To: amadeus who wrote (58109 ) 6/15/2002 12:54:15 PM From: X Y Zebra Read Replies (2) | Respond to I'm beginning to think that it drives the nasdaq as much as it reflects it.... I call the passive relationship the “cognitive function” and the active relationship the “participating function,” and the interaction between the two functions I call “reflexivity.” Reflexivity is, in effect, a two-way feedback mechanism in which reality helps shape the participants’ thinking and the participants’ thinking helps shape reality in an unending process in which thinking and reality may come to approach each other but can never become identical. Knowledge implies a correspondence between statements and facts, thoughts and reality, which is not possible in this situation. The key element is the lack of correspondence, the inherent divergence, between the participants’ views and the actual state of affairs. It is this divergence, which I have called the “participant’s bias,” which provides the clue to understanding the course of events. That, in very general terms, is the gist of my theory of reflexivity. It is generally summed up by saying that markets are influenced by psychological factors, and that is pretty trite. But that is not what the theory says. It says that, in certain cases, the participants’ bias can change the fundamentals which are supposed to determine market prices. soros.org "Reflexivity" is more a case of instability taking on a life of its own that may or may not be positive. The essential element is that a feedback process is set in motion that is the exact opposite of an equilibrium seeking system. A boom in stock prices will tend to get more extreme as it progresses making new capital abnormally cheap, encouraging excess investment and giving a false picture of real demand. www1.dragonet.es
