Perspective

The Core Idea

• we cannot understand fully the world we live in because we are part of that world. It is recursive
• You react with reality by both seeking to understand AND seeking to influence/change - cognitive function vs manipulative function
• Social events have a different structure from natural phenomena, for this reason
• The interplay between functions leads to indeterminism
• Like Heisenberg's uncertainty principle
• The core problem is to act, we are obliged to form a view of the world, but that view can never be totally accurate. Our actions are then not based on reality, and also affect that reality
• Misinterpretations of reality cause more changes to reality than is understood
• Ideologies based on false premises can transform reality.

Failed Philsopher

If you're around him a long time, you realize that to a large extent he is driven by temperament. But he is always trying to rationalize what are basically his emotions. - Robert Soros (son)

• First believed in Popper's theory that open society - freedom of thought and expression - would lead to a better understanding of reality
• But political discourse can be successfully used to manipulate realty
• so why even prioritize the cognitive function over manipulative?
• Reflexivity assumes importance of manipulative function
• If reflexivity is right, financial markets to not always revert to equilibrium

The Theory of Reflexivity

• People are participants, not just observers, so knowledge alone is not enough for reality
• This is fallability. without it, no reflexivity (but not all fallibility leads to reflexivity)
• Human brain never grasps reality directly
• Reason and emotion are actually inseperable
• ordinary language gives a very inexact and emotional view of the world (but its useful!!)
• logic and mathematics are more precise, but very limited usefulness every day
• Ideas expressed in ordinary language are not exact representation of underlying reality

• Example of reflexivity: You are my enemy
• it depends on how the receiver takes this and responds, makes it true or not true
• Neither participant walks away with same view view of world, and world itself is also different —> reflexivity
• the changes occur as a result of initial misconception (fallibility)
• this means the situation is one way, path dependent and unpredictable

The Enlightenment Fallacy

• Western thought went out of its way to seperate thinking and reality
• It was at that time appropriate to think of reality as something out there waiting to be discovered
• so many inventions, natural laws, etc to discover
• So the enlightenment was a fertile (useful) fallacy, but a fallacy nonetheless
• Karl Popper
• recognized ultimate truth is beyond reach of reason
• yet insisted that social phenomena were same as natural
• how could this be?
• Self reference ("All Cretans Lie" said the Cretan)
• only concerns statements, not facts
• reflexivity changes both how we see the world and the reality of that world

• Post Modern world is dangerous
• recognizes truth can be manipulated
• does not recognize the pursuit of truth as a requirement for successful open society
• Primary purpose of political discourse is to gain power, and to stay in power
• allows reality to be manipulated unhindered
• because this process is so indeterminate, the results are RARELY what the manipulators think they will be

Pursuit of Truth

• why should it take precedent over pursuit of power?
• unintended consequences
• This quote from senior Bush Advisor Karl Rove explains: "We're an empire now, and when we act, we create our own reality"
• The belief in reason led to the belief in truth. That link is now broken
• We must realize that reality and trying to understand truth matters even if it can be manipulated and never fully known

Radical Fallability

• how can we act with any confidence then?
• absolute certainty idologies are bound to be wrong
• we must rely on beliefs, no way around it
• language employs metaphor, not strict logic
• transfer one set of attributes to another, worldlessly
• inevetible that the comparisons will go too far
• Minsky moment — a good comparison will lead to overusing that comparison and rendering it bad
• this cant be really true - misconceptions can be corrected - but it is a useful beleive still

Reflexivity in Financial Markets

Equilibrium

• economists assume perfect knowledge, perfect decisions based on that knowledge and a naturally developing equilllibrium between supply and demand
• this is not how real world works
• so, economists now just say the demand and supply curves should be taken as is
• but people dont even know what they actually prefer, so how can this be independently taken?
• people act based on perception of best interests, not ACTUAL best interests

Reflexivity in markets

• markets usually reflect bias, not reality. doesnt always lead to reflexivity
• markets therefore are always wrong
• markets are best thought of as histories, and you need to understand the regulators for history
• have to recognize the regulators are also fallible
• the belief in power of markets towards equilibrium is market fundamentalism. soros says no better than Marxism
• If its reflexive, realize you cannot predict it

SuperBubble

• Market fundamentalism bubble with three trends:
• increasing credit expansion
• globalization of financial markets
• removal of regulation

• Current global system is heads i win tails you lose for the US
• easier to hold assets near the center - global savings get sucked to US
• will bail out if needed to save system but then force austerity
• free flow of capital = harder to tax, regulate

Rest of Book

• nothing is quite as profitable as investing in an early stage bubble
• Bear Stearns was unliked by wall st establishment, and thats why it was allowed to fail
• Henry Paulson was a true market fundamentalist - which is why he had no plan B after letting Lehman go
• Realized in 2008 dollar thesis was wrong, it had to go down not because countries wnated to hold more dollars but becuase they borrowed in dollars and needed to roll and repay!