Soros is known by many as the “man who broke the Bank of England” and one would be forgiven for assuming that he is a brusque, buccaneering speculator. This couldn’t be farther from the truth! Soros styles himself as a “failed philosopher” – indeed, he spent several years attempting to do original work on philosophy, developing the ideas that would later become Reflexivity Theory. Since the philosophical establishment largely ignored his work (possibly with good reason – it’s hard to know given I haven’t formally studied philosophy), he applied his theories to markets and the rest is history.

Soros on Soros is a an elegant retrospective on his life and thinking. The discussions of Reflexivity Theory were excellent (see these lectures for a possibly more accessible introduction), but I particularly appreciated the overview of Soros’ epistemology (from which Reflexivity Theory derives). His entire worldview – encompassing Open Society, reflexivity, financial markets – derives from one core statement: “I believe in my own fallibility”. Based on this one axiom, he builds a cogent and practical theory of decision-making in a world where the decisions of thinking participants impact reality. It doesn’t make a huge difference to me whether these ideas are original in the context of Western Philosophy, or that Soros is probably too imprecise to satisfy “true” philosophers – the ideas are fascinating and seem to have explanatory power.

Something that comes through very clearly (perhaps the hint is in the title) is Soros’ incredible capacity for introspection. This is a characteristic that seems to be shared by many other hedge fund legends (as per the Market Wizards series) but Soros takes it to the extreme. It’s abundantly clear that he has deeply reflected on his goals and weaknesses:

I recognize that I may be wrong. This makes me insecure. My sense of insecurity keeps me alert, always ready to correct my errors. I do this on two levels. On the abstract level, I have turned the belief in my own fallibility into the cornerstone of an elaborate philosophy. On a personal level, I am a very critical person who looks for defects in myself as well as in others. But, being so critical, I am also quite forgiving.

Soros on Soros is, at times, a challenging read (it has taken me several weeks to trawl through the highlights I made!). But this is only because it is so full of wisdom, the bulk of which I’m sure I haven’t been able to appreciate on the first pass. I look forward to reviewing my highlights a few months from now – I’m sure there’ll be many nuggets I missed!

Key ideas

• Trading approach:
  • Looks for changes in the rules in the game
  • Hypothesis-driven
  • Rides trends even if they are fundamentally flawed – as long as you understand the flaw!
• Personality:
  • Insecure – on the lookout for mistakes. But accepting of fallibility and forgiving.
  • Accepts feelings rather than denying their existence
  • Extremely introspective
• The inverse relationship between success and work:
  • Do the minimum to reach a conclusion
  • Beyond this, more work breeds attachment rather than insight
• Reflexivity theory: a general theory of the interaction between imperfect participants and reality. The market shapes peoples’ thinking and peoples’ thinking shapes markets.
  • Cognitive function: people have an interpretation of reality
  • Participating function: people make decisions based on their interpretation of reality, not on reality itself
  • In reflexive events, the cognitive function and participating functions interact in a two-way feedback mechanism that leads to disequilibrium.
  • Reflexivity theory applies to itself: knowledge of reflexivity theory can make markets more unstable.
• Phases of the system:
  • Near-equilibrium (ordinary): a small gap between thinking and reality – negative feedback processes keep it in line e.g people learning from experience.
  • Dynamic disequilibrium: “prevailing bias and the prevailing trend reinforce each other until the gap between them becomes so wide that it brings a catastrophic collapse. “
  • Static disequilibrium (rare in finance, but unfortunately common in history): dogmatic thinking and rigid social conditions lead to persistent deviations between thinking and reality
• Boom/bust processes can move a system between phases:
  • They occur when market prices start influencing fundamentals (e.g Tesla rally allows Tesla to access cheaper capital)
  • Boom/bust processes become unstable when there is an underlying flaw – usually, this flaw is that the fundamental value is reflexive
  • Boom/bust processes lead to regime change
  • Stages of a boom/bust process:
    1. Trend begins, unrecognised by most people
    2. Trend is recognised and its recognition reinforces the trend. Reflexive interaction between thinking and reality (still near-equilibrium)
    3. Trend becomes dependent on the biased thinking and the biased thinking becomes exaggerated
    4. Acceleration: the bias and the trend are tested by external shocks, and if they survive the tests, they become much stronger. This period may become a static disequilibrium.
    5. Moment of truth: divergence between thinking and reality becomes so great that the “participant’s bias is recognised as such”
    6. Twilight/stagnation period: trend sustained by inertia but ceases to be reinforced by belief and it flattens out.
    7. Loss of belief is bound to cause a reversal in the trend that had become dependent on an ever-stronger bias; this trend reversal is the crossover point. The opposite trend engenders a bias in the opposite direction, causing a catastrophic acceleration that qualifies as a crash.
• Soros’ epistemology: “I believe in my own fallibility”. Reflexivity theory derives from this statement.
• Popper’s model of science:
  • 3 types of statements: specific initial conditions, specific final conditions, and generalisations
  • Generalisations + initial conditions ⇒ predictions
  • Generalisations + final conditions ⇒ explanations
  • Initial conditions + final conditions ⇒ test of generalisations
• True statements: either “singular statements” (points of fact) or true statements derived by rules operating on singular statements.
• The existence of fallible thinking participants complicates things:
  • As active participants in the world, “we cannot confine our thinking to subjects that are independent of our thinking”
  • Decisions rely on beliefs of the world, but they also shape reality.
  • Reflexive statements are indeterminate: neither true nor false.
• Open society: humans are fallible, so we need a society that allows for critical thought, different opinions, democracy, minority opinions

Highlights

• Portfolio construction
• Trading approach
• Personality traits relevant to investing
• Life story and introspection
• Reflexivity theory
• Case studies of Reflexivity
• Soros’ Epistemology (from which Reflexivity Theory is derived)
• On markets and competition
• Open Society and Philanthropy
• The Soviet Union
• The US