In the global investment world, George Soros is a legendary investor, regarded on par with Warren Buffett. Interestingly, although both Buffett and Soros have made vast fortunes in financial markets, they followed two completely different paths. Buffett took the route of value investing, focusing on evaluating a company’s business model, market competitiveness, cash flow, and whether its valuation is reasonable. Soros, on the other hand, pursued a radically different approach, and this book presents the essence of his thinking.
Soros's life is full of legendary experiences. A Hungarian-born Jew, he survived the Holocaust at age fourteen by using false identification and a fake name to escape Nazi persecution. This experience, to some extent, shaped his adventurous spirit. After entering the financial industry, he founded the Quantum Fund and became globally renowned through several high-profile investment battles. At one point, he was the highest-earning hedge fund manager in the world.
So, what is Soros’s investment logic? Let’s first consider some background. In the 1970s, Eugene Fama, a professor at the University of Chicago and winner of the 2013 Nobel Prize in Economics, proposed the Efficient Market Hypothesis (EMH). EMH suggests that all available information is quickly absorbed by market participants and instantly reflected in market prices. A crucial underlying assumption of this theory is that market participants are sufficiently rational and capable of responding reasonably and promptly to all available information.
However, in this book, Soros openly and convincingly refutes the Efficient Market Hypothesis, asserting instead that markets are inherently inefficient. For anyone on the journey of learning how to invest, there comes a critical crossroads before forming their own investment framework: one path is the belief in efficient markets, and the other is the belief in inefficient markets. In this book, we will delve into Soros’s theory and explore his battles in global financial markets to understand why he believes markets are inefficient. After listening to this book, you will gain a deeper understanding of the fundamental logic behind investing.
The book featured in this audio session is a collection of five speeches Soros delivered at Central European University in Budapest, Hungary, in October 2009. It is no exaggeration to say that the essence of Soros’s lifelong thinking is distilled into these five lectures. Although the book is not long, in my opinion, it is vastly underrated. If you are looking to build an investment mindset that can generate long-term profits, this book should be one of your foundational cornerstones.
Soros believes that the intellectual framework he uses to make money in the financial markets and the one he uses to give money away as a philanthropist are, in essence, the same. This shared foundation is also the core theme of his life’s work. In a single sentence, it can be summarized as: the relationship between thinking and reality.
In the following sections, I will guide you through the essence of Soros’s philosophy, organized into three key concepts. The first is reflexivity, the second is the theory of bubbles, and the third is the open society.
Part One
Let us begin with the first key concept: reflexivity.
If there are only three words you should remember about Soros, they should be these—reflexivity. Soros believes that every person’s understanding of the world is inevitably partial and distorted. That is, no matter how intelligent or experienced you are, your perception of the world will never be fully accurate. There’s an old Chinese proverb that captures this idea well: “The blind men touching the elephant.”
Reflexivity means that not only is your understanding of the world inherently flawed and limited, but also—crucially—your distorted view can in turn influence reality itself. For example, when you label someone—whether the label is accurate or not—it may have a real effect on that person’s future development.
Psychologists once conducted an experiment to illustrate this idea: They randomly selected a class in a school and asked educational experts to identify the students with the most “potential.” A list of names was given to the class teacher, supposedly identifying the most promising students. In fact, because this was an experiment, the students on the list were selected entirely at random.
Surprisingly, when researchers followed up after some time, they found that those randomly chosen students actually performed better than average across various measures—the likelihood that they would become top-performing students had significantly increased.
This is a simple example of reflexivity, showing how our views of people or events can actively shape outcomes.
To grasp reflexivity at a deeper level, we need to further break down the functions of human thinking. Soros believes that a participant’s mind operates in two modes:
- One is cognitive, whose role is to understand the world we live in.
- The other is manipulative, whose role is to change the situation to make the environment more favorable.
To put it simply, the cognitive function is about discovering the patterns and laws that govern reality—whether in nature or society. We rely on this function whenever we study or try to understand anything.
