George Soros Lecture Series: General Theory of Reflexivity

good afternoon and welcome to the ceu

lecture

s i am john shattuck president and director of the central european university it is a great privilege for me to present this special

series

of five

lecture

s by

george

soros

held here in budapest at the hungary academy of sciences under the auspices of central european university in these lectures

george

soros

will draw on a lifetime of practical and philosophical reflection and share his latest ideas on economics and politics today mr soros will present the foundations of his philosophical

theory

each lecture will be transmitted by videoconference to one of the five universities on four continents creating an unprecedented interactive international audience of students in real time.

Today's lecture will include students from the London School of Economics, plus guests and university students from central Europe who are here at the academy. Our moderator today is the distinguished philosopher colin mcginn. for his work in philosophy of mind mr soros will give a lecture of approximately 50 minutes and mr mcginn will offer a brief response mr soros will then answer questions from the audience beginning with three questions from the london school of economics and then from our audience here in Budapest, I am now delighted to introduce you to George Soros, who really needs no introduction. Thank you very much and thank you all for coming, and both here and in London, throughout my life, I have developed a conceptual framework that has helped me. both to make money as a hedge fund manager and to spend it as a policy-oriented philanthropist, but the framework itself is not about money, but rather the relationship between thought and reality, a topic widely studied by philosophers from the principle that I began to develop. my philosophy as a student at the london school of economics in the late 1950s i took my final exams a year early and had one year to complete before i was qualified to receive my degree i was able to choose my own tutor and i chose karl popper who whose book The Open Society and Its Enemies had made a deep impression on me in his books Popper argued that empirical truth cannot be known with absolute certainty, not even scientific laws can be verified beyond the shadow of a doubt, they can only be they can verify. falsified by tests a fair test is enough to falsify but no number of confirmation cases is enough to verify that scientific laws are hypothetical in nature and their truth remains subject to proof ideologies that claim to be in possession of the ultimate truth are making a False statement can therefore be imposed on society only by force.

This applies to both communism and national socialism. All these ideologies lead to repression. Dad proposed a more attractive form of social organization, a society, an open society in which people are free to hold various divergent opinions and the rule of law allows people with different views and interests to live together in peace after having lived through the nazi and communist occupation here in hungary, i found the idea of ​​an open society immensely attractive while reading popper i was also studying economic

theory

and i was struck by the contradiction between dad's emphasis on imperfect understanding and the theory of perfect competition in economics that postulated perfect knowledge.

This led me to begin questioning the assumptions of economic theory. These were the two main inspirations for my philosophy. It is also deeply rooted in my personal history. The formative experience of my life was the German occupation of Hungary in 1944. At that time I was not yet 14 years old, came from a reasonably well-off middle class background and was suddenly faced with the prospect of being deported. and murdered just because I was Jewish, fortunately my father was well prepared for this experience so far from the balance that he had experienced during the Russian revolution and that was the diplomatic experience of his life until then.

He had been an ambitious young man when the First World War broke out and volunteered to serve. in the Austro-Hungarian army he was captured by the Russians and taken as a prisoner of war to Siberia being ambitious he became the editor of a newspaper produced by the prisoners it was handwritten and displayed on a board and it was called that made it so popular who was elected as the prisoners' representative, then some soldiers escaped from a neighboring camp and their prisoners' representative was shot in retaliation. My father, instead of waiting for the same thing to happen in his field, organized an escape, his plan was to build.

