Reflexivity
Soros's principle that market prices influence the fundamentals they are supposed to reflect, creating self-reinforcing or self-defeating feedback loops.
Definition
Reflexivity describes situations where investor expectations alter the underlying reality they're trying to forecast: rising stock prices ease a company's cost of capital, validating the rally; falling currencies trigger inflation that justifies the depreciation.
Reflexive episodes are unstable by construction — they accelerate until a constraint binds, then reverse with similar violence.
Why it matters
Reflexive trends are the source of the largest macro returns and the largest drawdowns. Recognizing one early is more valuable than any valuation framework.
Worked example
1992 Sterling crisis: short Sterling positions widened the credibility gap, forcing higher rates, slowing the UK economy, and validating the bearish thesis until the BoE exited the ERM.
Frequently asked
Is reflexivity the same as a feedback loop?⌄
How do you trade a reflexive setup?⌄
What ends a reflexive trend?⌄
Why can't models predict reflexive moves?⌄
Related terms
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