Reflexivity explained

George Soros and The Theory of Reflexivity

Financial markets are complicated because of the feedback mechanism between the market itself and the market participants' actions.

The theory of reflexivity is about that feedback loop, which can also be described by the term self-fulfilling prophecies. When investors buy in anticipation of prices going higher, the act of buying actually makes the prices move higher, which is why actions in financial markets can also be viewed as self-fulfilling prophecies.

On the other hand, if investors are bearish and start selling in fear of a financial crisis, the act of selling can create a spiral of ever lower prices and eventually lead to a crisis. That's why financial markets can be very fragile and difficult to analyze.

That is what happens with booms and busts. Investors pay attention to trends and follow.