The Alchemy of Finance
Book

The Alchemy of Finance

Reading the Mind of the Market

George Soros
Wiley, 1994
First Edition: 1987

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Editorial Rating

8

Qualities

  • Innovative

Recommendation

This is a remarkable book by a remarkable man. Billionaire George Soros is one of the most notorious, successful speculators of the 20th century and one of the most freehanded philanthropists. Here he outlines a theory that leads to the conclusion that markets are not morally good, that the financial system is rigged to protect the interests of the rich and powerful, and that economics is a spurious science. Much can be said in criticism of this book. It is replete with logical fallacies, muddies the arguments of those with whom the author disagrees, sets up straw men, and does not take adequate account of work done by philosophers and psychologists in some of the areas the author explores. But, getAbstract finds that there is also a great deal of good that can be said. Soros is an original thinker, at his best when he is talking about his own direct experience. He is straightforward about how his ideas have changed, and about his trading and forecasting errors. And why shouldn’t he be, when, as he says, his errors are the keys to his success?

Summary

The Power of Perceptions

George Soros once told a Princeton University seminar on international finance that the economic notion of equilibrium is irrelevant to financial markets and pernicious to traders. Because traders profit when they follow trends – that is, they make money when they correctly anticipate the expectations of market participants – perceptions actually drive markets, and fundamentals do not. Trends occur because perceptions reinforce themselves until some shock sends expectations in another direction.

The seminar’s host professor, former U.S. Federal Reserve Chair Paul Volcker, reports that Soros struck a successful blow against rational expectations, efficient markets and other notions from the economics textbooks. Soros explained that a stable state of equilibrium can’t exist because changing expectations constantly shape and reshape the market. Volcker finds that Soros’s distinctive perspective and his sense of how finance really works had important implications for both policymakers and academics.

Economics and Reflexivity

Soros is a proponent of the concept of reflexivity, which observes that what participants think about a situation...

About the Author

George Soros chairs Soros Fund Management, the principal investment adviser to the multibillion-dollar Quantum Group of Funds. His charitable foundations give nearly half a billion dollars annually in 50 countries for projects in education, public health, civil society development, human rights and other areas.

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