Reflexivity, Cults, and Value

Narrative management alters intrinsic value through reflexivity.

Billionaire hedge fund manager George Soros delivered 32% annualized net of fee returns to his investors for 30+ years. In Soros’ widely cited essay in the Journal of Economic Methodology, he credited much of his success to Reflexivity.


Reflexivity is an economic theory that states – investors’ perceptions affect economic fundamentals, which affects price, which in turn affects perception in a feedback loop. Reflexivity theory states that investors don’t base their decisions on reality, but on their perceptions of reality instead.

A simple example of Reflexivity is seen in credit ratings. The views of a Moody analyst is, in part, subjective. An upgrade in Moody’s credit rating to a company will decrease its Cost of Capital. Cheaper access to capital when equipped with efficient capital allocation will improve company fundamentals and subsequently price. The feedback loop between capital requirements (fundamentals), stock price, and credit ratings (perception) causes a virtuous or vicious cycle for the company leading to price extremes.

A Venture Capitalist’s perception of a tech startup can lead to a high valuation – thereby attracting talented managers and software developers on generous stock grants – thereby launching successful products, improving company fundamentals – leading to an even higher valuation.

Soros identifies price extremes and bets on reversals.

Cults enable reflexivity

Cult stock is a classification describing stocks that have a sizable investor following, despite the fact that the underlying company has somewhat insignificant fundamentals. In 2017, stocks like Tesla (TSLA), Netflix (NFLX), and Shake Shack (SHAK) were named cult stocks. (Cults shouldn’t be confused with short-lived fads)

Elon Musk tweeted ‘Tesla stock price is too high imo’ on May 1st, 2020. 

Surprisingly, Tesla’s stock price is up 26% from the pre-tweet price. When belief in a company borderlines religion, reflexivity enables irrational pricing. It is this irrational pricing that enables Tesla to raise capital, tackle new ideas, stir up exuberance, and improve fundamentals.

Cult companies command –

  • High customer retention rates and fanatic loyalty
  • Lower Customer Acquisition Costs due to high referrals and word of mouth marketing by customers
  • Premium prices, positively affecting profitability
  • Perception of a high-value option, the standard against which competitors are judged

And thus, building a Cult is an underrated competitive advantage.


Ex P&G Chairman & CEO Alan G. Lafley wrote in this Harvard Business Review article that one of the primary tasks of a CEO is ‘Defining and interpreting the meaningful outside’ – Why does the company exist? What should the company narrative to external and internal stakeholders be?

Cults are built through meticulous narrative management and can create or destroy shareholder value. This is why Elon Musk may be one of the greatest CEOs of all time, especially if you think Tesla is worthless.

Narrative management alters intrinsic value through reflexivity.