What about the manipulative function? Soros does place it under the umbrella of human thinking, but he emphasizes that manipulation is not limited to internal thought—it also includes the translation of thoughts into actions. Many of the examples Soros cites in the book make this clear.
Let’s return to the earlier education experiment to further illustrate the cognitive and manipulative functions. In any given class, some students perform better than others. We tend to assume that the better-performing students are more intelligent and thus have greater potential. This assumption reflects the cognitive function at work. But such recognition may be inaccurate. Some students might simply dislike studying at that age yet possess strong overall abilities and long-term potential.
This is exactly what Soros means when he says our understanding of the world is always partial and distorted.
In the experiment, educational experts provided a list of “high-potential” students to the teacher—but this list was random and did not necessarily include the students with the best academic results. This act—deliberately changing the teacher's perception of the class—is what Soros refers to as the manipulative function. It is an attempt to alter the situation directly, rather than through deeper understanding.
Cognitive and manipulative functions are not difficult to comprehend separately. The real complexity arises when these two functions begin to influence each other.
In the experiment, the experts randomly created a list of students but presented it to the teacher as the result of a professional assessment. The teacher, trusting the expert authority, may treat those students more favorably, thereby manipulating their development.
This is an instance where the manipulative function affects cognition.
In turn, as the teacher pays more attention and care to these students, their performance actually improves. This reinforces the teacher’s belief that the expert assessment was accurate, and the teacher becomes even more inclined to favor those students.
Here, cognition is now being influenced by manipulation.
Because these two functions constantly interact, the outcomes become uncertain and hard to predict.
At this point, you might wonder: In many scientific fields such as physics or astronomy, we seem able to make very precise predictions. For example, mastering Newtonian mechanics allows us to calculate planetary orbits accurately. How does this fit into Soros’s theory?
This is a great question—and it highlights the fundamental difference between natural phenomena and human phenomena.
When we study nature, the cognitive and manipulative functions are separate and do not interfere with each other.
No matter how well or poorly you understand Newtonian mechanics, your knowledge has no effect on the trajectory of a planet.
Because of this independence, we are able to make accurate predictions about natural systems—so long as we have a deep enough understanding of the underlying laws.
But when it comes to human affairs—such as economics or politics—the situation is very different.
Why is it so hard to make precise predictions in the social sciences?
Because reflexivity is everywhere. The cognitive and manipulative functions influence each other, creating unpredictable feedback loops.
This is why Soros believes we must adopt a dual framework:
When studying the natural sciences and social sciences, we must use different methods and different standards of evaluation.
That said, this dichotomy isn’t absolute—some fields, like biology, lie somewhere in between.
At this point, you may also begin to understand why Newton, one of the greatest scientific minds in history, once lost £20,000 in the stock market—equivalent to ten years of his salary.
The reason is this: Many natural phenomena are predictable, but financial markets are not.
Newton reportedly once said, “I can calculate the motion of heavenly bodies, but not the madness of people.”
Speaking of investing—since we’ve now touched on the stock market—let’s talk about financial markets. Soros made billions there. So how much of that success was due to his thinking framework?
Soros’s answer: A lot.
He proposed two rules for understanding financial markets:
1.Market prices inevitably distort the fundamentals. The degree of distortion can be trivial or extreme.
In simple terms: Prices do not accurately reflect macroeconomic conditions or a company’s fundamentals.
You may notice how this rule directly contradicts the Efficient Market Hypothesis (EMH).
This is why Soros has always rejected EMH—his theoretical framework is fundamentally incompatible with it.
EMH asserts that market prices accurately reflect all information, but Soros firmly believes that they cannot.
2.The second rule: Financial markets do not passively reflect the fundamentals—they can actively affect them.
That is, distorted market prices can influence macroeconomic conditions or a company’s fundamentals.
This is exactly what reflexivity is about.
Let’s take an example. In investing, there’s a well-known trap called the reflexivity trap.
Suppose Company A has an estimated intrinsic value of $10 per share.
In theory, when its stock drops to $6, it becomes a great buying opportunity.
But here’s the trap: When the price actually drops to $6, that low price may trigger a negative chain reaction—for example, banks might demand loan repayments, which could degrade the company’s operations and make it no longer worth $10.
