Reflexivity

The problem with markets is that they’re deeply narcissistic, constantly trying to glimpse themselves.

Soros: In the initial stage (AB), a new positive earning trend is not yet recognized. Then comes a period of acceleration (BC) when the trend is recognized and reinforced by expectations. A period of testing may intervene when either earnings or expectations waiver (CD). If the positive trend and bias survive the testing, both emerge stronger. Conviction develops and is no longer shaken by a setback in earnings (DE). The gap between expectations and reality becomes wider (EF) until the moment of truth arrives when reality can no longer sustain the exaggerated expectations and the bias is recognized as such (F). A twilight period ensues when people continue to play the game although they no longer believe in it (FG). Eventually a crossover point (G) is reached when the trend turns down and prices lose their last prop. This leads to a catastrophic downward acceleration (GH) commonly known as the crash. The pessimism becomes over done, earnings stabilize, and prices recover somewhat (HI).

Fallibility, Reflexivity, and the Human Uncertainty Principle