He took a raft and sailed to the ocean, but his knowledge of geography was somewhat poor. They did not realize that all the rivers in Siberia flow into the Arctic, they were drifting for several weeks before realizing that they were heading for the Arctic and it took them several more months to return to civilization via the tiger. Meanwhile, the Russian Revolution broke out and they were caught up in it. Only after a variety of adventures did my father manage to find his way back to Hungary if he had stayed in Hungary. The camp would have come home much sooner My father came home a changed man His experiences during the Russian Revolution affected him deeply He lost his ambition and wanted nothing more from life than to enjoy it He imparted to his children values ​​that were very different from those From the environment in which we lived, he had no desire to amass wealth or become socially prominent;

On the contrary, he worked only what was necessary to make ends meet. I remember they sent it to his main client to borrow some money before we left. On a skiing vacation, my dad was in a bad mood for months because he had to work to pay for it. Although we were reasonably prosperous, we were not your typical bourgeois family and we were proud to be different in 1944, when the Germans occupied Hungary. My father noticed right away. that these were not normal times and that normal rules did not apply, he arranged fake identities for his family and the number of people who could pay others, he kept them free, most of them survived, that was his best time living with a false identity. it turned out to be an exhilarating experience for me we were also in mortal danger people perished around us but we managed to not only survive but also help other people we were on the side of the angels and triumphed against overwhelming odds this made me feel very special it was a big adventure.

I had a reliable guide in my father and I emerged unscathed. What more could a 14-year-old boy ask for after the euphoric experience of escaping the Nazis, life in Hungary began to lose its luster during the Soviet occupation? for new challenges and with the help of my father I found a way to leave Hungary when he was 17 years old. I became a student in London. In my studies, my main interest was to gain a better understanding of the strange world into which I had been born, but I must confess that I also harbored some fantasies of becoming an important philosopher.

I believed I had acquired knowledge that set me apart from other people living in London. It was a bit of a big disappointment. I had no money and people were not interested in what I had to say, but I did not abandon my philosophical ambitions, even when circumstances forced me to earn a living in more mundane pursuits after completing my studies, I had several false starts, eventually I ended up as an arbitrage trader in New York, but in my free time I continued working on my philosophy, which is how I wrote my first major essay titled The Burden of Conscience.

It was an attempt to model a purpose framework of open and closed societies. He linked organic society with a traditional way of thinking. closed society with a dogmatic mode and uh and open society with a critical mode what I could not adequately resolve was the nature of the relationship between the mode of thinking and the real state of things, that problem continued to worry me and that is how I came to Develop the concept of

reflexivity

, a concept I will explore in more detail a little later. As it happened, the concept of

reflexivity

gave me a new way of looking at financial markets, a better way than the prevailing theory.

This gave me an advantage first as a securities analyst and then as a hedge fund manager I felt as if I was in possession of an important discovery that would allow me to fulfill my fantasy of becoming a major philosopher at a certain point in time when my career business hit a roadblock, I changed course and devoted all my energy to developing my theory, but I treasured my discovery so much that I couldn't part with it. I felt that the concept of reflexivity needed to be explored in great depth as I delved deeper and deeper into the topic I got lost on. the complexities of my own constructions one morning I couldn't understand what I had written the night before at which point I decided to abandon my philosophical explorations and concentrate on making money, it was only many years later, after a successful career as a hedge fund. manager who returned to my philosophy I published my first essay on the alchemy of finance in 1987.

In that book I tried to explain the philosophical foundations of my approach to financial markets the book attracted some attention it has been read by most people in the hedge fund industry and business schools are thought of, but the philosophical arguments did not make much of an impression; They were largely dismissed as the conceit of a man who has been successful in business and considers himself a philosopher. I myself came to doubt whether I was, after all, in possession of an important new idea. He was dealing with a topic that has been explored by philosophers since time immemorial.

What reason did he have to think that he had made a new discovery, especially like no other? You seem to think that yes, the conceptual framework was undoubtedly useful to me personally, but it did not seem to be equally valuable to others. I had to accept that judgment. I did not abandon my philosophical interests, but I came to regret them. a personal predilection I continued to be guided by my conceptual framework both in my businesses and in my philanthropic activities which came to assume an increasingly important role in my life and every time I wrote a book I faithfully recited my arguments this helped me develop my framework conceptual but I can consider that I continued to consider myself a failed philosopher once I even gave a lecture with the title a failed philosopher tried again twice all this has changed as a result of the 2008 financial crisis. my conceptual framework allowed me to both anticipate the crisis and facing it when it finally broke out has also allowed me to explain and predict events better than most others this has changed my own assessment and that of many others my philosophy is no longer a personal matter, it deserves to be taken seriously as a possible contribution to our understanding of reality and that is what has prompted me to give this

series

of lectures so here it goes today I will explain the concept of fallibility and reflexivity in

general

terms tomorrow I will apply them to the financial markets and then to politics that also will bring the concept of open society.

