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on 4 April 2017
I loved George Soros's approach towards the reasons people make decisions. It reminded me of the common sense argument put forward by John Lintner in the early 1960s. The opposite arguments increasingly look like lines from the fable about the Emporer's New Clothes.
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on 29 June 2008
As a previous reviewer states, this book seems as if it has been rushed into print. In addition to the poor quality of the graphs (they look like they have been photocopied) the short section where Soros provides a chronology of his recent trading decisions just read like a few pages of his diary have been added to the book to fill it out.

In addition, if you have read any of Soros' other books prepare to go over some familiar ground. As he fairly explicitly acknowledges a large motivation for him to write is to promote his conception of relexivity. If you are expecting and wanting to read this and discover trading tips, or very specific economic predictions you might as well save your money. Almost by its nature the concept of reflexivity does not lend itself to precision.

Having said that, the concept itself is an interesting one and can be applied widely, not just in markets, if only as a way to understand how views can affect the reality they seek to explain. One could argue for example that the War on Terror legitimised and reinforced the very thing it sought to oppose, and then in turn in doing so gave more strength to the argument that terrorism needed to be fought. On this point there is an excellent quote included in the book (can't remember if it is from Rummy or Rove) arguing that the US administration creates its own reality, which its critics are constantly struggling to catch up with an understand.

So personally I enjoyed the book more as a sort of scrapbook of what Soros is thinking right now, built around his concept of relexivity, rather than as anything particularly specific to the credit crisis.
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on 25 January 2009
This is a short and very insightful book regarding the ongoing financial crisis, but be aware that, as the title suggests, Soros' main purpose for rushing publication (April 2008 still in the midst of this crisis) was to put forward and test the validity and importance of the theory of reflexivity, a new framework or paradigm he is proposing for financial markets and social sciences in general. Part One of the book deals almost exclusively with the concepts and details of the refined version of his paradigm, which Soros first proposed in his 1987 book The Alchemy of Finance. He explains that reflexivity was his guiding framework during his very successful trading years, however his proposal was never taken seriously in academic circles. He is convinced that the ongoing international crisis will provided the opportunity for his proposed paradigm to finally be taken seriously and further developed by others.

Most of the book's content in Part One presents the rationale for this new paradigm but unfortunately most of the discussion is in the grounds of philosophy, and heavily influenced by the ideas of philosopher of science Karl Popper (see The Logic of Scientific Discovery and Open Society and Its Enemies) combined with theoretical concepts from social sciences, economics and some finance. Therefore, Part One is not an easy reading for those unfamiliar with these philosophical and technical concepts, as these chapters were clearly written for an audience of scholars and practitioners. He wants to be taken seriously in the academic world and not just as a successful speculator.

In a nutshell, Soros' reflexivity theory states that contrary to classical economic theory, which assumes perfect knowledge, neither market participants nor the regulators can base their decisions purely on knowledge. Their misjudgments, biases and misconceptions affect market prices, and more importantly, market prices affect the fundamentals they are supposed to reflect. He claims that markets never reach the equilibrium postulated by economic theory and financial models, and therefore policies and predictions based on market fundamentalism are both false and misleading. He explains that outcomes are subject to diverge from expectations, and he claims that markets move away from a theoretical equilibrium almost as often as they move towards it, and they can get caught up in initially self-reinforcing but eventually self-defeating processes.

Fortunately for the general public, Soros explicitly gives the readers the option to jump directly to Part Two, where he concisely discusses in detail the roots of the current crisis, along with his criticism to the prevailing paradigm in terms his new paradigm. Whether Soros' new paradigm is right or not, his analysis of past and the present boom and bust bubbles is worth the reading, as the key mistakes, misconceptions and actors self-deceiving behavior is analyzed in depth, and lets you understand why almost nobody saw this crisis coming, despite the lessons learned from previous bubble bursts and warnings by some prestigious individuals.

