[TameAntelope]

An article last week referred to this as "reflexivity".

* Reflexivity is a theory that positive feedback loops between expectations and economic fundamentals can cause price trends that substantially and persistently deviate from equilibrium prices.

* Reflexivity’s primary proponent is George Soros, who credits it with much of his success as an investor.

* Soros believes that reflexivity contradicts most of mainstream economic theory.

https://www.investopedia.com/terms/r/reflexivity.asp has some additional info.

I wonder if there's a way to marry "efficient market hypothesis" with "reflexivity on the edges" somehow. Well outside my ballywick, in any event.

[FabHK]

I think Keynes captured the essence of reflexivity nicely in his beauty contest:

"It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees."

https://en.wikipedia.org/wiki/Keynesian_beauty_contest

[xapata]

I don't think there's necessarily a contradiction between a weak form of the efficient market hypothesis and the quite evident phenomena of reflexivity. Inefficiencies form, the agents seek them out and in so doing remove them. The question is how fast the inefficiencies are removed and how costly they are to discover. There's decent evidence that the inefficiencies can take quite some time to disappear. The tougher question is how costly they are to discover and exploit. Unfortunately, it's hard to gather evidence on that, because of the confounding variables (trade secrets and competition, selection bias).

Another way to put it: You might be the best poker player at the table, but you might not be enough better to beat the rake. Or, sure, you can count cards and win at blackjack, but the casino ensures through table limits that on average they'll still come out ahead. Card counters will spend too much money finding a table with a good count that they won't win enough back exploiting the count to make up for the cost of information. On average.

[marcosdumay]

No, you can't marry the Efficient Market Hypothesis with any kind of inefficiency. Even less one that isn't compatible with a market settling into equilibrium.

The hypothesis is just false. Markets do seek efficiency, but not the way it states. But the Efficient Market Hypothesis leads to tractable mathematics, so people try to approximate the real world into it.

[edouard-harris]

> I wonder if there's a way to marry "efficient market hypothesis" with "reflexivity on the edges" somehow.

The key to this synthesis is that there is sometimes genuine, fundamental value to be had in creating a Schelling point for a resource or a certain kind of transaction. This is (part of) why online marketplaces are valuable and defensible businesses, for example.

"Reflexivity" is simply what it looks like when a Schelling point is in the process of forming. There are some very rare but very real cases in which a bubble really does create its own reality, and that reality sticks around because a shared delusion turns out to create enough real value to justify its existence. There is an art to identifying those cases, and that art is as well-compensated as one might imagine. (Most of the time, though, a Ponzi is just a Ponzi.)

[TeMPOraL]

I've read the Investopedia article, but I struggle to see what's the big deal about it? Where's the conflict?

The best I could summarize it is that "reflexivity" postulates that economic equilibria are usually not stable, but metastable. That is, they can be easily pushed out of their stability regime, at which point the feedback loops will no longer balance, and the equilibrium will get re-established elsewhere (if at all).

That's the only thing I can see that requires some empirical justification. Other than that, the postulates seem to be basically "feedback loops 101", and the "mainstream economics" concepts, as I understand them, are built on the same principles too.

[paulpauper]

This did not work between 2000-2003. Companies whose share prices went up 10x still want away.

The GME rally amazingly even exceeds the biggest bubbles of 1997-2000 in %-change and volume.

[paulpauper]

It is very easy to reconcile it with the EMH and risk neutral pricing. If positive reflexivity exists, then presumably so does negative reflexivity, so it cancels out.