Why are the flaws in rational expectation model considered as a blessing in disguise? According to Soros, people regardless of how rational they might seem, are in actual fact dealing with incomplete information in an imperfect market nowadays which leads them to develop lop-sided views on where the actual market is heading. This imperfect understanding about the market forces causes poeple to engage in different betting or hedging positions for any underlying financial instruments in any financial markets which in turn induces active market participation at the end of the day. This creates more trading opportunities as well as liquidity for market participants in general. The way to make money as perceived by Soros is to look for ways to capitalize on these vagaries in betting positions, to identify and search for the unexpected developments that associate with the opposing market positions and bet on it.
Thursday, August 21, 2008
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