Editing Economic bubble (section)

==In economics==
Investor [[George Soros]], influenced by ideas put forward by his tutor, [[Karl Popper]] (1957),<ref>{{cite book |last=Popper |first=K. |orig-year=1957 |author-link=Karl Popper |title=The Poverty of Historicism |url=https://books.google.com/books?id=Fc03vC5k7BgC |date=2013 |publisher=Routledge |isbn=978-1-135-97221-9}}</ref> has been an active promoter of the relevance of reflexivity to economics, first propounding it publicly in his 1987 book ''The alchemy of finance''.<ref>''The Alchemy of Finance: Reading the mind of the Market'' (1987) by [[George Soros]], pp 27–45</ref>  He regards his insights into market behaviour from applying the principle as a major factor in the success of his financial career.

Reflexivity is inconsistent with [[general equilibrium theory]], which stipulates that markets move towards equilibrium and that non-equilibrium fluctuations are merely random noise that will soon be corrected. In equilibrium theory, prices in the long run at equilibrium reflect the underlying [[Fundamental analysis|economic fundamentals]], which are unaffected by prices. Reflexivity asserts that prices do in fact influence the fundamentals and that these newly influenced sets of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern. Because the pattern is self-reinforcing, markets tend towards disequilibrium. Sooner or later they reach a point where the sentiment is reversed and negative expectations become self-reinforcing in the downward direction, thereby explaining the familiar pattern of boom and bust cycles.<ref>{{cite book
|last=George
|first=Soros
|author-link=George Soros
|title=The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What it Means
|edition=1st
|year=2008
|publisher=PublicAffairs
|isbn=978-1-58648-683-9
|page=66
|chapter=Reflexivity in Financial Markets
|chapter-url=https://archive.org/details/newparadigmforfi00soro_0
}}</ref> An example Soros cites is the [[procyclical]] nature of lending, that is, the willingness of banks to ease lending standards for real estate loans when prices are rising, then raising standards when real estate prices are falling, reinforcing the boom and bust cycle. He further suggests that property price inflation is essentially a reflexive phenomenon: house prices are influenced by the sums that banks are prepared to advance for their purchase, and these sums are determined by the banks' estimation of the prices that the property would command.

Soros has often claimed that his grasp of the principle of reflexivity is what has given him his "edge" and that it is the major factor contributing to his successes as a trader. For several decades there was little sign of the principle being accepted in mainstream economic circles, but there has been an increase of interest following the crash of 2008, with academic journals, economists, and investors discussing his theories.<ref>''Journal of economic methodology'', Volume 20, Issue 4, 2013: Special Issue: Reflexivity and Economics: George Soros's Theory of Reflexivity and the Methodology of Economic Science http://www.tandfonline.com/toc/rjec20/20/4 For example, Larry Summers, Joe Stiglitz, and Paul Volker in: ''Financial times'', The Credit Crunch According to Soros, January 30, 2009.  http://www.ft.com/cms/s/0/9553cce2-eb65-11dd-8838-0000779fd2ac.html</ref>

Economist and former columnist of the ''Financial Times,'' [[Anatole Kaletsky]], argued that Soros' concept of reflexivity is useful in understanding China's economy and how the Chinese government manages it.<ref name="project_syndicate_2015">{{cite web | url=http://www.project-syndicate.org/commentary/why-china-is-not-collapsing-by-anatole-kaletsky-2015-10 | title=China is Not Collapsing | work=Project Syndicate | date=12 October 2015 | access-date=12 October 2015 | author=Kaletsky, Anatole | location=London}}</ref>

[[Eugene Fama]], the Nobel laureate in economics who has often been described as "the father of modern finance", has expressed skepticism about the notion that economic bubbles can be identified.<ref>{{Cite journal |last=Engsted |first=Tom |date=2016 |title=Fama on Bubbles |url=https://onlinelibrary.wiley.com/doi/abs/10.1111/joes.12104 |journal=Journal of Economic Surveys |language=en |volume=30 |issue=2 |pages=370–376 |doi=10.1111/joes.12104 |issn=1467-6419}}</ref><ref>{{Cite journal |last=Greenwood |first=Robin |last2=Shleifer |first2=Andrei |last3=You |first3=Yang |date=2019-01-01 |title=Bubbles for Fama |url=https://www.sciencedirect.com/science/article/abs/pii/S0304405X1830254X |journal=Journal of Financial Economics |volume=131 |issue=1 |pages=20–43 |doi=10.1016/j.jfineco.2018.09.002 |issn=0304-405X}}</ref> He argues that for something to be a bubble, its ending needs to be predicted in real time, not just after the fact. He argues that conventional rhetoric about bubbles proposes no testable propositions and no ways to measure a bubble.<ref>{{Cite web |last=Competiello |first=Christopher |title='People see bubbles where there are none': Why Nobel laureate Eugene Fama thinks bubbles are impossible to identify in real time — and why behavioral finance is a myth |url=https://www.businessinsider.com/nobel-laureate-eugene-fama-opines-on-bubbles-and-behavioral-finance-2019-11?op=1 |access-date=2025-02-01 |website=Business Insider |language=en-US}}</ref>