In Soros view the origin of the present international crisis or super bubble as he called it, can be traced to three trends. A first trend is to be found in the ever increasing credit expansion. Another trend is the globalization of financial markets and the last, the progressive removal of financial regulations and the accelerating pace of financial innovations. The last two trends began in the 1980s, when under Reagan and Thatcher administrations began an excessive reliance on the market mechanism, or what he calls, market fundamentalism, and the inception date of the super-bubble is the 1980s, when market fundamentalism became the guiding principle of the international financial system, and this process started with the recycling of petro-dollars generated by the 1973 oil crisis, and accelerated during the Reagan-Thatcher years. Chapter 6 is particularly interesting in understanding the chain of events and how the previous bubbles and crisis led to the present "super-bubble".

He claims that regulators abandoned their responsibility and because the newly invented instruments were so sophisticated that regulatory authorities did not fully understood these new instruments and lost the ability to calculate the risks involved, and they came to depend on the risk control methods and evaluations developed by the institutions themselves, and even worst, something similar happened to the rating agencies who were supposed to evaluate the creditworthiness of the financial instruments, as they too came to rely on the calculations provided by the issuers of those instruments. Soros found this the most shocking abdication of responsibility on part of the regulars, because if they could not calculate the risk they should not have allowed the institutions under their supervision to undertake them. By relying on the risk estimates of the market participants, the regulators unleashed a period of uncontrolled credit expansion. Soros is particularly critical of value-at-risk calculations, as high standard deviations occurred with high frequency and this warning signal was largely ignored by regulators and participants alike. Here he blames Alan Greenspan for allowing his political views to intrude into his conduct as chairman of the Federal Reserve more than would have been appropriate, and so he missed the chance to stop the real estate bubble.

Even if his paradigm is wrong Soros raises several very interesting and insightful ideas. Paralleling Heisenberg's uncertainty principle Soros asserts that our understanding of the world "is inherently imperfect because we are part of the world we seek to understand" and this introduces an element of uncertainty into the course of events that is absent from natural phenomena. This implies that "social events have a different structure from natural phenomena", and particularly economist do not accept this limitation because this will downgrade their "science", economists have to accept a reduction in their status, no wonder they put up resistance. He claims that financial models are mistaken and they do not represent reality, and its widespread use for the design of synthetic financial instruments is at the root of the current financial crisis

He makes several bold conjectures and among the more controversial ideas he asserts that the ongoing crisis will have far-reaching consequences, resulting in the end of an era, with a decline in the power and influence of the US and a decline of the dollar as the internationally accepted reserve currency. Among other significant changes, he thinks sovereign wealth funds (from China, Singapore, the oil producing Arab-states, etc.) will become important players in the international financial system. He also contends that market fundamentalism is no better than Marxist dogma, as both ideologies cloak themselves in scientific guise in order to make themselves more acceptable, but the theories they invoke do not stand up to the test of reality, they use scientific method to manipulate reality, not to understand it.

The book ends with a chapter on policy recommendations that rather presents Soros' summary on lessons learned for the future and identifies some key social issues that need urgent attention. Among the key recommendations, Soros concludes that obviously the financing industry needs to be regulated in order to prevent excesses, but severe regulation could impede economic development, so the right balance must be found. Leverage has to be controlled even if it results in the reduction in both the size and the profitability of the financial industry.

He also concludes that some of the newly introduced financial instruments are unsustainable and they will have to be abandoned, but the regulators need to gain better understanding of these instruments and they should not allow practices they do not fully understand. Risk management needs to be managed by the regulatory authorities, not the participants, that was an aberration.

Soros also advocates that additional measures are required to avoid foreclosure to allow as many people as possible keep their homes; they are victims of the housing bubble deserving some relief and to avoid the human suffering and social problems that are likely to hit senior citizens, Hispanics, and black communities.

