The Alchemy of Finance

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The following description is from an executive summary that can be accessed at this link

The first part of the book is divided into several chapters where the theory of reflexivity is explained in great detail.
The concepts can certainly be hard to grasp for the beginner, but since Soros explains everything with real-time
examples with his own experience, it makes it a little easier. Soros also states that since the stock market meets all the
criteria of a perfect competition, he chose it to develop his theory of reflexivity.

At this point, Soros explores the concept of equilibrium and argues that it’s a misconception when it comes to the
stock market. Once can observe several fluctuations in the market and since the underlying conditions are also changing constantly, especially when it’s supposed to be reflecting the changes in the market, it’s a little difficult to show a firm relationship between the two.  Soros further explains that theories can be divided into technical and fundamental theory. While the technical theory is almost useless to the practitioner, the fundamental theory is quite interesting since it’s nothing but an out-growth of the equilibrium theory. It highlights the connection between the companies and its stock prices. While it’s accepted that the fortunes of the companies determine the stock prices, it’s ignored that the stock prices can also affect the
fate of the companies.

Any discrepancies between fundamental values and stock prices are quickly ignored and are blamed on the company’s future developments. Therefore, Soros states that he thinks in the opposite manner and doesn’t believe that the stock prices reflect the underlying values. In fact, the market has too many distorting valuations and these distortions also have the ability to affect underlying values.
Of course, this is not to say that the events that take place don’t correspond with the expectations of the participants.

This also doesn’t mean that the markets can’t predict anything at all; however, it’s certainly very limited. Therefore, to translate his approach in a better manner, Soros replaces the commonly accepted assertions in the market by pointing out that the markets tend to be biased at all times in at least one direction. In addition, the markets also possess the power to affect the events they can anticipate. When a combination of the assertions mentioned here is applied, it becomes easy to understand why the markets have the ability to anticipate some events.