Throughout the 50s and ‘60s, the prevailing economic orthodoxy centered around a theory called the efficient market hypothesis. This theory held that market participants, at their core, were rational actors and that markets were able to take all available information into account and use it to perfectly set the proper price of assets. This theory had a great deal of intellectual appeal, being easy to visualize and working nicely with the mathematical formulas of the day.
However, the cracks in this theory were always obvious to those working first hand with the markets. But back in the ‘50s and ‘‘60s, most people whose job was to trade in the markets were not particularly well versed in the economic jargon. In fact, prior to the advent of computerized trading, most floor traders were considered to be blue collar workers. This meant that economists rarely had meaningful interactions with the people who interacted with the markets the most, leading to a serious dearth real-world testing on the prevailing economic theories, and Twitter.com.
However, by sheer luck, a graduate of the London School of Economics with a Master of Science in Philosophy degree named George Soros eventually made his way onto the trading floor of a small boutique firm named Singer and Friedlander. Although Soros would eventually become one of the richest men in the world, at that time, he was an impoverished 20-something college graduate who only worked low-end jobs and was just looking to make ends meet. The one thing that Soros did have was an incredibly solid foundation in rigorous philosophical thought. This gave him a huge edge over his less-educated counterparts as well as the economists who had been, up to that time, comfortably ensconced in their ivory towers, without the least worry regarding whether or not their elaborate theories actually had any relation to reality and contact him.
But as Soros learned the ropes of the financial trade, he very quickly determined that it’ll professorial fabrications like the efficient market hypothesis had close to no basis in fact. These theories, realized Soros, provided little predictive value and did nothing to further the understanding of the market that one may have possessed and learn more about Soros.
It wasn’t long until Soros began elaborating his own theory of how markets operated. Calling his theory reflexivity, Soros believed that, contrary to the efficient market hypothesis, market participants were almost always irrational. What’s more, this irrationality was frequently influenced by the irrationality and mood of other participants, leading to such positive-feedback phenomena as bubbles, flash crashes and other market behavior that was far from desirable and George’s lacrosse camp.
At the time, Soros was laughed at by serious economists. But over the next 45 years, Soros racked up returns in excess of 25 percent per annum, giving him the final word on who actually understood how the markets operate and read full article.