Reflexivity
While textbooks may teach the perfectly efficient nature of financial markets, George Soros, Infamous for “breaking the Bank of England”, studied the influence of human judgement on assets.
George Soros. Infamous for “breaking the Bank of England”, the billionaire hedge fund manager owes his success to the “theory of reflexivity”. While textbooks may teach the perfectly efficient nature of financial markets, Soros studied the influence of human judgment on assets. Investors don’t base their choices on reality but on their perception of reality.
At the theory’s core, perception of an asset influences its fundamentals which influences the price and so commences a positive feedback loop. Let’s look at Dogecoin. Elon Musk endorsing Doge, despite its lack of developed technology, increased how it was perceived. As it became more popular and the price rose, dev resources were deployed to improve its underlying technology which led to further price gains. The theory of reflexivity works in the opposite way too.
Sure, this may appear obvious having lived through a period of hype cycles and crashes, especially recently but the way Soros applied his theory made him his billions. By predicting how perception will change, Soros could get in before rallies and out before crashes.
If you have a spare few hours, read all 11000 words Soros put together on the topic here.