Reflexivity

Reflexivity is the two-way causal link between belief or perception and reality: beliefs change behaviour, behaviour changes outcomes, and outcomes reinforce or revise beliefs. The system is not a one-way input-output map; the "output" feeds back into the "input." In markets, prices reflect beliefs about fundamentals, but prices also affect fundamentals (e.g. credit conditions, investment, consumption). In organisations, expectations affect performance, and performance affects expectations. The loop can be reinforcing (a virtuous or vicious cycle) or dampening (corrections). The strategic implication: when reflexivity is present, prediction is harder because the act of predicting — or acting on the prediction — can change the outcome.

George Soros popularised reflexivity in finance: market participants don't merely discover prices that reflect fundamentals; they influence fundamentals through their behaviour. A rising market can loosen credit and boost spending, which justifies the rise — until the loop reverses. The same pattern appears in reputation, hiring, and product adoption: perception affects reality, which affects perception. The discipline is to map the loop: what beliefs or prices drive what behaviour, and how does that behaviour change the thing that was believed or priced?

Reflexivity undermines the idea of equilibrium as a stable attractor. In reflexive systems, equilibrium is at best temporary; the feedback can push the system away from where "fundamentals" would place it. The analyst's job is to identify when reflexivity is strong (so that extrapolation is risky) and when the loop might flip.