George Soros: The new paradigm for financial markets

Usually you will not find George Soros books in the library of a devoted value investing practitioner who is more likely to have the shelf filled with Buffet, Graham, Peter Lynch, and likes.. Even I managed to read Soros only after reading the above mentioned gurus and when I realized that the ‘marginal utility’ of reading another book on buffett has reduced dramatically. Even though I wanted to started with the ‘Alchemy of finance’, which is a more popular and detailed book, I decided to ‘test the waters’ and see the comfort levels with his philosophy so I picked this book.

 

The book even though being a very repetitive one manages to explain the concept and theory of reflexivity (explained later in this post) in good detail. Even though for more practical application of his theory we may have to go through ‘Alchemy of finance’, but for a broad level understanding, this book does a decent job.

 

In a very crude form I would describe the ‘theory of reflexivity’ as this : When there is a system and an observer who is trying to understand it and both of them are independent i.e. the observer’s understanding of the system doesn’t affect the system then complete knowledge of system is possible but when the observer becomes a participant i.e. his understanding leads to action that changes the system he is trying to understand then there exists a circularity that leads to an unpredictability and uncertainty that makes perfect knowledge impossible , just like in financial markets.

 

Further in the book Soros mentions something he calls the “boom-burst framework”. Its nothing fancy but a

 

Soros use this theory to propose and prove a very interesting hypothesis of ” The Super Bubble” which, according to him started immediately after the world war II and ended with the subprime mortgage crisis and all the other boom burst sequences as the test phases in this super bubble and then explaining the same using his basic “boom burst” framework to explain this thesis.

 

Even though I am not yet convinced about it ( I am not saying its wrong , but I have to dwleve a lot more into this to convince myself) , it comes out as an interesting read. Although I believe that the whole thing could have been written in a white paper format rather than a book and would have a avoided a lot of repetitions.

 

This book is recommended for an interesting and quick read but will add value only if you decide that you are comfortable with the philosophy and wanna go in detail.

 

P.S: George Soros have been a topic of discussion lately due to his political influences and there have been a detailed study by a Fox News Reporter on the various activities and political motivations of George Soros and possibility of his writings to be politically motivated. I have no view on that. Even though in my leisure time , I may like to research more on this, its certainly not on top of my list , but due to this assertion I will surely be more careful before incorporating anything from Mr. Soros writings in my investment philosophy.

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