In the fourth lecture I will explore the difference between market values ​​and moral values ​​and in the fifth I will give some predictions and prescriptions for the current moment in history. We can express the central idea in two relatively simple propositions: one is that the situation that thinking participants have, the participants' worldview is always partial and distorted, that is the principle of fallibility, the other is that these distorted views can influence the situation with which they relate. because false views lead to inappropriate actions, that is the principle of reflexivity, for example, treating drug addicts as criminals creates criminal behavior, misinterprets the problem and interferes with the proper treatment of addicts, as another example, state That government is bad tends to make bad government fallible. and reflexivity are pure common sense, so when my critics say that I am simply stating the obvious, they are right to some extent, what makes my propositions interesting is that their importance has not been

general

ly appreciated, the concept of Reflexivity in particular has been carefully avoided. and even denied by economic theory, so my conceptual framework deserves to be taken seriously, not because it constitutes a new discovery but because something as common sense as reflexivity has been so carefully ignored, recognizing that reflexivity has been sacrificed in for the sake of the vain search for certainty in human affairs, mainly in most cases. especially in economics and yet uncertainty is the key characteristic of human affairs.

Economic theory is based on the concept of equilibrium and that concept is in direct contradiction with the concept of reflexivity, as I will try to show in the next lecture that the two concepts give rise totwo. completely different interpretations of financial markets the concept of fallibility is much less controversial it is generally recognized that the complexity of the world we live in exceeds our ability to understand it I have no great new insights to offer the main source of difficulty is that the participants are part of the situation they have to face in the face of a reality of extreme complexity, we are forced to resort to various methods of simplification, generalizations, dichotomies, metaphors, decision rules, moral precepts, to mention just a few, these mental constructs acquire an even more complicated existence of their own to complicate the situation. , the structure of the brain is another source of distortions.

Recent advances in brain science have begun to provide insight into how the brain works and have substantiated Hume's claim that reason is the slave of passion. The idea of ​​a disembodied intellect or reason. It is a figment of our imagination the brain is bombarded by millions of sensory impulses but consciousness can only process only seven or eight subjects simultaneously the impulses need to be condensed, ordered and interpreted under time pressure events and errors and distortions cannot be avoided. Brain science adds many new details to my original claim that our understanding of the world we live in is inherently imperfect The concept of reflexivity needs a little more explanation It applies exclusively to situations that have thinking participants The thinking of the participants fulfills two functions one is to understand the world in which we live, I call this cognitive function the other is to change the situation to our advantage, I call this part the manipulation or participation function, the two functions connect thought and reality in opposite directions In the cognitive function, reality is assumed to determine the opinions of the participants, the direction of causality is from the world to the mind, in contrast to the manipulative part. function the direction of causality is from the mind to the world that is, the intentions of the participants have an effect on the world when both functions operate at the same time they can interfere with each other how by depriving each function of the independent variable that would be necessary to determine the value of the dependent variable because when the independent variable of one function is the dependent variable of the other, no function has a genuinely independent variable, this means that the cognitive function cannot produce enough knowledge to serve as a basis for the decisions of participants, similarly, the manipulative function can have an effect on the outcome, but cannot determine it;

In other words, the outcome may differ from the participants' intentions, there is likely to be some slippage between intentions and actions and more slippage. As a result, between actions and results there is an element of uncertainty both in our understanding of reality and in the actual course of events. To understand the uncertainties associated with reflexivity, we need to investigate further whether the cognitive function operated in isolation, without any uncertainty. Interference from the manipulative function could produce knowledge. Knowledge is represented by two statements. A statement is true if it corresponds to the facts. That is what the correspondence theory of truth tells us.

