Reflexivity,business cycles,and the new economy

Conclusion Markets are not efficient as that term is currently used in academic finance. Rather, markets are reflexive in that market behavior and the fundamentals reflect each other via a two-way, interactive feedback loop. Free markets remain reflexive unless market participants close the feedback loop, which they can do, and have done, to justify and perpetuate a boom. Practical finance theory was clear on the market behavior boom-bust cycles generate, but it was silent regarding the cause of such cycles. Austrian business cycle theory, on the other hand, provides a clear theoretical explanation of the cause and effects of business cycles. By utilizing both theories in a unified manner it is possible to track each stage of a business cycle, which was demonstrated in an analysis of the recent new economy business cycle. Such an approach could be enormously beneficial to both academicians and practitioners during the next business cycle. A Second Vice President of the General Star Management Company, a subsidiary of Berkshire Hathaway. The opinions expressed in this paper are mine, and do not necessarily represent the views of General Star Management Company or Berkshire Hathaway.