Soros George. The Alchemy of Finance

John Wiley & Sons, 1994. — 367 p. — ISBN 9780471042068.Soros is unquestionably one of the finest investors of our time, and the concept of "reflexivity" that he introduces in this book does have some merit. However, I found his wordy tome is a slightly burdensome read. Most of his most valuable points are in the first 80 pages; the remaining 300 could have been trimmed down by a wise editor.
Soros' main points revolve around a concept that he dubs "reflexivity. " Reflexivity claims a few things: First, that prices aren't objective; they're based on people's biased perceptions of the fundamental factors influencing the market. Second, people make trades based on their biased perceptions, so perceptions will influence the market. Third, and most importantly, those market movements can in turn change the market's underlying fundamentals. There is, therefore, a continuous co-evolution of the market fundamentals, the market's price movements, and market participants' perceptions.
Let's run through an example to make this clear. Say a profitless Internet company's stock soars because investors have overblown expectations of earnings growth. That company could then use its inflated stock in a stock-swap to aquire another company that DOES has earnings. This aquisition would thus "justify" the stock's inflated stock value. Thus, mistaken perceptions have allowed a change in the structure of an industry (i.e. two companies merged which would not have earlier).
Soros makes a number of other valuable points about "reflexivity. " He notes that traditional economics try to sidestep the issue of subjectivity and biased perceptions by assuming people behave rationally, which of course isn't always true. To demonstrate this, he points out that we see reflexive behavior all over the markets. For example, we see self-reinforcing price trends (people buy because a stock is going up, or sell when it's going down), rather than random-walks in prices. We see booms & busts in the credit markets. And so on.
Finally, the genesis of the title, "The Alchemy of Finance" comes from Soros' observation that finance can never be a science because the traditional tools of science - that is, explanation, prediction and objectivity - can't be used, because perceptions and subjectivity cannot be separated out like they can in a controlled science experiment. Finance can only be a form of alchemy - it seeks operational success, instead of being able to seeking and test fundamental laws as the scientific method does.
Overall, I found the book insightful in parts, but rambling. Some other reviewers claimed that the book was pseudo-intellectual. I did find that it lack academic rigor, but I can't be sure if that's because he was writing for a popular audience.
Since the book was written in the late 80's, there's been growing interest & academic research at the intersection between psychology and financial markets. Soros was not the first to recognize that financial markets involve a good dose of psychology, but his book serves to underscore this important truth about the market.ForewordTheory
The Theory of Reflexivity
Anti-equilibrium
The Problem of Imperfect Understanding
The Problem of the Social Sciences
The Participants' Bias
The Concept of Reflexivity
Reflexivity versus Equilibrium
Reflexivity in the Stock Market
Reflexivity in the Currency Market
The Credit and Regulatory Cycle
Historical perspective
The International Debt Problem
The Collective System of Lending
Reagan's lmperial Circle
Evolution of the Banking System
The "Oligopolarization" of America
Appendix
The real-time experiment
The Starting Point: August 1985
Phase 1: August 1985-December 1985
Control Period: January 1986-July 1986
Phase 2: July 1986-November 1986
The Conclusion: November 1986
Evaluation
The Scope for Financial Alchemy: An Evaluation of the Experiment
The Quandary of the Social Sciences
Prescription
Free Markets Versus Regulation
Toward an international Central Bank
Exchange Rates
International Debt
Oil
An International Currency
The Paradox of Systemic Reform
The Crash of '87
Epilogue
Notes
Appendix