Highly recommended, even if you only read Part Two or if you are skeptical about his reflexivity framework. Personally I think Soros is quite right to question the predictive capabilities of economic and financial models however, I do not think reflexivity is truly a paradigm, but rather one key assumption made in economics, and indeed in some application (such as finance) practitioners got mistakenly carried away and forgot to properly take this uncertainty into account, because then their models would be worthless.

PS: If you enjoyed this book, then I recommend you The Black Swan: The Impact of the Highly Improbable, with a similar but more solid theory on how to deal with uncertainty and risk, and written just before the Financial Crash. Also, Soros just published an update of his book under the new title The Crash of 2008 And What It Means: The New Paradigm For Financial Markets. Be aware that most of the contest is the same, just one chapter is devoted to his analysis on the latest developments of the financial crisis.
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TOP 500 REVIEWERon 13 February 2009
George Soros has forgotten more about finance, economics and trading than most of his critics will ever know. He has made more money than most of his critics put together will ever make. So when George Soros speaks on matters to do with money, I listen, and when he writes a new book, I read it.

When Soros speaks about politics, which he frequently does, I also like to listen. He is a sharp critic of the United States especially under the policies of the Bush administration, as well he should be since we'll be paying for the stupidities of the Bush administration both nationally and internationally for many years to come. But here in this book, he puts aside (for the most part) the political and concentrates on one of his pet ideas, which he calls "reflexivity."

This is the idea that human interactions and the "truth" of those interactions are shaped not only by fundamentals and events in the natural world but by our perception of those events. This might be called the Heisenberg uncertainty principle as applied to the social sciences, markets and interpersonal relationships. The value of a stock is influenced by a feedback loop that is in part based on the perceptions of buyers and sellers. This makes the value of a stock or commodity a moving target forever in flux. As in Russell's self-referential paradox, reflexivity makes it impossible to accurately predict where markets will go, or to predict in principle the direction of human activities. Simply put, there is a quality in economics, the financial markets and like phenomena that is self-referential leading to uncertainty. Soros concludes that markets do not tend toward equilibrium and they are not "efficient" and price fluctuations are not "random walks" away from a "true" value. Finally, he concludes that financial bubbles arise because the self-referential quality of markets is not understood by economists and others in the financial world.

Here's how he puts it more generally at the start of Chapter 1: "...our understanding of the world in which we live is inherently imperfect because we are part of the world we seek to understand." (p. 3)

Soros sees reflexivity as a "two-way feedback loop, between the participants' views and the actual state of affairs. People base their decisions not on the actual situation that confronts them but on their perception or interpretation of that situation." Our decisions, he contends, have dual functions. One is the "manipulative function," the other is the "cognitive function." As we try to understand the world, we also try to manipulate it to our advantage. He notes, "The two functions operate concurrently, not sequentially." This "creates an indeterminacy in both the participants' perceptions and the actual course of events." We are (of course) "obliged to form a view of the world, but that view cannot possibly correspond to the actual state of affairs." We are obliged "to act on the basis of beliefs which are not rooted in reality."(pp. 10-11)

Taking a clue from cognitive psychology, evolutionary psychology and neuroscience, it is clear that we construct (as the postmodernists are wont to remind us) a "reality" within our heads that only approximates the "real" world and is biased by our needs and desires and is limited by both our senses and our ability to make meaning of what we perceive. Soros's reflexivity is in essence putting a name on something that has generally been known (but mostly ignored) for a long time.
A consequence of Soros' view is "the postulate of radical fallibility" which, when applied to financial markets allows one to "assert that, instead of being always right, financial markets are always wrong." (p. 76) As for financial bubbles and what follows, he writes (all in italics for emphasis on page 78), "there has to be both some form of credit or leverage and some kind of misconception or misinterpretation involved for a boom-bust process to develop." Of course he is referring most directly to what he calls "The Current Crisis and Beyond" which is the title of Part II of the book.

