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Circle of Competence Issue #91


"Fallacies do not cease to be fallacies because they become fashions." - G.K. Chesterton


George Soros Lecture Series on Reflexivity in Financial Markets

Recently I've been reading George Soros's classic The Alchemy of Finance. I have thoroughly enjoyed the book, even though it can be a bit academic at times, because the basic premise is something that I have noticed in real life but haven't been able to put into words.

His basis thesis is that while natural science observes fundamental events in the world around us, social science can't formulate the same kind of 'laws' as science because we are studying ourselves - this leads to an interesting case where simply thinking about or studying ourselves can influence our decision making and reality in real time. The concept is known as reflexivity. The famous Chicago-school of economics is known for its formulaic 'efficient-markets' hypothesis that states that markets are efficient and encompass all known information, thus achieving a theoretical 'equilibrium'. However Soros flips this concept on its head with reflexivity - he postulated that thinking participants' (which are the basic units of markets) views influence market prices and fundamentals, which then reflexively influence thinking participants' views, concluding that markets are never in 'equilibrium.'

While basic in its premise, the theory leads to a very different set of outcomes that more closely match reality. It better explains the boom-bust of the capitalist economy, creative destruction, political and regulatory environments, and lemming-like behaviors of crowds in markets. Even more interesting to me is that this theory of reflexivity is not merely applicable to financial markets but also to politics (thinking participants views influence political outcomes which influence views), psychology (participants' views influence emotions/actions which influence views), and culture. To me, there seems to be some ancient wisdom in the book for simple reason that it encourages us to always question our assumptions about reality and where they came from - most likely if we dig deeply enough, they are rooted in our environments (psychological, familial, economic, social, etc.).



George Soros 1995 interview (Charlie Rose, h/t @MacroOps)

Druckenmiller on 2020 Outlook, Monetary Policy, U.S. Election (Bloomberg)' 2019 annual letter (

The financial lesson of 2008-2009 that most investors have forgotten (Wall Street Journal)

Warren Buffett 1997 email exchange on Microsoft (Saber Capital Management)


The dating market thesis overview (Tyro Partners)

2019 Stratechery year end review (Stratechery)

FedEx and Walmart should merge (Scott Galloway, No Mercy/No Malice)

The future of nuclear plants (Wired)

Latest New York Times piece on the Chinese surveillance state (New York Times)

The 14 charts that explain tech in 2019 (Verge)

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