What Scoop teaches you about reflexivity

Evelyn Waugh's novel about journalism warns investors against creating their own realities, says Matthew Partridge.

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Written by Evelyn Waugh (pictured) in 1938, Scoop is a satirical novel that sends up foreign correspondents and journalism in general. Due to a mix-up over names, nature columnist William Boot is mistakenly sent to cover a civil war in the (fictional) African country of Ishmaelia.

Completely clueless, Boot is the only one left behind when the press pack learn of a great "battle" in the interior of the country. The battle turns out to be a ruse invented by the government to distract the media, which means that Boot alone is there to witness the government's demise, though his namesake ends up receiving all the credit for his scoop.

The key moment

Early in the story, one of the old hands, Corker, gives Boot a crash course in journalism, relating the story of Wenlock Jakes, a "star" foreign correspondent whose reports are "syndicated all over America".

On one occasion Jakes accidentally goes to the wrong country, but his completely fictitious report about a revolution is then picked up by other journalists who repeat and embellish it. The result: "government stocks dropped, financial panic, state of emergency declared". "In less than a week there was an honest to God revolution under way."

Lessons for investors

The idea that perceptions help create the reality we believe we are merely observing, which then in turn determines our perceptions, is known as reflexivity. George Soros is a proponent, arguing in his The Alchemy of Finance that stock prices "are not merely passive reflections" but "active ingredients in a process in which both stock prices and the fortunes of the companies whose stocks are traded are determined".

Everything from "the issue and repurchase of shares and options" to "the standing of a company, its credit rating, consumer acceptance and management credibility" can be impacted by investor confidence.

Technology firms, especially those that are in the early stages of development, are particularly dependent on investors keeping faith with them, because they may need several infusions of capital before they become profitable. The classic example is Amazon, which nearly went bankrupt in the immediate aftermath of the bursting of the dotcom bubble. It was only when the retailer showed that it could turn a profit that credit markets were reassured.

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