In Chapter 7 Soros makes some predictions about what is to come. The last note in the book is dated March 23, 2008. I read through the "outlook," and from the perspective of today (February 13, 2009) it's easy to see that Soros is substantially right. He is not only an expert on international markets but a fine connoisseur of bubbles and the opportunities they present. "Nothing is quite as profitable as investing in an early-stage bubble," he writes. (p. 129)

Soros has a way of saying the obvious that some of his critics have disparaged, but sometimes the obvious is what we overlook. According to his "new paradigm" based on reflexivity, "events in the financial markets are best interpreted as a form of history. The past is uniquely determined, the future is uncertain. Consequently it is easier to explain how the present position has been reached than it is to predict where it will lead." (p. 104)

I would add that this is what economists are quite expert at: telling us what has happened. Guessing what is going to happen is what Soros is very good at.
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on 27 June 2008
This slim volume of 160 pages and small format was written and published in haste something the author readily acknowledges and attributes to his desire to release the book during the current crisis in order to make an impact. It shows: the book lacks not only bibliography but also an index and contains only footnotes, headings in charts are barely legible, there are lose statements, his prose is dyspeptic while the coined and key word in the book namely reflexivity is awkward.

On the other hand the author presents concisely significant insights on the nature of financial markets, the causes of boom and bust cycles and the causes and nature of the present crisis which he characterizes as super-bubble, the most serious since the great depression and discusses its likely consequences.

The core postulates of the author are:our understanding of the world in general and of financial markets in particular is inherently imperfect because we are part of the system we seek to understand. People with imperfect understanding interact with reality in two ways. On the one hand they seek to understand the financial markets which he calls the cognitive function. On the other, they seek to make an impact and change the situation to to their advantage which he calls the manipulative function. The interaction of the two functions which compounds the uncertainty and indeterminacy, the author calls reflexivity (uncertainty relates to the participants' thinking, indeterminacy to the course of events).

The author contents that the prevailing paradigm that financial markets are self-correcting and tend towards equilibrium is fallacious.

Financial markets under ordinary conditions seemingly are in equilibrium with small random variations. But on rare occasions because of misconceptions which initially are self-reinforcing financial markets lead to boom but ultimately they are self-defeating and lead to bust.

The present crisis, the author characterizes as super-bubble and the worst since the great depression. And this because it does not relate to a specific sector of the Economy i.e the subprime mortgages but permeates the whole Economy.

The current crisis which the author believes that it has evolved over the last 25 years attributes to the following factors:the long-term and ever increasing credit expansion, globalisation, the accelerating pace of financial innovations and the progressive removal of financial regulations.

Finally the author contents that the present crisis marks the end of a long period of relative stability based on the United States as the dominant power and the dollar as the main international reserve currency. He foresees a long period of political and financial instability hopefully followed by the emergence of a new world order.
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on 26 November 2008
I really don't know what the people giving one star only to this book are smoking.

First things first. If you expect to read this book casually like you would read an easy novel, then this certainly is not the book for you.

What Soros is asking from you is to read, take pause, and think.

Soros is not only bringing into question the fundamental paradigms about how capitalism works, he is also bringing into question the whole foundation of enlightened Western thinking since the Renaissance. Another reviewer said Soros was delaing in platitudes. Phwa! He obviously skimmed a bit too much...

That my friends is not a small fish to fry, it is the first book or article I have seen linking the failure of markets to a misconception at the very heart of rational thinking.

Soros makes reference to philosophy in order to explain why economists use mathematics models based on bogus assumptions. This is important and is worth thinking about.

If anything, you get a valuable insight in how a guy that is making tons of money is thinking. That by itself should be enough reason to read this book.
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on 17 November 2012
Although this book is quite short, at 160 pages, it still feels too long for what the author actually has to say. It is obviously one of those books that would never have been published if it wasn't for the fact that the author is rich and famous, and although one can't blame George Soros for wanting to expound his philosophical theories along with his knowledge of the financial markets, that doesn't mean most people would necessarily want to read this rather rambling thesis.

