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A Problem Getting Global
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We certainly live tough times. It is in human nature to avoid uncertain situations and it is very probable that behavior comes out from deep instincts. The bigger the stake is, the bigger the induced stress it is. And when solution does not rely on inner power, there is a big chance the stress to reach high levels. It may become obsession. What can be tougher than the thought that the future of the company you are working for may be seriously affected, no matter what you (or anybody else from your team) can do?
And yet, the burden can be lighter when you begin to understand the reasons underlaid, even when you realize that solution is beyond your/ours/team effort. The book „The New Paradigm For Financial Markets“ can bring you up a ray of light in the darkness of financial crisis, which started over more than a few years in United States and now became visibly global (*). The way the book is written it is quite entertaining. I am not personally a fan of financial literature, nor the writer’s fan either, but I was pleasantly surprised about the style the problem is exposed. The book itself does not propose solutions (how come it would succeed on such a topic?), but successfully argues the fact that we do live in a society which does not act 100% logically and, still, evolves under the reign of imitation.
George Soros proposed himself (and I can only say he really succeeded) to write a brief philosophical history of the actual financial doctrine, presented as a problem which, by the way, now cannot be denied. I’ll try to resume it here below.
The statement
The ”perfect competition“ doctrine, developed in western economy universities as a scholastic paradigm, tried to copy the laws of nature and apply it to the financial and economic domain, thereby making a huge mistake, because:
the players on the economical-financial market create a lot of instabilities due to the fact they take decisions based on partial information; their actions are often random and proves to be too often wrong, despite the fact they should attempt to process all events as rationally as possible
the market evolution is a result of a continuous interaction of instabilities metioned above
an open society lies in a continuous emulation (I avoided word ”evolution“), changing its initial statement permanently, thus preventing players to learn from their mistakes (my adding: and give them reasons to justify their failures)
the interaction between individual human decisions cannot be framed into equations, (my comment: but statistically it can be -and de facto it is- manipulated with methods developed in modern market economy)
Demonstration
The financial market evolution is very well explained with the ”soap bubble“ theory, which describes a long-term, sustained but slow rising evolution, followed by a sudden but unpredictable collapse. In the end, a relative rebalancing of the market occurs, depending on the existing elements in the market at its resettlement.
Because the rising evolution is lately supported by artificial mechanisms, the final is not surprising. In fact, doing business on financial market became merely a gambling, many players use to force their luck in a silent race of tough nerves, trying to anticipate the real edge which will make the difference between a high-price sell and a crash.
In a practical way, the author identified that type of evolution on more segments of the financial market, successfully exploiting it. A few real cases are exposed in the book, proved and commented with the help of some historical evolution graphs cited from official documents. The actual crisis is the result of a ”giant soap bubble“. Its appearance was fueled in time by artificial mechanisms developed upon the base of the false ”perfect competition“ theory, mainly on (but not limited to) the real estate market.
Conclusion (of the author)
the supposition that the market regulates itself to a real equilibrium is obvious false
the financial domain is not a science in the classical way of definition yet
the ”perfect competition“ theory, proved de-facto as false, must be replaced with a new one: mr. Soros propose us the ”theory of reflexivity“, based on the relationship between thinking and reality, which basically claims that ”misconceptions and misinterpretations play a major role in shaping the course of history“ (page 7).
I recommend this instructive reading to all the people who have financial and/or organizational responsibilities: economists, managers, business owners.
Taking into account the fact that economical factor is stick together with the political one, and both are bound (not just individually, but more often as a whole) by the conscience of those which apply them in real life, I recommend it to anybody who really wants to know the role they have to play in a democratic open society. And when I say this, first of all, I am thinking to active electors, not just to politicians.
I do not recommend this book to anyone who feel himself excluded from the list above.
Pseudo-link
Because this is a personal site, I won't give you direct links you can get the books from, but you can search on internet by using the following [key-words] (without square brackets):
for Romanian version: you can order the book online by accessing the link found with the search [editura Litera noua paradigma]
for English version: try a search after [TheNewParadigmForFinancialMarkets.zip] if you want the book in pdf file format, or, if you prefere to buy it online, search again using spaced words and without ”.zip“.
* I wrote the first version of this article in march-2009
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