The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means - George Soros

Practical insights and new rules from George Soros

Legendary financier George Soros is worried. The financial markets face the worst credit crisis since the Depression and their existing paradigm needs to be replaced. The new paradigm Soros recommends is based on what he calls the "theory of reflexivity." This book-length essay provides a crash course in the billionaire investor's philosophy and view of financial markets, the origins and consequences of the current credit crunch, the boom-bust model and the behavior of market participants. Soros intersperses his market analysis with enough personal details from his early life and career to keep the book lively. He is also quite vocal in his political beliefs; Democrats will probably appreciate the case he makes against President George W. Bush's administration and its policies. One weakness of the book, other than its repetitiveness as Soros explains his theory, is that he relies heavily on technical and financial jargon, which makes it tough to penetrate and may prove a barrier to some readers. Ironically, he seems to be fully aware of this shortcoming when he writes that readers may find one of his particularly theoretical chapters to be "somewhat repetitive and hard-going." Nevertheless, his warm personal voice and the depth of his financial experience, which spans more than half a decade, is hard to match. Thus, getAbstract notes that this book has much to offer executives, investors, and students of financial markets and theory. (As is true of every Abstract, the following views are those of the author and not of getAbstract.)

Inane Ramblings

For some reason old men, once they have made a lot of money, turn to philanthropy and academia in an attempt to justify the wealth they have amassed and the time they wasted doing it. Soros appears to be no different.

This book is really just Soros' rant regarding his `new' theory of `reflexivity - if you are hoping for a book filled with insight into the markets or the current crisis, then avert your gaze.

So what is the theory, well, in 3 points the theory (and the whole book) boil down to;
i) equilibrium economics doesn't work (i.e. markets aren't drawn to equilibrium)
ii) people have biased views, which in turn cause biases in market prices
iii) because people participate in markets, their biased views also affect fundamentals, causing a feedback loop that leads to more biases in markets and prices

No, seriously, I'm not winding you up, that is it!

He even admits that the theory is different from equilibrium economics insofar as it cannot really extrapolate into the future, but is very good at explaining history (I can explain history - I get a history book out of the library, read it and tell others - that's not a theory).

So, we have a theory that says markets aren't perfect (from an informational standpoint), but instead are biased (for generalists please read `biased' as `wrong'), and that can tell us lots about the past and nothing about the future - BRILLIANT, GENIUS, BREAKTHROUGH (I'm being facetious).

Quoting from the book;
"How far the new paradigm can be developed remains to be seen. There is just so much one person can do on his own. Others need to be engaged. That is what has prompted me to write this book".

Firstly, he even tells you he didn't write the book to give you an insight into the current crisis (despite the title). My advice, take him at his word and don't buy the book.
Secondly, there's a reason "There is just so much one person can do on his own", and that's because the theory is not worth giving airtime to - any person who has ever sat through an Economics lecture has come up with the theory themselves ("wow, this theory of equilibrium economics is cr@p - all these assumptions about perfect information, unbiased expectation - oh well, whatever floats the Professors boat I suppose, that'll be why he's wearing those shabby clothes, if he was smart he'd be making loads of money - still I better learn the stuff, got to pass my exams so I can escape here and make lots of money in the City").

Just so you don't think I'm kidding - I quote 2 paragraphs that will save you reading the whole book;
"I was greatly influenced by the philosophy of Karl Popper, and this made me question the assumptions on which the theory of perfect competition is based, in particular the assumption of perfect knowledge. I came to realize that market participants cannot base their decision on knowledge alone, and their biased perceptions have ways of influencing not only market prices but also the fundamentals that those prices are supposed to reflect"

"I believe that the theory of reflexivity can explain the current states of affairs better than the prevailing paradigm, but I have to admit it cannot do what the old paradigm did. It cannot offer generalization in the mold of natural science. It contends that social events are fundamentally different from natural phenomena; they have thinking participants whose biased views and misconceptions introduce an element of uncertainty into the course of events. Events follow a one-directional path that is not determined n advance by universally applied laws, but emerges out of the reflexive inter-play between the participants' views and the actual state of affairs."

Give me strength ..................

worth reading

An interesting work. Our friend from Cyprus (below) has already done a high-quality job summarising some of the major points.
This was the first of Soros' books which I've read - I found the book to be an enjoyable read despite the technical nature of the content.
His conclusions are well argued and fascinating, especially the dynamics of how a bubble forms and grows, and the "super-bubble" driven by the increasing availablity of credit.
Definitely worth reading.

Meager Pickings

OK so the guy is a genius at anticipating markets and making money but this isn't his book of magic spells. Not sure who he is pitching at. Neither an accessible read for an interested lay person nor a rigorous text for a more academic audience (see elsewhere on poor graphs, lack of footnotes or appendices explaining to some extent the plethora of financial instruments he trots out). If I understand it properly his main theme is that markets do not tend towards equilibrium as conventional theory predicts, rather, he coins "reflexivity" to describe 1) periodic swings of abnormal behavior (is that not a dynamic equilibrium of sorts?), 2) bodies with the necessary resources can influence markets to their advantage and 3) herd mentality tends to drive the direction of markets. Hardly a new insight.

However there are good observations. Not least that unfettered market fundamentalism is not necessarily aligned with a net benefit to society. I would have preferred some words describing a paradigm of proportionate control that governing bodies really need to get right.

Cerebral mast.....bation

I have the greatest respect for George Soros and what his acheived entirely on his own and the struggle he endured with is family at a young age. I did find this book hard going sometimes whereby he tends to over and uneccesarily complicate rather than just say it as it is, what he means in simple English; the subject matter is complicated enough as it is! I was looking for his brilliant mind to give some real life practical guidance to the problems which face companies and individuals in the next year or 2. Maybe i'm just thick and missed the point, but Soro's core beloved principle of reflexivity upon which the book hinges appears to me to be just relabelling something which has been in existance for donkeys years,ie human nature and being wary of uncertainty in the markets.Soros has packaged it up and taken ownership of it - the principle and the theory seems to make sense; what i don't get is how in real world practical terms it is implemented, adopted and utilised,as he give no suggestions other than to dangle the carrot. Its a bit like lets reduce crime completely from our streets, or make everyone slim, great idea but how do you practically acheive this in a sustainable fashion? The amazing thing is how someone who comes across as so cerebral and theoretical has turned it into real billions for himself! Show us some guidance George not just your theories! He obviously likes to cerebrally master....te