I recently read George Soros’ The New Paradigm for Financial Markets: The Credit Crisis of 2008 and What It Means, a bargain book I got off Big Bad Wolf 2012. Having read the author’s Alchemy of Finance, this 162 page book further refines his idea on reflexivity. While I don’t claim to understand every single thing he talked about, I posted on my goodreads.com account, “Just read all his books anyway.”
One starking difference where reflexivity applies to social science (vs natural science) is how a participant’s bias could affect his or her environment. For example, under natural science, a participant can generalize the observation that the sun always rises in the east and sets in the west. Whether he or she thinks or hopes that the sun will rise from the west is irrelevant. This leads to the accumulation of knowledge that marks the age of enlightenment where reason and reason alone can define reality.
However, in social science, market participants have not only (a) the cognitive function, i.e. seek to understand the environment (as above) but more importantly (b) the manipulative function – i.e. seek to change the situation. It is this bias that participants cannot base his or her decision on knowledge alone. For example, whatever equilibrium nonsense they teach in school is utter rubbish and far from reality. (If market price does follow a random act but always gyrates towards equilibrium, how can bubbles and panics develop?)
Hence, we can never have perfect knowledge. We will never be able to perceive the objective reality ( click here for the post). Consequently, the environment is always larger than us. The Laplace’s Demon can never be slain.
So what are the implications?
(1) Never stop learning – if we accept that the environment is larger than us and that our perception is limited, never stop learning. Learn is just another word for change or adapt.
- However, the challenge is that it’s always easier to manipulate the external environment. (refer to the 2nd function above). The resulting effects are denial and delusion. This is especially chronic for those who are in power.
- Curiously, the environment never changes. It’s our perception of the environment that changes. Hence it’s true that what we focus on is what we’ll usually get. There is some truth in positive thinking.
(2) Be feely – so how would we know? Yes learning is great, understand that the environment is larger than us but how do we know when we lack something?
- When our perception of the environment matches closely with the environment, we’ll be completely at ease with ourselves. Isn’t that what monks try to achieve via meditation?
- No fear, no anger and no stress. Full of satisfaction.
- We may manipulate the external environment and kid ourselves that all’s quiet on the western front but our thoughts will form part of our mental environment that will influence how we perceive the environment. It’s therefore wrong to say that ‘time will heal everything’. The negative emotion will always be there, undisturbed by time, unless we face it.
(3) Have a little faith – oh death, where is thy sting?
- We may recall that a person who just learns how to drive will focus all his or her attention on driving. Until it shifts to autopilot mode, the driver may find it difficult to engage in a conversation or to observe the scenic surrounding simultaneously. What actually happens is that his/her sense of fear heightened his/her attention so that he/she can focus on driving, i.e. the object of fear.
- So if that person unfortunately met with an accident, the experience will create a painful memory. Eventually, his/her sense will be so attuned to picking up the slightest sight or sound of that particular experience in the environment that it will just create another experience to reinforce what he/she sees or hears.
- Hence what we focus on is what we’ll usually get.
- Unless that person trusts himself that he has done his very best and is willing to court another experience in the absence of fear, it will be a downward spiral from there. He/she must face it and de-charge the negative energy in the experience.
- 2 extreme scenarios may develop:
- (a) we may refuse to acknowledge the situation – denial
- (b) we may focus on other nonthreatening information – delusion
- When was the last time you hear denial or delusion is good?
When I posted this quote by Charles Darwin on my facebook previously, “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change”, I believe many people will echo with it. But at a practical level, implied within the statement is this question: how do we know when we need to change before the situation turns into desperation?