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Soros also calls himself an insecurity analyst. "I recognize that I may be wrong. This makes me insecure. My sense of insecurity keeps me alert, always ready to correct my errors."32 He explains, "I watch whether the actual course of events correspond to my expectations. If not, I realize I'm on the wrong track. When there is a discrepancy between my expectations and the actual course of events, it does not mean I dump my stock. I reexamine the thesis and try to establish what has gone wrong. . . . But I certainly don't stand still and I don't ignore the discrepancy. I start a critical examination."33


In The Alchemy of Finance, Soros says the idea of reflexivity is crucial to his analysis of market behavior. The idea was to record the decision-making process—not a scientific experiment but an alchemic experiment—because he expected he was conducting an experiment to include the results.34

Two words sum up the concept: imperfect understanding. On one hand, reality is reflected in people's thinking—this is the cognitive function. On the other hand, people make decisions that affect reality, and these decisions are based not on reality but on people's interpretation of reality—the participating function.

Soros says those two functions work in opposite directions, and in certain circumstances they can interfere with each other. The interaction between them takes the form of a two-way reflexive feedback mechanism.35

Soros observes that financial markets are characterized by a discrepancy between the participants' perceptions and the actual state of affairs. At times, it is negligible.36 In a normal situation, the discrepancy between thinking and reality is not very large and there are forces at play that tend to bring them closer together, partly because people can learn from experience and partly because people can actually change and shape social conditions. This is what Soros calls a near-equilibrium condition. Far-from-equilibrium conditions occur when people's thinking and the actual state of affairs are very far removed from each other and have no tendency to come closer together.

Dynamic disequilibrium occurs when the prevailing bias and prevailing trend reinforce each other until the gap between them becomes so

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