interest in their currencies. When he did, other speculators joined the fray in what’s been described as a pack of wolves descending on a herd of elk.
Political and economic views
He makes massive, highly-leveraged bets on the direction of the financial markets. His famous hedge fund is known for its global macro strategy, a philosophy centered around making massive, one-way bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives, and other assets based on macroeconomic analysis. Reflexivity theory states that investors don’t base their decisions on reality, but rather on their perceptions of reality instead. The actions that result from these perceptions have an impact on reality, or fundamentals, which then affects investors’ perceptions and thus prices. The process is self-reinforcing and tends toward disequilibrium, causing prices to become increasingly detached from reality. Soros views the global financial crisis as an illustration of the theory.
This can also be seen in the effect that published academic research has on so-called market anomalies. Larry Swedroe summarized recent academic papers that demonstrated how publicized anomalies induce trading by institutional investors and thereby degrade the magnitude of the anomaly. For example, towards the end of last year, Tesla announced it would be raising $5 billion through an at-the-market offering of shares. A few years ago, this sort of cash call would have had a substantial negative impact on the stock price, but the market was happy to absorb the extra shares on this occasion.
The observations are not independent of the participation of the observer. His bid for such recognition — in a new book published last week — lies in a theory called “reflexivity,” which Soros argues should supplant conventional economic thought that’s based on coolly calculating rational actors. Soros, 77, who dow premarket futures first read philosophy as a teenager during World War II, has promoted the concept for more than 20 years with little success. Why these anomalies don’t disappear entirely is due in part to the limits of arbitrage. It will be interesting to see how these effects play out over time in the smart beta space.
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Unfortunately, investors who have chased this wave have seen disappointing returns. When the speculators placed their bets, the currency issuers were forced to attempt to maintain the ratios by buying their currencies on the open market. When the governments ran out of money and were forced to abandon that effort, the currency values plummeted. The letter was co-signed by Javier Solana, Daniel Cohn-Bendit, Andrew Duff, Emma Bonino, Massimo D’Alema, and Vaira Vīķe-Freiberga. In reaction to the late-2000s recession, he founded the Institute for New Economic Thinking in October 2009.
thoughts on “Soros, Fallibility, Reflexivity, and the Importance of Adapting”
He often makes reference to the use of leverage and the availability of credit in initiating the process, and the role of floating currency exchange rates in these episodes. In the financial markets, we can see reflexivity in progress every single day. The distorted views of individual market participants can lead to different outcomes for securities that do not represent the underlying company’s fundamentals. Within economics, reflexivity refers to the self-reinforcing effect of market sentiment, whereby rising prices attract buyers whose actions drive prices higher still until the process becomes unsustainable. The same process can operate in reverse leading to a catastrophic collapse in prices.
George Soros Lecture on Reflexivity, Part 3
This is a think tank composed of international economic, business, and financial experts, who are mandated to investigate radical new approaches to organizing the international economic and financial system. If you want a deep dive into the biggest global macro trend happening right now (which no one else is talking about), enter your email below and we’ll send you our special report breaking down the most important factor driving markets over the next 6 months… Bourdieu argued that the social scientist is inherently laden with biases, and only by becoming reflexively aware of those biases can the social scientists free themselves from them and aspire to the practice of an objective science. For Bourdieu, therefore, reflexivity is part of the solution, not the problem. George Soros shared his thinking on economics and politics in a five-part lecture series recorded at Central European University in 2009.
George Soros on Monday, October 26, 2009, delivered the first of The CEU Lectures on “The Economy, Reflexivity and Open Society” that reflect the culmination of a lifetime of thinking on finance, politics and open society. He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation. Keep abreast of significant corporate, financial and political developments around the world. Stay informed and spot emerging risks and opportunities with independent global reporting, expert
commentary and analysis you can trust. Reflexivity includes both a subjective process of self-consciousness inquiry and the study of social behaviour with reference to theories about social relationships. Of course, real life never matches up exactly with the theory’s assumptions.
