Reflexivity and Equilibria

Abstract

The failure of models based on rational expectations to explain the “boom and bust” of financial markets does not support Soros’ critique of mainstream economics or his call for a theoretical revolution. Contrary to what Soros says, standard rational choice theory has the conceptual resources to analyse reflexivity. The dynamic of feedback loops for example can be described by simple models based on multiple equilibria and informational cascades. The problem is that agents and theorists sometimes lack the information required to identify equilibria and tipping points.

Keywords: reflexivity, equilibria, informational cascades

JEL Classification: B41, C70