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How George Soros derived a novel theory then used it to beat Wall St.

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George Soros always had a philosophic bent. As a child growing up in Hungary, he was horrified by the loss of extended family members to the Nazi death camps. This sparked an intense interest in how political ideologies and the philosophies that guide them create the societies in which we all end up living. This interest on in the intellectual underpinnings of the living world would guide him through the course of his life and eventually lead directly to his most spectacular achievements.

In 1947, he was accepted at the London School of Economics. There, he studied under the tutelage of the renowned philosopher Karl Popper. Popper had gained international fame for his groundbreaking work “The Open Society and Its Enemies”. George Soros was captivated by the ideas contained within this book and would eventually go on to name his flagship charitable foundation, The Open Society Foundations, after it.

He graduated in 1954, drifting around the English countryside for a few years and working a string of none-too-satisfying jobs. He eventually applied around Wall St. and was hired at the firm Singer and Friedlander. Here, he began his own work, a philosophical tract which would prove to be the foundation of much of his later success in the financial markets on Biography.

The folly of pure reason

The reigning school of thought at that time held that markets were efficient. This meant that all participants had perfect information on Snopes, all were perfectly rational and, thus, all parties to market transactions were capable of pricing in all currently available information. Soros admired the elegance and mathematical beauty of this theory. The only problem he saw was that the academics who derived it had never bothered to see if it had any semblance to reality. It turned out that it did not.

George Soros began devising his own theories of how markets really worked. He reasoned that the Efficient Market Hypothesis was perfectly wrong on all counts – that market participants have limited, imperfect information that they often deliberately hide or misrepresent to other participants, that few parties to transactions were perfectly rational, and that, most of the time, participants were utterly incapable of taking the totality of information into account in order to properly valuate financial assets on Politico.

But Soros also went one further. He reasoned that often times the way that market participants valuate assets depends on how they perceive others to be valuating the same assets. He called this self-referential quality reflexivity. This observation may seem simple enough, but, at the time, it had escaped nearly every financial expert there was. A corollary of this insight was that it routinely led to the nasty tendency of bubble formation, the identification of which Soros took advantage of again and again.

Using his superior skills at identifying bubbles of all stripes, he went on to post 25% returns year after year, decade after decade. This incredible track record has made him the 23rd richest man in the world and earned him the respect of his peers and recognition as being one of the greatest traders in history.