The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means
By George Soros
PublicAffairs, 2008
I must admit up front that I have a bias toward Mr. Soros. He is the reason why, after business school, I headed for Wall Street to start a career as a Euro-convertible bonds trader, which eventually led me to start a hedge fund. However, besides the financial mystique that surrounded Soros’ image at the time, it was his tormented attempt to reconcile ingenuous human complexity with market dynamics that most attracted me to his work.
His first book, The Alchemy of Finance, published in 1987, struck the first blow against financial theories that, in the name of clinically pure equations and solutions, conveniently disregarded the complexity of a market’s interactions with its participants. The theory of reflexivity was born.
In light of the recent market turmoil and in the midst of a credit crisis of biblical proportions, Soros revisits his theory of reflexivity to try to explain the historical forces behind such crises. Reflexivity seems to apply more adeptly than traditional financial theories, like market efficiency or rational expectations, in explaining the self-reinforcing cycle that has fueled this present credit and market distortion to such a degree of systemic risk.
Behavioral finance has climbed to a place of intellectual predominance in the last few years by trying to elaborate on those questions left unanswered by frequently failing financial models. Perhaps, 21 years after Alchemy‘s first release, Soros will have his intellectual revenge.
One caveat: Soros is actively engaged in the political process by funding political organizations around the world. It would be disingenuous to read his book based solely on its financial merits. Toward the end, the book does moves away from a balanced discussion of market dynamics and regrettably becomes a political statement.
