Theory of Reflexivity
Updated: May 13, 2020
One of the most important behavioral theories that influence your victories and defeats in life!
I’ve been active on Facebook, posting a number of posts on the financial markets’ movement post the lockdown imposed in India. One of my friends asked me as to how do I predict the markets ‘correctly’?
Well, prediction is impossible, but understanding the situation is not. Basically, as George Soros – the proponent of the THEORY OF REFLEXIVITY and THE MAN WHO BROKE THE BANK OF ENGLAND – once mentioned; if you have a Situation A, then you’d have to know if it leads to Situation B or Situation C. If you can understand this, then you can be better prepared for eventual outcome, whatever it might be.
The THEORY OF REFLEXIVITY (not to be confused with Einstein’s Theory of Relativity) flies in the face of the EFFICIENT MARKET HYPOTHESIS; the theory is about the feedback loop situation that detaches a person from reality and the feedback loop eventually feeds upon itself to keep the person further away from reality.
George Soros wanted to prove this theory correct and selected that famous (or infamous?) 16 September, 1992 day, to break the Bank of England when the British government had to let the Pound go for a free fall devaluation and which eventually compelled England out of ERM (Exchange Rate Mechanism – the precursor of the Euro currency).
Geroge Soros made a profit of $1 billion by short selling the Pound that day! You may have read about Bill Ackman, the US hedge fund manager who JUST LAST MARCH (yes, March, 2020) made a profit of $2.3 billion by shorting the US markets (actually he dealt in CDS— Credit Default Swap), but if you compare the two events, I would rank Soros’s coup against the Bank of England as a thriller, with lots of suspense and actions involved from both the sides!
Bottom line: The Theory of Reflexivity is one of the most important behavioral theories that influence your victories and defeats in life!
[I read about this trade of Soros in the book, ‘Soros: The Unauthorized Biography’ by Robert Slater in 2012 and have been a fan of him & his THEORY OF REFLEXIVITY since then.]