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George Soros: On Reflexivity

As Davos 2023 kicks off today, I decided to take a closer look at one of the leading personalities of the World Economic Forum agenda.

George Soros is admired in many circles, but if there was an award for the best real-life James Bond villain, he might be the runner-up. Fawning fans around the world were no doubt devastated by the news that he won’t be attending.

There are many quotes and anecdotes about Soros that paint a caricature of someone disconnected from reality or hellbent on social destruction, so I decided to read his book The Alchemy of Finance to understand what really makes him tick.

Soros is best known for the Quantum Fund and the Open Society Foundation, but his true passion is philosophy: “I should like to end with an impassioned plea for reinstating philosophy as the source of all knowledge and wisdom.”

My kind of guy. But before we address reflexivity proper, we should first see how it fits into the history of Western philosophy.

Soros positions himself in the dialectic tradition. “Hegel propounded a dialectic of ideas; Marx turned the idea on its head and espoused dialectic materialism; now there is a new dialectic [reflexivity] that connects the participants’ thinking with the events in which they participate – that is, it operates between ideas and material conditions.”

Hegel (thesis) – Marx (antithesis) – Soros (synthesis)?

Interesting, but not accurate. The most important philosophical question here is which one is fundamental: ideas or matter. Hegel and Marx fully understood that humans must operate between ideas and material conditions.

Reflexivity is a “feedback loop between the participants’ understanding and the situation in which they participate.” Soros highlights the limitations of the social sciences by noting that humans make choices, which renders scientific predictability impossible. Check. The philosophical term is free will, which Soros never mentions.

Reflexivity is germane for financial markets, where humans with imperfect understanding are constantly adapting to complex market signals, which “ensures that their actions will have unintended consequences.”

Soros thus invokes alchemy. Whereas science identifies truths about the world that can be falsified, reflexivity transforms the world. However, rather than transform matter (turning lead into gold), reflexivity transforms markets and societies.

Soros’ comment about imperfect knowledge falls under what philosophers call epistemology. Soros wisely rejects the efficient market hypothesis, which says market prices fully reflect all extant information, but he goes further with the human uncertainty principle: “people’s understanding of the world in which they live cannot correspond to the facts and be complete and coherent at the same time.”

According to Soros, the human mind is imperfect, check, but he goes further by saying there are no eternal truths. “I regard the search for permanence and perfection as an illusion.” Or “death can be embraced in a number of ways; the pursuit of perfection and eternity.”

Philosophers call this view relativism, but Soros avoids the term. Perhaps this is what allows him to rage against market speculators in his book (for thee) while he leveraged reflexivity, so to speak, to short the British Pound in 1992 for massive profits (no for me)?

Soros discredits some market orthodoxy and is correct that markets behave in a reflexive way, with self-fulfilling trends. For example, if stock prices rise, the wealth effect provides investors with access to more credit or leverage, which can move stocks into bubble territory.

However, Soros doesn’t address one of the most important causes of market bubbles: the difference between real money and fiat money. He addresses credit, but nary a word about how fiat money proper influences the markets in a reflexive way.

Soros rejects fundamental analysis, the lifeblood of CFAs and financial analysts around the world. The market is always wrong and is never in a process of moving toward equilibrium or true value. He also (oddly) rejects technical analysis, which tracks historical prices and volume trends to identify future entry and exit points.

Soros claims reflexivity is a new way to understand market behavior, but it is just technical analysis in disguise. “The underlying trend influences the participants’ perceptions through the cognitive function; the resulting change in perception affects the situation through the participating function.” Technical analysis = market psychology.

Soros’ relativism explains his peculiar mix of rejecting eternal truth (for thee) while at the same time passionately pursuing a vision of a moral and open society (not for me). It’s worth noting that following the path of reflexivity while avoiding the pursuit of eternal truth is what led us to slavery, fascism, and communism.

Soros claims to prize philosophy but he avoids terms like free will, epistemology, and relativism. He claims reflexivity is a new discovery, but he’s really just rehashing old ideas without acknowledging that he’s standing on the shoulders of giants.

“I have always harbored an exaggerated view of my self-importance – to put it bluntly, I fancied myself as some kind of god … Reality falls short of my expectation…but I no longer need to harbor a sense of guilt.”

To understand Soros, read his book.

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