George Soros, Billionaire and famed investor wrote this book in 1986. It is a challenging read but worth persisting with as Soros outlined his approach to investment management – an approach that had provided investors in his Quantum Fund, extraordinary returns over the previous 18 years. It was a seminal work and controversial for its time. The book is obviously dated at this stage but it is important to acknowledge that the dominant theory/ investor belief system of the time was the efficient markets hypothesis.  Soros thinks about markets deeply, is able to contextualise market events in his own head very well and makes numerous profound observations. Another famed investor Paul Tudor Jones summed up the contribution pretty well when he wrote in his Foreword to the second edition,

“‘His investment record is the most unimpeachable refutation of the random walk hypothesis ever”

  • Financial orthodoxy (as still taught) rests on false premises
  • The philosophical underpinnings of the success of the scientific method could be used to illuminate “historical processes,” of which the financial markets are a minor subset.

Theory of Reflexivity

  • Soros says that market participants both react to and cause market events
  • He applies the theory to the wider world – that participants in all scenarios form and are formed by these very scenarios. He argues, in situations with thinking participants there is a two-way interaction between the participants thinking and the situation in which they participate.
  • Soros dismisses the efficient markets hypothesis and random walk theory ideas
  • Clearly, markets are not efficient. Otherwise, there would not be sudden repricing of risk or money managers like Soros beating the market performance over an extended period of time.
  • It is ‘reflexivity’ that causes this self-reinforcing phenomena
  • Personal self-interest drives market participants. Investor actions are built upon expectations of future price movements, and those future price movements are dependent on his/her actions. This represents the feedback loop that Soros suggests had been ignored by classical economists until the time of his writing
  • The fluidity of markets and nature means that everything influences everything else
  • For example, Investors try to predict the future and make a decision for that future but their decision today can influence the future


The science of Investment management

  • Soros dismisses the linkages made between the social sciences and natural sciences
  • The fundamental difference lies in the absolute objectivity of natural science which is impervious to emotion or feeling. Social sciences on the other hand are characterised by human emotion
  • Soros argues that the concept of equilibriumis redundant as markets fail to allocate resources perfectly leading to inevitable boom-bust cycles. The use of Winston Churchill’s quote with reference to the alternatives to the free-market are refreshingly candour:

“Democracy is the worst form of government, except for all the other ones.”

Key Takeaways

  • We should never study the fundamentals in isolation as we risk missing broader important aspects of interest
  • An individualised “silo” approach to asset classes should also be avoided
  • Investors need to gain greater philosophical awareness and lean into other sphere’s of scientific scrutiny to properly grasp the dynamics of capital markets
  • This notion of reflexivity should encourage 2nd, 3rd, and 4th degree thinking ideas
  • We must always be careful and aware of the limited predictive power in situations with thinking participantsdue to the persistent uncertainty this feedback loop creates
  • “salesman principle– emotional attachment to any investment adds unnecessary risks


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