Learning Lessons from: George Soros

On Wednesday, George “The Man Who Broke The Bank” Soros returned to his alma mater to promote his new book The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means. Arguably the world’s most well-known speculator, the Old Theatre was packed with awe-filled admirers who have made the long pilgrimage despite The Match kicking off in 2 hours’ time. A member of the audience later commended him on how quickly Soros had managed to get his book published, with statistics as up-to-date as from last month. You can listen to an mp3 file of the session here.

He began by paying tribute to his old teacher Karl Popper and his Open Society. Here was Popper’s principle of “fallibilism”, that anything he believed may be right or wrong and must therefore be constantly challenged for improvement. Soros used this idea to question the conventional wisdom of the efficient market hypothesis or equilibrium theory, and to push the theory to which he himself subscribes to – reflexivity.

He disputes the assumption that markets tend towards equilibrium in the long run, that people are rational agents. Instead, reflexivity dictates that the people’s biases enter into transactions and therefore cause unpredictable fluctuations. These fluctuations can be amplified by certain conventional beliefs and turn into self-reinforcing positive feedback which cause the market to wildly overshoot or undershoot. These deviations are random and occur with a probability according to the Bell Curve, but the less likely it is to happen, the bigger impact it would have (RE: Taleb?).

From this theory, he draws the conclusion that market liberalisation is to blame for the crisis we have today. Giving people (and banks) more freedom means that we’re giving a thicker tail to the Bell Curve and increasing the probability for such biases to build up. He says that deregulation of the financial sector has “encouraged” the creation of new instruments which in turn caused asset price bubbles to build up. We can’t only regulate the money supply, we have to watch the availability of credit too. He saw credit expansion-fuelled growth and wealth creation as ultimately unsustainable and he was highly critical of the present incentive systems in banks and their rule of “Heads you win, tails you don’t lose.”

When questioned about his proposed immediate policy imperatives, he was rather vague and simply said that we need to increase regulation but not to go to the other draconian extreme. Quality, not quantity of regulation was necessary. He was glad that the UK had not joined the Euro since that would’ve given us even less tools and autonomy to adjust to the credit crunch, just when we need it the most.

There was one particularly thought-provoking question from the audience, and that was whether Soros considered “market fundamentalism” (a rather distasteful term imo mais c’est la vie) to be an alibi for self-interest and greed. I was surprised that he agreed with this seemingly-conspiracy-like theory and denounced it as propaganda by the rich who have a self-serving bias. He considered it to be all too convenient for those who have rather than those who have not.

[Editor’s note: this is the ninth instalment of the Learning Lessons series, detailing the author’s exploits on the London lecture circuit. For further information or to subscribe to the mailing list, contact arthurmauk@gmail.com]