But if there is interference from the manipulative function, the facts are no longer useful. as an independent criterion by which the truth of a statement can be judged because the correspondence may have been brought about by the statement changing the facts consider the statement it is raining that statement is true or false depending on whether it is in fact raining now consider the statement This is a revolutionary moment in which the statement is reflective and this truth value depends on the impact it has. Reflexive statements have a certain affinity with the liar's paradox, which is a self-referential statement, but while self-reference has been widely analyzed, reflexivity has received a lot. less attention, that is strange because reflexivity has an impact on the real world, while self-reference is purely a linguistic phenomenon in the real world, the thinking of the participants finds expression not only in statements but also in various forms of action and behavior, which makes reflexivity a very broad scope. phenomenon that typically takes the form of feedback loops the opinions of the participants influence the course of events and the course of events influences the opinions of the participants the influence is continuous and circular that is what makes it a cycle Feedback Reflective feedback loops have not been rigorously analyzed and when I originally found them and tried to analyze them I ran into several complications.

The feedback loop is supposed to be a two-way connection between the opinions of the participants and the actual course of events, but what about a two-way connection between the participants? opinions and what happens to the lonely individual who questions who he is and what he represents and changes his behavior as a result of his reflections in trying to resolve these difficulties? I was lost so much time between the categories that I created that one morning I couldn't understand what I had written the night before, that's when I left philosophy and dedicated my efforts to making money, so to avoid that trap, let me propose the following: the terminology, let us distinguish between the objective and subjective aspects of reality.

Thought constitutes the subjective aspect of events. objective in other words the subjective aspect covers what happens in the mind of the participants the objective aspect denotes what happens in this in external reality there is only one external reality but many different subjective views reflexivity can then connect any two or more aspects of reality By establishing two-way feedback loops, exceptionally it can occur even within a single aspect of reality, as in the case of a solitary individual reflecting on his own identity, this can be described as self-reflexivity, then we can distinguish between two categories broad ranges of reflective relationships that connect subjective aspects and reflective events that also involve the objective aspect marriage is a reflective relationship the 2008 crisis was a reflective event when reality does not have a subjective aspect there cannot be reflexivity feedback contaminates it can be negative or positive negative feedback that brings participants' opinions and the real situation are closer together, positive feedback distances them further;

In other words, negative feedback is self-correcting and can continue forever if there are no significant changes in external reality, eventually leading to a balance in the opinions of the participants. come to correspond to the real state of things, which is what is supposed to happen in financial markets, so equilibrium, which is the central case in economics, turns out to be a limiting case in my conceptual framework; In contrast, a positive feedback process is self-reinforcing and may not continue forever because eventually the participants' opinions would become so far removed from objective reality that the participants would have to recognize them as unrealistic, and the iterative process it cannot occur without any change in the current state of things because it is positive in nature. feedback that reinforces whatever tendency prevails in the real world rather than equilibrium, we face dynamic disequilibrium or what can be described as conditions far from equilibrium, usually in situations far from equilibrium, the divergence between perceptions and reality leads to a climax that establishes the emotion. a positive feedback process in the opposite direction such boom-bust-bust processes or bubbles that initially reinforce themselves but eventually counteract each other are characteristic of financial markets, but can also be observed in other spheres; there I call them fertile fallacies; interpretations of reality that are still distorted. produce results that reinforce the distortion.

I realize this is all very abstract and difficult to follow. It would be much easier if I gave some concrete examples, but you'll have to bear with me. I want to make a different point and The fact that it is so difficult to follow abstract arguments helps me achieve this when dealing with topics such as reality or thought or the relationship between thought and reality. It is easy to get confused and formulate problems incorrectly, so misinterpretations and misconceptions can play a huge role. role in its role in human affairs the recent financial crisis can be attributed to a misinterpretation of how financial markets work I will discuss that in the next lecture in the third lecture I will discuss two fertile fallacies the enlightenment fallacy and the postmodern fallacy these concrete Examples will demonstrate how important misconceptions have been in the course of history, but for the rest of this lecture I will remain in the lofty heights of abstraction.

