# George Soros models

Mr. Soros in his books talked about principles which are not used by today's financial mathematics — namely reflexivity of all actions on the market. Simply it can be given by following: expectations of traders are based on the news and historical prices. They trade based on their expectations and hence influence prices which then influence expectations on the next "turn". I have never met an implementation of these ideas in the scientific framework. Have you? If yes, please give me a reference.

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I think most would refer to Soros's "reflexivity" as "mean reversion". I think his point is that there are frictions that delay mean reversion (i.e., the market can bear some mis-pricing before reverting back to the correct level). – richardh Apr 5 '11 at 9:42
@richardh That's funny, because I would call it "momentum". – Shane Apr 16 '11 at 23:00
@shane -- I wrestle with the distinction between momentum and mean reversion; they seem to be two sides of the same coin. One month's winners are the next's losers (short run reversal), $j$-month winners win for the next $k$ months after you skip a week (momentum), and stocks that win for 36-60 months lose for the next 24 or so (long run reversal). And vice versa. – richardh Apr 17 '11 at 16:51
are j and k fixed in your example? Otherwise this is just the description of a random walk. – RockScience Apr 18 '11 at 3:17
why did this MARKED as answered question popped up again? I have value to add I believe but the question is marked answered... – Matt Wolf Dec 9 '12 at 10:16
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## 3 Answers

Keynes introduced this idea in the notion of a Keynesian Beauty contest: http://en.wikipedia.org/wiki/Keynesian_beauty_contest

Anyone who uses a rolling window regression where the parameters and/or parameter estimates are re-fitted periodically are implicitly accounting for this reflexivity (i.e. the market's changing behavior as agents respond and adapt to each others actions)

With respect to a scientific-framework, agent-based modeling is something that fits the bill and also game theory: http://en.wikipedia.org/wiki/Agent-based_model

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 I very much agree that game theory is the relevant discipline. In particular, the subfield of learning in games, also called evolutionary game theory. – MichaelJ Dec 9 '12 at 6:58

The answers above are good, but I suspect they will be unsatisfactory if you are looking for implementations that are successful in practice. The sort of bottom-up analysis championed by Soros is very difficult to carry out in a rigorous, quantitative manner. This is true very generally, not just in finance. There are certainly models of financial markets that explicitly consider beliefs and actions of individual market participants (see game theory), but these always rely on extreme oversimplifications of actual human cognition and behavior.

On the other hand, many seem to be able to develop a good intuitive sense for what sort of beliefs and biases are driving the behavior of financial market participants and exploit this knowledge. Soros is often counted among their ranks. Although this approach may be sophisticated, it is usually not considered quantitative. Soros often claims that he looks for a sort of "turning point" where market participants realize the flaws in their beliefs. This is in contrast with most quantitative models that implicitly assume that whatever structure is observed in the data will persist long enough for a profit to be extracted.

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 There are "quantitative" indicators for that kind of strategies still, like market sentiment... I know you didn't mean there weren't but it's just to emphasize it's not only about the trader's feeling, he uses quantitative tools. – SRKX♦ Dec 12 '12 at 18:44

Sure it is used in non-linear dynamics. What is not used is that this non-linearity is caused by huge operators who cause the deviation from Normal Law delaying the reversion to the mean. This is just common sense and mathematically logics when you go straight to Normal Law premisces: all samples must have about the same weight and being independant. Clearly these premisces are hugely violated in Stock Market.

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