George Soros: How Market Action Shapes Investment Decisions

In his book – The Alchemy of Finance, George Soros argues that his approach to financial markets, which emphasizes the perspective of a participant rather than a purely scientific method, is validated. Scientific methods lead to the random walk theory, which fails to account for the trial-and-error process participants experience.

Soros acknowledges that formulating accurate predictions is difficult and often results in randomness, but successful conjectures can be highly rewarding. His decision-making is significantly influenced by market behavior, which provides critical feedback and shapes events.

Soros contends that while markets are not always correct, they are essential for evaluating investment decisions and identifying mistakes.

Here’s an excerpt from the book:

This conclusion validates the approach I have taken over a strictly scientific one. If we abide by the methods of natural science, we arrive at the random walk theory. The hypotheses that are being tested have to be disregarded because they do not constitute facts and what we are left with is a jumble of haphazard price fluctuations.

On the other hand, if we look at the situation from the inside, from the vantage point of a participant, we discover a process of trial and error. It is not easy to make sense of the process: many people participate with only a vague idea of what is going on, and I must confess that the sensation of being on a random walk is not unfamiliar to me.

My attempts at formulating conjectures about the future work only intermittently; oftentimes all I get is white noise. But when I succeed in formulating a worthwhile conjecture the results can be very rewarding, as Phase 1 of the experiment demonstrates; and even if my perceptions are flawed, as was often the case in Phase 2, I have a criterion that I can use to identify my mistakes: the behavior of the market.

The real-time experiment has shown how greatly my decision-making process is influenced by the market action. At first sight this seems to contradict my original contention that markets are always wrong. But the contradiction is more apparent than real.

Markets provide the criterion by which investment decisions are judged. Moreover, they play a causal role in shaping the course of events. The information is more readily available than events in the real world; hence the market action offers the most convenient feedback mechanism by which one’s expectations can be evaluated.

One need not regard the market as always right in order to use it in that capacity. Indeed, if one believes that the market is always right there is little to be gained from having a feedback mechanism because the prospect of outperforming the market be comes a matter of pure chance.

You can find a copy of the book here:

George Soros – The Alchemy of Finance’