Soros Investment Tip No. 6: Revealing Bias

Since market expectations and the course of events themselves are both interlinked and interact, and since market expectations play a pivotal role in the course of events, becoming an important part of things themselves, the greater the bias in expectations due to the imperfections of people's perceptions, the greater the likelihood that a relatively rational investor will find a profitable opportunity.

Soros argues that the volatility of markets stems from the feeling that people have a biased and flawed perception of markets. This feeling comes from the fact that precise feedback behavior on known information does little, but is the product of a combination of rational analysis of hard data and one's own emotional inclinations. Investors rely on this feeling to form a predisposed view and to buy and sell investments, which in turn, when applied to the market, affects investors' expectations. Thus, developments do not move from fact to fact, but from fact to feeling and from feeling to fact again.
As we mentioned in the previous article, it is important for investors to recognize the link between market expectations and the trend of events themselves, and to understand the strength of the impact of such deviations in expectations on the development of things. One of the main focuses of Soros' theory is to explore the role of misperceptions or biases in the course of events.
Revealing deviations in expectations and tracking their development in relation to objective deviations can be extremely helpful in capturing market opportunities on the one hand, and on the other hand, as the market itself adjusts to deviations in expectations, or as resonances form to advance themselves, we can adjust our investment strategies and make adjustments to our existing positions to continue to hold or reduce them. For example, last year's cot soybeans in May and June up market, mainly due to the U.S. Midwest drought caused by the market that may cause a reduction in soybean production, in fact, the U.S. Soybean planting belt rainfall distribution is not uniform, drought areas are mainly Illinois, the impact on the soybean crop is not large, especially the late rainfall to make growing conditions have been better improved, the market for local drought hype exaggerated, so that expected production to deviate significantly from the actual, ultimately leading to a retaliatory decline in the market.

The above analysis shows that when the deviation between participants' expectations and reality is small, the market can correct itself and its impact is negligible, and Soros says that the market is in quasi-equilibrium at this point. When the deviation is too large, there are two aspects of performance, one is that the idea and the actual are very different, but the situation is still stable, such as the market is less open, the situation can be effectively controlled, it is meaningless to Soros, the other is a high degree of marketization, expectations deviate from the large, rapid development, the participants into no time to deal with the situation, the situation is unstable, this state is extremely advantageous to Soros, become it’s this state of affairs was extremely favorable to Soros and became a favorable opportunity for him.