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The theory of reflexivity: A non-stochastic randomness theory for business schools only?

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  • Ehnts, Dirk
  • Carrión Álvarez, Miguel

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. --

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Bibliographic Info

Paper provided by Berlin School of Economics and Law, Institute for International Political Economy (IPE) in its series IPE Working Papers with number 28/2013.

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Date of creation: 2013
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Handle: RePEc:zbw:ipewps:282013

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Web page: http://www.ipe-berlin.org/
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Keywords: efficient market hypothesis; theory of reflexivity; George Soros;

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  1. Alan Greenspan, 2005. "Risk transfer and financial stability," Proceedings 968, Federal Reserve Bank of Chicago.
  2. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
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  4. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
  5. Sergey V. Chernenko, 2004. "The information content of forward and futures prices: market expectations and the price of risk," International Finance Discussion Papers 808, Board of Governors of the Federal Reserve System (U.S.).
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  7. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  8. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
  9. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
  10. Fama, Eugene F, 1970. "Efficient Capital Markets: A Review of Theory and Empirical Work," Journal of Finance, American Finance Association, vol. 25(2), pages 383-417, May.
  11. Kimmo Eriksson, 2012. "The nonsense math effect," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 7(6), pages 746-749, November.
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