Soros has a theory, which he calls reflexivity, concerning the relationship between the way we acquire knowledge and the way that knowledge distorts the reality of what we are learning about. He applies this theory to the credit crisis of 2008, suggesting that the models used by market traders (ie, speculators) are useless because they don't take account of the way we continuously adapt our knowledge to suit the new facts.
It could well be that Soros was one of the first people to write about this, I'm not sure, but by the time I got round to reading this book, I'd heard most of it before. There are better books than this about the financial crash, but that isn't the main point of this book. The main point is that Soros wants to tell us about his philosophy. Unfortunately, his philosophy is a bit vague and rambling. Also, by tying it to the crash of 2008, much of it is already rather dated.
These are all shortcomings that the author, to his credit, admits to. He makes a few good points along the way, but I doubt that this is his best book.
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on 8 December 2008
I have great admiration for Soros and his financial expertise but getting to grips with this book was a challenge and I remain unconvinced that the application of reflexivity is a necessary tool for analysing how future financial markets will evolve. Soros himself admits that he doesn't know how much philosophy has helped his financial success and that discussing reflexivity is difficult because he has to use a language that doesn't recognize its existence. Nevertheless, this short book, which is in part an autobiographical account, neatly summarizes the challenges faced by the financial markets going forward and is a worthwhile read.

For the most part the book is a thesis on the theory of reflexivity centred around the connection between perception and reality or rather the interplay between the cognitive (theoretical) and manipulative (practical) functions.

According to Soros the current paradigm is centred on the idea that financial markets are self correcting and tend towards equilibrium. However he believes that new instruments were based on the flaw that the markets will tend towards equilibrium but instead many of these instruments have changed the functioning of the financial markets. A new paradigm is therefore required that takes a more cautious approach to leverage. Market participants cannot base their decisions just on knowledge because they have to deal with the future as well as the past and expectations are not knowledge.

Soros gives us a useful historical account of past financial crises and a few examples of how the application of reflexivity would have enabled investors to react differently. For example, in the 1960s some companies with relatively high stock prices went on acquisition sprees as their per share growth expanded along with their price earnings multiples. Investors paid little heed to how growth was achieved and were caught in a bubble which subsequently burst. Had the theory of reflexivity been applied, it would have taught investors that equity leveraging does not necessarily generate earnings growth.

In the case of the 80s banking crisis, there was a failure to recognize reflexivity in the form of a connection between the creditworthiness of the borrowers and the willingnesss of the creditors to lend.

The book concludes that the current crisis was caused by credit expansion, the globilisation of the financial markets, the removal of financial regulation and the ensuing acceleration of financial innovation. Looking into the future, Soros predicts that the US may no longer be the centre of the global financial system and that there will be a flight from the dollar. He also thinks that the crisis may not last long because of the huge growth in China, India and the Middle East.

If you are interested in how the finance and philosophy interact, read this book. Otherwise be warned, there are some chapters that are heavy going so you might want to skip through them.
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on 19 June 2008
Not sure what the previous reviewer was looking for.
George Soros brings an interesting and quite realistic perspective to how financial markets work and why the current financial downturn has come about. His writing style does not lend itself to light reading and can be heavy going at times. And reading this book requires a degree of inmersion into elements of philosophy as well as financial markets. This does not in itself disqualify the subject matter in it. Soros offers an interesting and timely analysis which I have found worth understanding.
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on 5 October 2008
Hidden inside the book, towards the end, Mr. Soros points out that when those who create credit are in trouble the government has to bail them out, as credit creation is too important. Therefore they should accept that since they are at government protection and they need to pay a price. And the price is anti-bubble-cycle regulation (my words, he puts it much more elegantly in the book).

With this acceptance on both sides we can work towards minimal effective regulation, not just petty throwing of insults between 'hippies' and 'capitalists'.

This issue is way to important to be left to the extremes to deal with. All of us, in the more moderate middle ground, need to get in on this debate at a finer level of discourse.

And Mr. Soros provides a very useful framework for this.
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