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The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means by George Soros
Book Summary InformationAuthor: George Soros Edition: Hardcover Audio: English (Original Language); English (Unknown); English (Published) Published: 2008-05-05 ISBN: 1586486837 Number of pages: 208 Publisher: PublicAffairs Product features:
Book Reviews of The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It MeansBook Review: It is Soros' paradigm after all Summary: 4 StarsThe book is divided into two parts- conceptual framework and application of Soros theory on current financial crisis. The first half of the book caters to theories and conceptual frameworks that will work as a foundation to understand the current financial crisis in Soros perspective. Soros propound that current financial crisis is the result of our old way of thinking or old paradigm which is predominantly held belief that financial market corrects itself or it comes to equilibrium. However, that stubborn belief of the old paradigm caused the current financial crisis and Soros long held philosophical belief called reflexivity (which was disregarded by academics and economist because it lacked empirical evidence) should redefine the financial paradigm. So what is the theory of reflexivity that Soros want us to apply as a new paradigm? Theory of reflexivity states that there are two way connections between cognitive function and manipulative function. Cognitive function is the way we know the world by studying and researching whereas manipulative function is how we make that reality appear real. From this connection arises uncertainty and this is what reflexivity is about. Or more generalized way, there is conflict between how we perceive the given facts because not all of us interpret the same way. There are conflicts and misunderstandings on one same object. Therefore, disapproving rational expectation, which asserts that market participants, in pursuing their self interest, base their decisions on the assumption that the other participants will do the same does not hold under reflexivity. Since we live in a world that is imperfect, the belief that perfect competition, rational expectation, and the financial markets tend equilibrium is all false under Soros argument. The reason that financial crisis happened was because of the old belief or paradigm that market will correct itself according to equilibrium theory. However, Soros argue that financial market is one way self directed course and it does not average itself naturally, refuting the equilibrium theory.
Main point of the book: theory of reflexivity should be promoted instead of clinging onto equilibrium theory or the belief that market can correct itself. The book is Soros new proposition, offering new paradigm to understand the market.
If your plan is to understand the current financial crisis in detail then I would reconsider picking Soros' book. The reason is that it is mostly about Soros' theory and how it should be applied to the current financial crisis. This condensed book does not elaborate on details how the current financial market came to be. If you want to know the details and facts how financial debacle has come to be, then I would offer read Mark Zandi's financial crisis since it is looking at from housing crisis. Rather it is more about Soros long time philosophy and belief that was widely ignored among economists is strongly propounded in this book, the theory of reflexivity. First part of the book deals with the reflexivity.
I was not expected to delve seriously into Soros outlook and belief. However, after reading seriously about his theory, I start to wake up from stubbornness and ignorance that every theory that was taught an undergraduate school should not be taken seriously. As an economics undergrad, I always thought that the equilibrium theory, rational expectation, or perfect competition was like an indisputable statement that cannot be challenged even though it is just a theory. However, I realized that theories are just hypothesis. It can be disapproved and invalidated. Social science and natural science is not the same because in social science it has an element of uncertainty in it. Soros elaborate on this uncertainty into his theory of reflexivity. We have to understand Soros background in order to accept the theory of reflexivity.
Soros published this book during early 2008. This book was before the Lehman Brothers collapsed. The world financial crisis did not unravel until October of 2008. However, Soros prediction and expectation at the end of the book came out to be right. As Soros expected, the regulators are back in the financial markets. It is a cycle and a history as Soros proposes. Behind all the financial crashes, it has a certain pattern. Bubbles form and burst, and the messes are cleaned up by the regulators. However, recent financial forum on the current financial crisis, Soros said that regulators are not perfect as well. I do not believe that Soros' theory of reflexivity will be taken seriously in the academia or among economists. It is Soros' experience and belief rather than an economic theory, it is a philosophical belief that Soros have formed since he was young. I do not support nor discredit his theory of reflexivity. It is somewhat blurry and hazy to understand at first what Soros new paradigm called reflexivity is about. After reading several on reflexivity, I still cannot grasp what he is trying to say or apply to current financial crisis. It is somewhat intuitive that theory of reflexivity is clothed with lofty words with cognitive function and manipulative function to make it genuine and sophisticated. However, I believe that it could be worded very simply such as that because we are fallible human being, the effort to understand the market is futile.
Summary of The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It MeansIn the midst of the most serious financial upheaval since the Great Depression, legendary financier George Soros explores the origins of the crisis and its implications for the future. Soros, whose breadth of experience in financial markets is unrivaled, places the current crisis in the context of decades of study of how individuals and institutions handle the boom and bust cycles that now dominate global economic activity. "This is the worst financial crisis since the 1930s," writes Soros in characterizing the scale of financial distress spreading across Wall Street and other financial centers around the world. In a concise essay that combines practical insight with philosophical depth, Soros makes an invaluable contribution to our understanding of the great credit crisis and its implications for our nation and the world.
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