Financial markets and crisis: statement of George Soros

I would like to address in the following posts the issue of financial markets. Despite the huge amount of information that exists in the newspapers and the Internet, it lacks of a basic understanding among non-specialists. Remarkably, it happens that this lack of understanding affects also the specialists. The so-called technical analysis of financial markets is more a collection of recipes than a rigorous procedure, and if it works is due to the conviction of many people that it actually works. However, as a physicist, today I will be more interested in the underlying theory of financial markets, based on the "Efficient Market Hypothesis", that essentially states that markets regulate themselves, that they tend to be equilibrated (thanks to the supply and demand law), and that deviations around equilibrium are random (and hence, on average, compensated and not too far from equilibrium). This theory, as I mentioned it happens with most of the theories studied in Economics, has not been really tested and observational evidences suggest that is actually wrong. Not having reliable theories, economic policy and financial market analysis are based on a bunch of recipes that typically experience has helped to collect. Therefore, we should not get alarmed when they tend to work so poorly.

I will go into this issues in depth in future posts. Today, I just want to mention that I got surprised by the reading of the statement of George Soros before the U.S. Congress in November 2008, where he was inquired about the financial crisis. His explanation is not only clear and full of insights, it also reveals a knowledge about the way financial markets work that I would better expect from the theorists doing Economics. Most of the ideas I just mentioned in the last paragraph are already contained in his statement, where he also ventures to give his own theory about market behaviour. Likely, the real explanation is far more complex, but still I do think it is much more reallistic than the things that can be studied in undergrad courses.

But maybe I should not be that surprised. After all, George Soros owes part of its richness to the hedge funds he manages, those being aggresive investment tools that move huge amounts of money and can even unstabilize global financial markets. Being successful here requires a lot of expertise and real understanding of market behaviour. I hope it comes a time in which this kind of knowledge is provided by academicians, not by speculators.

The complete text, whose reading I definitely recommend, can be found following this link (in English):

http://online.wsj.com/public/resources/documents/georgesoros.pdf