Reflexivity — Why Markets Overshoot

Classical economics assumes that markets trend toward equilibrium — that prices reflect fundamentals, and that deviations from fundamental value are self-correcting. George Soros built a billion-dollar fortune proving this wrong. His theory of reflexivity explains not just why markets overshoot, but why they must.

Why This Matters

George Soros is among the most successful macro investors in history, most famous for "breaking the Bank of England" in 1992 by shorting the British pound and generating over $1 billion in profit. But behind the headline trades is a theoretical framework — reflexivity — that Soros developed over decades and considers his most important intellectual contribution. Reflexivity directly contradicts the efficient market hypothesis. Where efficient markets theory holds that prices reflect available information and that market participants' expectations are independent of prices, Soros argues that the relationship runs in both directions: prices influence participants' thinking, and participants' thinking influences prices, creating a two-way feedback loop that is inherently destabilising.