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1-Page Summary of The Alchemy Of Finance
The Power of Perceptions
In a seminar for Princeton University, George Soros said that the concept of equilibrium doesn’t apply to financial markets and is bad for traders. Trends only occur because people’s perceptions reinforce themselves until some shock causes them to change those perceptions.
A former U.S. Federal Reserve Chair hosted a seminar, and the man who broke the Bank of England gave a talk on how markets are not stable because they’re constantly changing based on expectations. Paul Volcker found that George Soros’s perspective was important for both policymakers and academics to consider in their analyses of finance.
Economics and Reflexivity
Soros believes that what we think about a situation can influence the outcome of that situation, and vice versa. This means that people cannot know their situations because they are contingent on what people know about them.
The theory of rational expectations suggests that current market prices are a good indicator of future events. It says that markets will move towards equilibrium based on participants’ expectations unless some external shock introduces new information. This theory implies that financial markets will optimally allocate resources, but there is evidence to the contrary.
The rational expectations theory is flawed because it assumes that market actors make decisions based on what is best for them. However, in reality, they don’t always do that. They are often not fully informed and have a limited understanding of the world around them; therefore, their decisions can be misguided or even harmful to themselves.
Rational expectations theory states that the market is wiser than any individual. However, it’s important to note that the market is self-reinforcing and can be wrong even though it looks right. Bubbles are one example of this. The bubble bursts when people stop buying into the idea of rising prices, but only after a certain point in time.
The “Human Uncertainty Principle”
Humans are less certain than physical particles. People create their social realities based on what they believe to be true, not necessarily what is actually true. Therefore, people make decisions that may lead to unexpected results and actions that don’t achieve the goals intended.
Power Relationships
The market is affected by the political system in a country. Some countries have more power than others, which can affect how they interact with other countries. For example, some countries are able to borrow money from other nations because they’re considered safe investments (i.e., their debt is denominated in another nation’s currency). This allows them to use fiscal and monetary policy tools that help stabilize their economy during tough times.
Countries that have borrowed money in foreign currencies cannot be as powerful as countries with their own currency. They must follow the rules of international lenders, such as the International Monetary Fund, if they want to borrow more money. These lenders are willing to cause recession in peripheral countries because it’s better than not being able to get loans at all. Of course, these people aren’t really paying for this recession—it’s actually those who live there who pay for it when jobs and wages are lower than before.
Financial globalization is one of the goals of market fundamentalists. Governments can’t control capital movement, which goes to wherever it will make the most money. Market fundamentalists have been very successful in lowering taxes and deregulating markets; they’ve also created a long bull market that has benefited the United States and Britain greatly. The heavily indebted countries in Europe and Asia paid for these policies with their suffering economies.
