The Theory of Reflexivity – A Non-Stochastic Randomness Theory for Business Schools Only?

Berlin School of Economics and Law Working Paper, No. 28/2013

31 Pages Posted: 13 Dec 2013

See all articles by Dirk H. Ehnts

Dirk H. Ehnts

TU Chemnitz

Miguel Carrion Alvarez

Banco Santander, Global Risk Methodology

Date Written: December 10, 2013

Abstract

'The Alchemy of Finance', a book written by George Soros (1987) on the workings of financial markets, 'has found a place in the reading lists of business schools as distinct from economics departments', according to the author (2003, 4). His theory of reflexivity, which is at the center of the book, states that interdependence exists between the cognitive and manipulative functions of market participants. While Soros claims that imperfect knowledge rules on financial markets, academic orthodoxy assumes perfect knowledge and hence displays – in the absence of external shocks – financial markets as efficient.

We review the work of Soros on reflexivity and follow up his claim that it can be used to attack the efficient market hypothesis. Both are discussed and then the ideas of Soros are compared to those of Post-Keynesian economics. We argue that Soros’ book is mainly ignored by neo-classical economists because they disagree with his axioms, and by heterodox economists because his ideas are not new.

Keywords: efficient market hypothesis, theory of reflexivity, George Soros

JEL Classification: B26, D8

Suggested Citation

Ehnts, Dirk H. and Carrion Alvarez, Miguel, The Theory of Reflexivity – A Non-Stochastic Randomness Theory for Business Schools Only? (December 10, 2013). Berlin School of Economics and Law Working Paper, No. 28/2013, Available at SSRN: https://ssrn.com/abstract=2366780 or http://dx.doi.org/10.2139/ssrn.2366780

Dirk H. Ehnts (Contact Author)

TU Chemnitz ( email )

Chemnitz
Germany

Miguel Carrion Alvarez

Banco Santander, Global Risk Methodology ( email )

Ciudad Grupo Santander
Boadilla del Monte, 28660
Spain

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