Reflexivity Theory

The reflexivity theory argues that one can maximize profits by detecting an accumulating trend early and escaping before it collapses. It can be summarized in the following three characteristic points.

① Economic reality and financial markets influence each other.
② When an imbalance arises in economic reality, it tends not to be corrected but to expand day by day.
③ When a change occurs in the financial market, such a movement becomes established as a trend.

Negative feedback brings the participants’ views and the actual situation closer together; positive feedback drives them further apart.

In other words, a negative feedback process is self-correcting. It can go on forever and if there are no significant changes in external reality, it may eventually lead to an equilibrium in which the participants’ views come to correspond to the actual state of affairs.

Topics: George Soros,economic theory,Hyman Minsky Model
Category: Wiki/Term