That’s reflexivity in action.
Of course, not all companies are equally subject to this dynamic.
In general, companies with high debt are more vulnerable to reflexivity.
That’s why evaluating reflexivity is especially important in investment analysis.
Part Two
We’ve just covered the first key concept of the day: reflexivity—undoubtedly the cornerstone of Soros’s intellectual framework. Now let’s turn to the second keyword: bubble theory. Soros studied the cycle of financial markets—from boom to bust—and introduced his own bubble theory.
To understand this concept, we first need to look at an interesting pair of mechanisms: negative feedback and positive feedback.
Let’s begin with an example. When a stock price deviates too far from its intrinsic value—say, it rises significantly—investors may judge it to be overvalued. As a result, buying interest decreases, selling pressure increases, and the stock price falls back closer to its intrinsic value. This is negative feedback, a self-correcting process. Over the long run, it keeps prices oscillating around their true value. In theory, such a system can continue indefinitely.
In contrast, positive feedback is a self-reinforcing loop. In financial markets, it often looks like this: rising prices improve company fundamentals (via easier financing or stronger sentiment), which in turn drives prices even higher, and so on. In reality, positive feedback loops often appear in rapid succession. They may build momentum in one direction, but they eventually reach a tipping point. However, it’s worth noting that positive feedback loops don’t always run their full course—they can be interrupted at any time by negative feedback.
Once you understand the difference between positive and negative feedback, Soros’s bubble theory becomes easier to grasp. According to Soros, every bubble consists of two components:
- A prevailing trend rooted in reality.
- A misinterpretation or false belief about that trend.
When these two elements reinforce each other—a real trend and a distorted view of it—a self-reinforcing boom-bust cycle is set in motion.
This is the mechanism by which bubbles form. Major bull and bear markets throughout history are often the product of such self-reinforcing trends. But, as with all things, they eventually come to an end. As the trend grows more extreme, there comes a point when the gap between perception and reality becomes too vast to ignore. Once enough people are forced to acknowledge this divergence, the reversal begins—like a roller coaster that climbs steadily upward before plunging off the other side.
Let’s use a classic example: the real estate bubble. Rising housing prices are initially driven by cheap and abundant credit. As property values rise, the value of real estate used as collateral also increases. That collateral, in turn, enables borrowers to access more credit, which fuels further price gains. A large upward trend in housing prices is often a textbook example of a self-reinforcing loop. But eventually, credit growth hits a wall. Liquidity dries up. Forced deleveraging occurs. And prices begin to fall.
To summarize Soros’s bubble theory:
- Bubbles are inevitable—they occur periodically.
- They can persist longer than most people expect.
- Their essence is a positive feedback loop, a self-reinforcing trend based on misperceptions.
- While such trends can be powerful, they are ultimately finite. Every bubble will eventually burst.
Soros used this theoretical framework to seek out global financial opportunities, particularly identifying tipping points where bubbles were about to collapse. A case in point: during the 2007–2008 global financial crisis, Soros’s application of reflexivity theory allowed him to foresee the impending collapse. His fund became one of the rare beneficiaries in that turmoil. While many other hedge funds suffered heavy losses, Soros’s Quantum Fund posted a 32% return in 2007 and still delivered 8% in 2008, in the midst of the worst financial storm in decades.
Interestingly, despite profiting greatly from bubbles, Soros is deeply concerned about them and has offered policy recommendations to mitigate their risks. He has criticized the prevailing view that markets are inherently self-regulating and should be left alone. In his view, this belief has been proven wrong—we have overestimated the market’s ability to correct itself. Given the financial system’s built-in tendency toward bubbles, Soros argues that regulators must intervene to keep them in check. Even if regulators make mistakes in the process, intervention is still necessary, because it is their responsibility to protect the system from extreme imbalances.
So, to conclude the second keyword—bubble theory—we can say that it’s a powerful and practical insight in Soros’s framework. He didn’t just develop it; he successfully used it to build wealth. And yet, he remained deeply concerned about the damage bubbles can cause. He advocated for robust regulatory intervention, rather than passive faith in the market’s invisible hand.
