How George Soros knows what he knows

By Flavia Cymbalista, Ph.D

Abstract / Introduction:

In its traditional formulation as an explanatory principle, reflexivity means that any object of thought contains in itself the thinking activity that generates it. Applying the concept of reflexivity to the question of financial markets valuation, Soros concludes that economic reality is actively shaped by the perceptions of market participants. This leads him to a theory of investment radically different from other existing approaches.

Existing approaches try to make sense of market reality by delineating factors that are determinants of price and identifying indicators that can be used to predict the future course of prices. Different theories emphasize different factors, they differ with respect to the definition of factors that determine market events. But the different approaches share the assumption that market events are determined by factors that function like logical units. The unit-like factors function like the discrete terms in a logical calculus, remaining fixed, unchanged through the process of events. What is not covered by such factors is viewed as just indeterminate and unpredictable.

 

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