Reflexive Tendencies

Reflecting on the feedback loop of sentiment and how it can impact private markets

One of the most overlooked and misunderstood theories in investing is George Soros’ concept of reflexivity. At its core, reflexivity is the idea that perceptions shape reality, and reality, in turn, influences perceptions in a feedback loop that creates self-reinforcing cycles. We see this in economic and business trends, such as the Dot-com bubble and the 2008 Great Financial Crisis and its aftermath. It’s visible in politics, where extreme ideologies emerge (think Hitler pre-WWII and, more recently, in US politics), and even in societal shifts driven by trends like artificial intelligence. The same dynamics are present in mainstream industries, like the tech enabled coffee craze sweeping Southeast Asia.

When it comes to investors, most focus on observable factors—price movements, cash flow, earnings. But Soros goes a step further, arguing that you can gain an edge by understanding how people’s beliefs about these metrics change and shape actual outcomes. It isn’t the metrics themselves that drive results, but how individuals think they will impact future events.