I maintain that situations that have thinking participants have a different structure than natural phenomena, the different difference lies in the role of thought in a natural phenomenon, thought does not play any causal role and fulfills only a cognitive function in human affairs. Thinking is part of the topic and serves both a cognitive and manipulative function. The two functions can interfere with each other. Interference does not occur all the time in everyday activities such as driving a car or painting a house. The two functions actually complement each other, but When it occurs, it introduces an element of uncertainty that is absent in natural phenomena.

Uncertainty is manifested in both functions. The participants act on the same basis of an imperfect understanding and the results of their actions will not correspond to their expectations. I call it the principle of human uncertainty and consider it a key characteristic of human affairs; on the contrary, in the case of natural phenomena, events develop independently of the opinions held by the observers, the external observer participates only in the cognitive function. and phenomena provide a reliable criterion by which the truth of the observer's theories can be judged so that the outside observer can obtain knowledge based on that knowledge nature can be successfully manipulated there is a natural separation between cognitive and manipulative function and, because of that separation, both functions can serve their purpose better than in the human sphere.

At this point I must emphasize that reflexivity is not the only source of uncertainty in human affairs; Yes, reflexivity introduces an element of uncertainty. both on the opinions of the participants and on the actual course of events, but other factors can also have the same effect, for example, the fact that participants cannot know what others know is something very different from reflexivity , but the fact that different participants have different interests, some of which may conflict with each other, is another source of uncertainty; Furthermore, each individual participant may be guided by a multiplicity of values ​​that may not be self-consistent, as Isaiah Berlin has noted about the uncertainties created by these factors.

These factors are likely to be even more extensive than those generated by reflexivity. I've lumped them all together and when I talk about the human uncertainty principle, which is an even broader concept than reflexivity, the human uncertainty principle I'm talking about is much more specific. and stricter than the subjective skepticism that permeates Cartesian philosophy, it gives objective reason to believe that our perceptions and expectations are, or at least perhaps, erroneous, although the primary impact of human uncertainty falls on the participants, it has implications of long reach for the social sciences. I can explain them best by invoking Karl Power's theory of the scientific method.

It's a wonderfully simple and elegant scheme. It consists of three elements and three operations. The three elements are scientific laws and the initial and final conditions to which those laws apply. All three operations are prediction. explanation and proof when scientific laws are combined with initial conditions they provide predictions when combined with final conditions they provide explanations in this sense predictions and explanations are symmetrical and reversible, leaving proofs where predictions derived from scientific laws are The actual results according to Popper's scientific laws are hypothetical. They cannot be verified. They can only be falsified by testing. The key to the success of the scientific method is that it can test generalizations of universal validity with the help of singular observations.

A testfailed. is enough to falsify a theory but no amount of confirming examples is enough to verify this is a brilliant solution to the otherwise intractable problem how can science be both empirical and rational according to popper? It is empirical because we test our theories by observing whether the predictions we derive from them are true, and rational because we use deductive logic in doing so. Dad dispenses with inductive logic and instead relies on testing generalizations that cannot be tested and do not qualify as scientific papers. The emphasis on the central role of testing plays an important role. very important role in the scientific method and establishes a strong argument for critical thinking, but in asserting that scientific laws are only provisionally valid and remain open to reexamination, the three most salient features of Dad's scheme are the symmetry between prediction and explanation, the asymmetry between verification and falsification and the central role of evidence evidence allows science to grow, improve and innovate.

The proper scheme works well for the study of natural phenomena, but the human uncertainty principle throws a monkey into the supreme simplicity and elegance of Dad's scheme. The symmetry mat in symmetry. between predictions and explanations is destroyed by the element of uncertainty in predictions and the central role of testing is jeopardized if the initial and final conditions include or exclude participants who think the question is important because the tests require replicating those conditions. if the thoughts of the participants are included. It is difficult to observe what the initial and final conditions are because participants' opinions can only be inferred from their statements or actions if they are excluded.

