Updated Oct 1, What Is Reflexivity? The theory of reflexivity has its roots in sociology, but in the world of economics and finance, its primary proponent is George Soros. Soros believes that reflexivity disproves much of mainstream economic theory and should become a major focus of economic research, and even makes grandiose claims that it "gives rise to a new morality as well as a new epistemology. Soros believes that reflexivity contradicts most of mainstream economic theory. 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.
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Soros believes these perceptions control price trends, domestic government regulation and foreign markets. He is also arguably one of the greatest financial investors working today. In his well-regarded book, The Alchemy of Finance, Soros utilizes his management of the Venezuelan based Quantum Fund to demonstrate and test his own market theories, and offers unique international economic solutions to world-wide financial crises.
He also states that investment trades are usually based on biased behaviors or perceptions. And he states that various movements in the financial market created by these biased perceptions and trades can actually change the underlying principles and real value of the economic market.
Conventionally, many economic theorists state that people behave rationally when they make economic decisions. He points to self-reinforcing price based stock performances, such as individual people buying when they see a stock go up, and selling when they see it go down, which in turn create wider economic fluctuations throughout investment and credit markets internationally.
The theory of reflexivity basically asserts that individual biases can at least potentially alter basic economic fundamentals.
Soros claims that his concept of reflexivity, led directly to his own financial success through his understanding of the results of reflexive effects in the market. He also states that reflexivity is most easily witnessed when investor bias grows and widens through trend-monitoring speculators and situations that employ the leveraging of equity. In the current economic environment, a good example of reflexivity has occurred in the housing market. As lenders made more cash accessible to home buyers, more people bought more expensive housing, which increased the prices of housing.
Because the housing prices increased, investments in housing looked sound, and more money was lent. With loans guaranteed by the government, and a general government-sponsored attitude of the positive nature of home ownership, prices and desire for homes both mounted, lending standards were lowered, and the housing market and the lenders investing in it both reacted reflexively to the biased perception that these actions would lead to continued economic gain.
It essentially refers to a circular relationship moving between cause and effect, with both affecting each other in a self-referencing economic symbiosis. Reflexivity occurs when the observations and actions of individuals actually affect the situations or markets they are watching.
Susan Porter is a financial writer whose interests span from market research, to stock trading, to psychology. Read more of her work on the blog Stock Trading!
It has also enabled me to explain and predict events better than most others. This has changed my own evaluation and that of many others. My philosophy is no longer a personal matter; it deserves to be taken seriously as a possible contribution to our understanding of reality. Understanding what reflexivity is, and how it affects markets and much more is one of the most important fundamental truths a trader can grasp. The idea is centered around there being two realities; objective realities and subjective realities. Objective realities are true regardless of what participants think about them.
Overview[ edit ] In social theory , reflexivity may occur when theories in a discipline should apply equally to the discipline itself; for example, in the case that the theories of knowledge construction in the field of sociology of scientific knowledge should apply equally to knowledge construction by sociology of scientific knowledge practitioners, or when the subject matter of a discipline should apply equally to the individual practitioners of that discipline e. More broadly, reflexivity is considered to occur when the observations of observers in the social system affect the very situations they are observing, or when theory being formulated is disseminated to and affects the behaviour of the individuals or systems the theory is meant to be objectively modelling. Thus, for example, an anthropologist living in an isolated village may affect the village and the behaviour of its citizens under study. The observations are not independent of the participation of the observer. Reflexivity is, therefore, a methodological issue in the social sciences analogous to the observer effect.
George Soros’ Theory of Reflexivity
Soros has wryly described his home as a Jewish antisemitic home. Tivadar had also been a prisoner of war during and after World War I until he escaped from Russia and rejoined his family in Budapest. In Hungarian, soros means "next in line," or "designated successor"; in Esperanto it means "will soar. Soros later described this time to writer Michael Lewis : "The Jewish Council asked the little kids to hand out the deportation notices. I was told to go to the Jewish Council. And there I was given these small slips of paper
Reflexivity (social theory)