[OPE] Mr Soros on reflexivity

From: Jurriaan Bendien (adsl675281@tiscali.nl)
Date: Sat Jun 14 2008 - 16:28:35 EDT

There is a short article online on Mr Soros's concept of reflexivity (he referred to it in previous books). Excerpt:

(...) Reflexivity is a two-way feedback mechanism, which is responsible for a causal indeterminacy as well as a logical one. The causal indeterminacy resembles Heisenberg's uncertainty principle, but there is a major difference: Heisenberg's theory deals with observations, whereas reflexivity deals with the role of thinking in generating observable phenomena. (...)  It says that, in certain cases, the participants' bias can change the fundamentals which are supposed to determine market prices. (...) What I need to do is to demonstrate that there are instances where the participants' bias is capable of affecting not only market prices but also the so-called fundamentals that market prices are supposed to reflect. I have collected and analyzed such instances in The Alchemy of Finance, so all I need to do here is simply to enumerate them. In the case of stocks, I have analyzed two particular instances which demonstrate my case perfectly; one is the conglomerate boom and bust of the late 1960s, and the other is the boom and bust of real estate investment trusts in the early 70s. http://www.geocities.com/ecocorner/intelarea/gs1.html

No doubt Mr Soros's concept has merit, (1) insofar as he reintroduces the active human subject in economic affairs and asserts the power of human beings to alter basic economic relationships (in contrast to views of the economy or the market as overdetermined by immutable and inexorable laws of motion, a sort of technical economic "engine") and (2) insofar as he rejects dogmas about market equilibrium. However, the question remains what exactly is attributable to the influence of "participants bias" and what it attributable to the influence of objective conditions in which that bias occurs, and how we know that, how we can verify the relationship between them. To what extent is the bias a conscious free choice, and to what extent is it itself determined? The causal sequence could be read in different ways. How exactly do we tell the difference between a subjective bias and a determined response to given conditions? In Goethe's old formula, it may be that "you think you push, while you are pushed", in other words you might think or say you are acting according to a certain motive, but in reality you are driven along by factors of which you are unaware or only dimly aware. The problem is really that there are multiple reflexivities possible, not just one, in fact one might think of the economic community as a hall of mirrors which extend infinitely and through which light could be refracted in multiple different ways. At this stage, I haven't read his new book, but aim to do so.

In a previous book, he put his view as follows:

"Every market participant is faced with the task to estimate the value in the present of a future development of events, but that development is co-determined by the value which all market participants together attribute to it in the present. That is why market participants are forced to be led partly by their subjective judgement. Characteristic of that bias is that it is not purely passive: it has influence on the course of events which it should represent. This active aspect is lacking in the concept of equilibrium such as is used in economic theory." (translated from George Soros, "The Crisis of Global Capitalism" (1998), Chapter 3, Dutch edition, p. 83).


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