Part Three
Now we move on to the third key concept of the day—one that George Soros devoted much of his later life to promoting: the idea of the Open Society. This section touches on philosophy, a subject Soros has long been passionate about. In fact, he is often considered one of the most philosophically minded figures in the financial world.
To understand the idea of the Open Society, we must begin with a philosopher whom Soros deeply admired—Karl Popper. Popper authored a famous book titled The Open Society and Its Enemies, in which he argued that in an open society, individuals are free to hold differing opinions, and people with conflicting views and interests can coexist peacefully.
This book had the greatest influence on Soros’s worldview. His entire philosophy developed on the foundation of Popper’s concept of the open society. Interestingly, Soros once went through what he called a midlife crisis. Around the age of 50, his hedge fund had grown to manage $100 million, of which $40 million was his personal wealth. He felt that he had earned enough for himself and his family, and continuing in the high-pressure world of hedge funds was mentally exhausting. During that period, he felt lost and unsure of his next direction. Ultimately, he found renewed purpose by founding a philanthropic organization dedicated to promoting open societies.
However, Soros did not follow Popper’s ideas blindly. Based on years of real-world observation and reflection, he identified certain shortcomings in Popper’s original concept.
According to Popper, since human understanding of reality is always partial and distorted, no one can ever achieve perfect knowledge. Therefore, a society that guarantees freedom of speech, thought, and elections is a relatively ideal structure—because it allows competing ideas to coexist and evolve.
Soros agreed with this to an extent, but he believed Popper’s framework had a critical flaw: it focused solely on human cognition—our capacity to understand reality. Implicit in this was the assumption that the purpose of thinking is primarily to better grasp the world as it is.
However, Soros argued that in real life, manipulative functionality—our ability to influence or shape reality—can be just as powerful, if not more so, than cognition.
As we’ve discussed earlier, the human mind has two key functions: cognitive (to understand) and manipulative (to influence). Soros observed that modern humans often overemphasize cognition and neglect manipulation. This tendency, he believed, stems from the Enlightenment era in the 17th and 18th centuries. Back then, humanity had limited knowledge and control over nature. As a result, reality was imagined as a passive, objective entity simply waiting to be discovered. This perspective overlooked the impact that human thought can have on shaping reality.
While this way of thinking works well for understanding natural phenomena, it becomes problematic when extended to the social sciences and human behavior. This is what Soros called the "Enlightenment Fallacy"—the mistaken belief that cognition alone is sufficient to explain the world. He believed Popper himself had fallen into this trap.
By contrast, Soros highly valued the manipulative function of thought and even actively participated in politics. For example, he held a deeply negative view of former U.S. President George W. Bush. Soros believed that Bush had lied to the world about weapons of mass destruction in Iraq, using this falsehood as a justification for war—a war that, in Soros’s view, constituted a serious human rights violation.
During the latter half of Bush’s first term, Soros raised significant funds and committed considerable energy to preventing Bush’s re-election. However, in 2004, Bush was elected for a second term. This failure prompted Soros to reflect more deeply.
He concluded that Bush’s success could be partly attributed to his ability to manipulate reality and shape public perception. This, Soros believed, was a reflection of a postmodern worldview—one that says: if reality can be manipulated, why prioritize understanding it at all? Why not simply control it?
In Soros’s view, the Bush administration had excelled at manipulating reality. By launching a “War on Terror,” Bush united public sentiment and legitimized the invasion of Iraq. But in doing so, the U.S. severely damaged its global reputation and influence.
Soros warned that ignoring the existence of objective reality and focusing solely on manipulation leads to the Postmodern Fallacy. We must recognize that there is a core to reality that cannot be manipulated, and the postmodern error lies in dismissing this immutable core.
He also pointed out that although reality can be manipulated to a degree, the outcomes will always deviate from the manipulator’s original intent. And the greater the deviation, the greater the risk.
Let’s briefly recap:
- The Enlightenment Fallacy is to focus only on cognition while ignoring manipulation.
