George Soros: Reflexivity and fallibility: guiding principles of understanding and acting within social systems

These are my notes while watching discussion of George Soros’ book “The Age of Fallibility: Consequences of the War on Terror” somewhere in University of Washington. A link to video recordings of the discussion on YouTube are here.

It is a little bit strange to me that the theory of reflexivity did not get through to science (or maybe it did, but with some other name and I cannot figure that out). Well, ok, social constructivism would be probably the name for it, but I do not feel that it is taken seriously enough.

  • Inherent unpredictability of the world due to:
  • reflexivity_cognition

  • The concept of open society is based on the fallibility – our unability to understand the world as it is.
  • Dogmas are false exactly because they impose certainty on a uncertain world.
  • Hayek believed that the market will find an equilibrium and is a mechanism for keeping a balance, but it is not (according to Soros, at least). Particularly financial markets are not “searching” for theoretical equilibrium. Information is not enough to come to rational decisions. What is going to happen depends on your judgement – is not something that can be known, rather, it is something to be decided…
  • Characteristic of the market (and of history) is self-reinforcing mechanisms with build in bias. You can dig yourself in various holes – you become enthusiastic about internet and that creates an internet bubble.
  • It is impossible to know the truth, but it is important to care about it and search for it (sort of). It is important to come as close as possible to understanding reality. You get closer by recognizing that you cannot get there exactly.
    flaws
    Knowing the above you can exploit it.
  • Question about the relation of values as a direction of the action. Do we need a new epistemology? The one which is not abstracted from action, but the one that embraces it (George McLean). Our knowledge is shaped by our values and that should be recognized.
  • Post modernistic approach that there is no reality and everything is a narrative is a misconception, similarly to the misconception in the economic theory and belief in the separation between the observer and the world. The better way is to realize that our biased perception of reality (and actions) is part of reality and shapes the reality but reality does not necessarily correspond to our understanding and therefore we have unintended consequences.
  • misconceptions

  • Three conditions for the social systems: (1) conditions of extreme rigidity which imposes strict rules; (2) another extreme is a chaotic society, revolutionary situations (in the history of USSR you have both extremes); (3) Open society is something in between:
    three_conditions
  • A good question from Anar Umurzakova “the chaos should be closer to reality than the rigid (or maybe open) systems?”. Answer: Closed/frozen society is also a self-reinforcing process:
    frozen
  • The learning occurs (of financial institutions, e.g.) through understanding reflexive relations. Interestingly, Soros names Greenspan as the guy, who very well understood the uncertainty, while Taleb (in Antifragility) calls him the primary “fragilista” ;).
    understanding
  • The difference between Open Society Fund and organizations like Wold Bank is that in OSF people care about what they are doing, but international organizations are mostly concerned with self-preservation
  • Discussion about 3 Worlds of Popper:
    3worlds
    What is the difference between World 1 and 2? There is a two connection between them, so we actually have two.
    worlds12
  • Soros gives an example: “If I say that you are my enemy, you may become my enemy just because I said this”: this is an example of structural coupling (Maturana)!
    reflexivity
  • Do we value freedom because of the efficienteconomy?
  • Second part / introduction:
    revolutionary_science
  • Incommensurable definitions;
    equilibrium_vs_reflexivity

  • 2nd_order_cybernetics
  • How to go back to the normal science?
    corresopondence
    new_old

  • Reflexivity theory adds to the existing economic theory the inherent bias in the decision making. It is not only information which leads to the actions, something is also in between. This ‘something in between’ adds a new dimension to the economics’.
  • Bioeconomics / neuroeconomics: studies how humans make decisions on the neurological basis and can answer the question how the biases form in the brain and how do they work. See Neuroeconomics.
  • Political manipulation:
    manipulation
    You have an option to manipulate the reality. Well, is it good or not, that’s the question…. Soros says it is bad, but what about virtual realities, computer games and, at the extreme, “life in the virtual reality”?
  • It is only when you discover a difference between market perception of how things are and your own perception, you can do something (arbitrage in case of financial markets). Otherwise, there is nothing to be done. The key to investment decisions (I think the principle may be used much broader):
    arbitrage
  • A larger view of the scientific process.. Theories of truth, etc. This is not what Soros said, but it is nice anyway:
    correspondence_theory

    engineeringconstructivism

    tree_wolrds_again

    Soros comment: classical theory of economics is a special case within the theory of reflexivity.

  • The future is not a single event, it is a range of events that can emergence depending on biases and actions of the participants. Therefore the future itself is indeterminate. So, any kind of determinate prediction has to be a false prediction.
  • Popper’s position was that the value of the theory lies in the severity of the tests which do not falsify it. Philosophers of science object this by asking how can you measure severity of tests? Soros gives an example of his investment to nearly bankrupt company (as perceived by the market), which eventually did no go bankrupt as a ‘severe test’ of his own hypothesis that the company is going to do ok. This smells related to improbable events, Black Swans and antifragility….
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