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The New Paradigm for Financial Markets

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The New Paradigm for Financial Markets

The Credit Crisis of 2008 and What It Means

Public Affairs,

15 min read
10 take-aways
Audio & text

What's inside?

Legendary investor George Soros explains why this is the worst credit crisis since the 1930s and what to do about it.

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Editorial Rating

7

Qualities

  • Innovative

Recommendation

Legendary financier George Soros is worried. The financial markets face the worst credit crisis since the Depression and their existing paradigm needs to be replaced. The new paradigm Soros recommends is based on what he calls the “theory of reflexivity.” This book-length essay provides a crash course in the billionaire investor’s philosophy and view of financial markets, the origins and consequences of the current credit crunch, the boom-bust model and the behavior of market participants. Soros intersperses his market analysis with enough personal details from his early life and career to keep the book lively. He is also quite vocal in his political beliefs; Democrats will probably appreciate the case he makes against President George W. Bush’s administration and its policies. One weakness of the book, other than its repetitiveness as Soros explains his theory, is that he relies heavily on technical and financial jargon, which makes it tough to penetrate and may prove a barrier to some readers. Ironically, he seems to be fully aware of this shortcoming when he writes that readers may find one of his particularly theoretical chapters to be “somewhat repetitive and hard-going.” Nevertheless, his warm personal voice and the depth of his financial experience, which spans more than half a century, is hard to match. Thus, getAbstract notes that this book has much to offer executives, investors, and students of financial markets and theory.

Summary

The Global Financial Crisis

The present financial crisis, the worst since the 1930s, is a result of a “superboom” that has lasted more than a quarter of a century. The global financial system got into this kind of trouble largely because it is based on a faulty, “false and misleading” paradigm, which holds that markets tend toward equilibrium. Market participants widely accept the incorrect concepts of perfect competition and the possibility of perfect knowledge, leading them to hold biased perceptions that affect prices and their underlying fundamentals.

The markets need a new paradigm that focuses on the relationship between thinking and reality. This new paradigm must recognize that misinterpretations play a key role in history. Market participants should seriously consider the “theory of reflexivity,” which says that markets do not reach the equilibrium that is said to exist. Instead, it acknowledges that misconceptions are inevitable and that a true understanding of the markets should reflect the impact of misunderstandings.

“Setting the Stage”

The current financial crisis is more than a housing bubble and is greater than the previous crises the ...

About the Author

Billionaire financier, investor, philanthropist and former hedge-fund manager George Soros chairs Soros Fund Management. He founded a global network of foundations that support open societies. His best-selling books include The Bubble of American Supremacy, Underwriting Democracy and The Age of Fallibility.

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