Initial and final conclusions do not constitute singular observations because the same objective conditions can be associated with very different points of view. held by participants in any case generalizations cannot be adequately tested. These difficulties do not prevent social scientists from producing worthwhile generalizations, but they are unlikely to meet the requirements of an adequate scheme or match the predictive power of the generalizations. laws of scientific physics. Social scientists have found this conclusion difficult to accept. Economists in particular suffer from what Sigmund Freud might call physics envy and there have been many attempts to eliminate the difficulties connected with the human uncertainty principle by inventing or postulating some kind of fixed relationship between the thinking of the participants and the real state of affairs, Karl Marx claimed that the ideological superstructure was determined by the material conditions of production and Freud maintained that people's behavior was determined. out of impulses and complexes of which they were not even aware, both claimed scientific status for their theories, although, as Popper pointed out, they cannot be refuted by evidence, but by far the most impressive attempt has been that of economic theory, which She started assuming she was perfect. knowledge and when that assumption proved unsustainable it went through increasing contortions to maintain the fiction of rational behavior economics ended with the theory of rational expectations which maintains that there is a single optimal vision of the future that corresponds to it and eventually all market participants They will converge around that vision: this postulate is absurd but it is necessary to allow economic theory to be modeled on Newtonian physics.

Curiously, both Karl Popper and Friedrich Hire recognized in their famous exchange in the pages of Economica that the social sciences cannot produce results comparable to physics. Hayek invades against the mechanical and uncritical application of the quantitative methods of the natural sciences, calling it scientism. and Carl Appropriate wrote about the poverty of historicism where he argued that history is not determined by universally valid scientific principles. However, Popper's laws proclaimed what he called the doctrine of the unity of method, by which he meant that both the natural sciences as social ones had to be judged with the same criteria and, of course, Hayek became the apostle of the Chicago school of economics, where market fundamentalism was born, but in my view, the implication of the principle of human uncertainty is that the subject matter of the natural and social sciences is fundamentally different, therefore they need to develop different methods and must be held to different standards, economic theory should not be expected to produce universally. valid laws that can be used in reverse to explain and predict historical events.

I maintain that slavish imitation of the natural sciences inevitably leads to the distortion of human and social phenomena. What can be achieved in the social sciences does not reach what can be achieved in physics. However, we are a little concerned about drawing a clear distinction between the natural sciences and the social sciences. These dichotomies are generally not found in reality, but are introduced by us in our efforts to make some sense of an otherwise confusing reality, while making a clear distinction between physics and the social sciences. It seems justified that there are other sciences such as biology in addition to the study of animal societies that occupy an intermediate position, but I had to abandon my reservations and recognize a dichotomy because the social sciences encounter a second difficulty from which the natural sciences are exempt and that is that social sciences Theories are reflexive Heisenberg's discovery of the uncertainty principle did not alter the behavior of quantum particles one bit, but social theories, whether Marxism, market fundamentalism or the theory of reflexivity, can affect the topic to which it refers, to which the scientific method is supposed to be dedicated.

The search for truth Heisenberg's uncertainty principle does not interfere with that postulate, but the reflexivity of social theories does. Why should the social sciences limit themselves to passively studying social phenomena when they can be used to actively change the state of things, as I pointed out in Alchemy? of finance our the alchemy of finance the alchemists made a mistake in trying to change the nature of base metals through incantations, instead they should have focused their attention on the financial markets where they could have been successful how could they protect themselves social sciences against this interference I proposed a simple remedy recognize a dichotomy between the natural and social sciences this will ensure that social theories are judged on their merits and not by a false analogy with the natural sciences I propose this as a convention for the protection of the scientific method no As a degradation or devaluation of the social sciences, the convention sets no limits on what the social sciences can achieve;

On the contrary, it frees the social sciences from slavish imitation of the natural sciences and protects them from being judged by wrong standards. open new perspectives it is in this spirit that tomorrow I will present my interpretation of financial markets I apologize for dwelling so much on the rarefied realm of abstractions I promise to come down to earth in my next conference tomorrow thank you