One of my favorite ideas in the opaque Soros-ian investing oeuvre—borrowed from Popper and others, to be fair— is that of reflexivity, the notion that things feed on themselves and every move in markets breeds a counter-move. Here is Soros in the FT a decade ago:
I can state the core idea in two relatively simple propositions. One is that in situations that have thinking participants, the participants’ view of the world is always partial and distorted. That is the principle of fallibility. The other is that these distorted views can influence the situation to which they relate because false views lead to inappropriate actions. That is the principle of reflexivity. For instance, treating drug addicts as criminals creates criminal behavior. It misconstrues the problem and interferes with the proper treatment of addicts. As another example, declaring that government is bad tends to make for bad government.
Both fallibility and reflexivity are sheer common sense. So when my critics say that I am merely stating the obvious, they are right—but only up to a point. What makes my propositions interesting is that their significance has not been generally appreciated. The concept of reflexivity, in particular, has been studiously avoided and even denied by economic theory. So my conceptual framework deserves to be taken seriously—not because it constitutes a new discovery but because something as commonsensical as reflexivity has been so studiously ignored.
When you have too many people leaning in one direction you can always be certain a vicious countermove is coming, even if the original stance wasn’t wrong. It is a cliche, but the “too many people on the same side of the boat” metaphor holds: With the least provocation they will all race to the other side, often in concert, guaranteeing the boat flips on that side instead. It isn’t the leaning that kills you—it’s the spike in group action.