CRISIS breeds opportunity, as the bottom-fishers starting to circle beaten-up mortgage bonds and leveraged loans can attest. For George Soros it offers a chance of a different sort: to revive his favourite intellectual theory. In his latest book, “The New Paradigm for Financial Markets”, published on April 3rd, he sets out to illuminate the credit crunch through the prism of “reflexivity.”
The theory draws on thoughts first developed in his 1988 bestseller, “The Alchemy of Finance”, which was itself influenced by the work of Karl Popper, one of Mr Soros’s philosophical heroes. Essentially, it says that financial markets have built-in biases which have an impact not only on prices but also, in extreme times, the fundamentals themselves. In such moments, market events affect as well as reflect supply and demand.
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