- The Postmodern Fallacy is to focus only on manipulation while ignoring cognition.
- Soros’s concept of reflexivity offers a more complete framework that balances both functions of the mind.
So how should we apply the Open Society framework to real-world problems?
Soros proposed a practical solution: we must draw a clear distinction between market behavior and political behavior.
In the market, behavior is inherently amoral. Your dollar and someone else’s dollar are worth exactly the same—no questions asked. The market’s strength lies in this neutrality, which makes it highly efficient. Participants don’t need to consider moral implications.
Politics, however, is not the same. In a representative democracy like the U.S., citizens elect officials to exercise power on their behalf. Ideally, politicians should serve the public interest. In reality, they often prioritize personal or special interests, especially when campaign financing is involved. Getting elected requires large sums of money, and elected officials are often beholden to those who funded their campaigns. This pollutes the political system, placing private interests above public welfare.
Here, Soros stressed the importance of morality. He argued that we must draw a line between economic and political activities. In economics, profit-driven behavior is acceptable. In politics, it is not. Political decisions should be motivated by public interest, and ethical considerations must come first.
Therefore, individuals must recognize their dual roles:
- As market participants, they are free to pursue self-interest.
- As political participants, they must prioritize the public good.
This distinction forms the heart of Soros’s Open Society vision: a world where freedom is preserved, reality is respected, and morality is not forgotten.
Conclusion
That brings us to the end of this episode. Let’s briefly recap the three key concepts we explored today.
The first keyword is reflexivity, which lies at the very core of Soros’s intellectual framework. Soros believes that human thinking has two functions: cognitive (understanding reality) and manipulative (influencing reality). When it comes to natural phenomena, these two functions operate independently, which makes it relatively easy to identify patterns and make accurate predictions.
However, when dealing with social phenomena, cognition and manipulation become entangled. This interplay introduces inherent uncertainty into human systems, making predictions highly unreliable. That’s why we can forecast planetary motion but not the fluctuations of stock prices.
Understanding reflexivity is crucial to both our work and personal decision-making. Whenever we attempt to make a prediction, we should first ask: Is this a natural or social phenomenon? Assessing the degree of reflexivity involved can significantly reduce the chances of making mistakes.
The second keyword is bubble theory. Soros developed his own theory of financial bubbles and used it to great effect, becoming one of the most successful investors in the world. According to his model, a typical bubble follows a clear sequence: initial emergence, acceleration, reinforcement, twilight phase, tipping point, rapid decline, and eventual collapse in crisis.
Soros used this framework to identify turning points in global markets—and in some cases, even leveraged his capital and influence to accelerate those turning points. This was his secret weapon in generating outsized returns. By understanding how bubbles form and burst, we can view market behavior through a new lens—and make more informed investment decisions as a result.
The third keyword is open society. This is the concept Soros devoted most of his energy to after turning 50. The idea originally came from his mentor, Karl Popper, who envisioned an open society as a democratic system in which individuals with different views and interests coexist peacefully.
However, Soros didn’t adopt the idea wholesale. He offered his own refinements. He believed Popper overemphasized cognition, falling into what Soros called the “Enlightenment fallacy.” On the other hand, modern politics—exemplified by the Bush administration—overemphasizes manipulation, falling into the “postmodern fallacy.”
Soros offered a more balanced perspective and proposed a principle of role distinction. People must be clear about which role they are playing: as a market participant, it is acceptable to pursue self-interest; but as a political participant, one must prioritize the public good.
This, Soros argued, is a key to improving the world—a principle well worth adopting.
Looking back on Soros’s life, we can see that he was a true practitioner of reflexivity. On the one hand, he devoted his life to observing and understanding the deeper forces shaping the world. On the other hand, he actively sought to influence the world around him—such as his 2004 campaign to prevent George W. Bush from being re-elected. Though he failed in that instance, it didn’t deter him from trying again.
Soros’s legacy is not just in the billions he made—but in the ideas he tested, the questions he raised, and the balance he constantly sought between understanding and action.
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