Reflexivity
The actors in the show shape the show's conclusion; the characters in the book decide where the chapter goes.
The Founding Fathers implemented the American Constitution in 1789, the same year as the French Revolution. As one country established order, the other fell to anarchy. "Our new Constitution is now established, everything seems to promise it will be durable; but, in this world, nothing is certain except death and taxes," Benjamin Franklin wrote at the time. In doing so, he betrayed another certainty; that he—like all of us—has overwhelmingly incomplete information about our world ('nothing is certain'). I like the phrase. This might sound obvious, yet it has broader implications for how we live our lives.
Much more recently, and with less global consequence, George Soros orchestrated Black Wednesday in 1992. In doing so, Soros demonstrated with clarity that the known unknowns, or lack of certainty, are as powerful as the known knowns.
Many of my youthful readers won't remember (I was not born), but the UK joined the European ERM (Exchange Rate Mechanism) in October '90. The ERM lived somewhere on the uncertain path towards the Euro; it indirectly caused monetary and economic policy unification. Member countries, under the mechanism, were required to keep their exchange rates from fluctuating by more than 6% from a weighted average of the other currencies (including the Danish krone, Spanish peseta, German mark and French franc). This required an artisans level of interest rate management; joining the ERM constrained the British government to follow a European-wide policy.
On 'Black Wednesday’, 16 September 1992, the UK, which John Major's Conservative party then led, was forcibly ejected from the European Exchange Rate Mechanism due to militant short selling by the financial markets. Not long before, George Soros, the infamous fund manager, noticed that if hedge funds bet their financial clout against the pound, Major would be forced (with Norman Lamont as his Chancellor) to inflate the value of the currency by increasing interest rates. Soros trusted that the pounds value would continue to fall, despite government intervention and that the pound would crash out of the ERM.
And Soros was right: £10 billion were sold short on Black Wednesday, and Lamont frantically upped interest rates to 15% to little effect. The pound fell further than 6% and crashed out of the ERM. Soros took home £1 billion profit from one trade in one day.
Yet while Soros' bet's morality is questionable (it cost the British public £3.3 billion, plus a recession), the framework he deployed to make it is starkly relevant. Like Franklin two hundred years before, Soros recognised that little is certain.
Moreover Soros went on to develop a framework that capitalises on this uncertainty. He called it reflexivity in his essay "Fallibility, Reflexivity, and the Human Uncertainty Principle":
My conceptual framework is built on two relatively simple propositions. The first is that in situations that have thinking participants, the participants' views of the world never perfectly correspond to the actual state of affairs. People can gain knowledge of individual facts, but when it comes to formulating theories or forming an overall view, their perspective is bound to be either biased or inconsistent or both. That is the principle of fallibility.
The second proposition is that these imperfect views can influence the situation to which they relate through the actions of the participants. For example, if investors believe that markets are efficient then that belief will change the way they invest, which in turn will change the nature of the markets in which they are participating (though not necessarily making them more efficient). That is the principle of reflexivity.
The two principles are tied together like Siamese twins, but fallibility is the firstborn: without fallibility there would be no reflexivity.
Soros based his idea on the work of Karl Popper, a philosopher, who exposed the "influence of a prediction upon the event predicted." Popper called it the "Oedipus effect", after a Greek legendary figure Oedipus who murders his father, who he had never seen before, because of the prophecy that had caused his father to abandon him. As Popper puts it, "the oracle played a most important role in the sequence of events which led to the fulfilment of its prophecy." Popper died in 1994, but historians have found the same conclusions earlier still. In 1776 Edward Gibbon published the first (of six) volumes of The Decline and Fall of the Roman Empire. In it, Gibbon demonstrated, "During many ages, the prediction, as it is usual, contributed to its own accomplishment".
The same "Oedipus effect" sometimes comes under another Greek name, the "Pygmalion effect", where high expectations lead to improved performance in a given area. For example, Toby performed better at school than I because people, including myself, expected him to (much to my frustration). The Greek Pygmalion was a sculptor who fell in love with a statue he had carved; the sculptor wished for a bride who would be "the living likeness of my ivory girl". The gods granted his wish, and the figure became alive: when he kissed his ivory statue and found that its lips felt warm. He kissed it again and found that the ivory had lost its hardness.
And so, Soros is not the first to note that our beliefs about the future can shape it. Each of these stories, whether it's Oedipus, or Pygmalion, or the works of Popper of Gibbon, will surely resonate with each of us. What's interesting about the effect of a prediction on the predicted event (positively or negatively) is how it can shape our future.
This way of thinking has been captured in woo-hoo culture, too. In this context, the same theories are characterised (by the MSM, and the rest of us) as rubbish. You may have come across the Law of Attraction (a.k.a. the New Thought movement) or the book and film The Secret, which all support the idea of our wants manifesting in our lives. Popper and Soros are saying the same, but they are better connected and more rational, and in the case of Soros, much wealthier. The founder of the New Thought movement, Phineas Quimby (a stunning nineteenth-century name), wrote that "the trouble is in the mind, for the body is only the house for the mind to dwell in, and we put a value on it according to its worth." Yet it's been characterised as failing to have "any basis in scientific reality" and that its premise contains "an ugly flipside: if you have an accident or disease, it's your fault". This is perhaps true… and I am a non-believer of the New Thought movement, too. But I'm taken by the notion of Pygmalion and his ivory bride.
The Oedipus effect has relevance to you and me, especially if you're motivated to make any change to the world. Daily, I confront the cold reality of building a business that has little momentum. It's early, after all. Rarely do doubts pass through my mind, no least because I regularly (and I mean ten-times-a-day), I return to the aphorism 'we are the stories we tell ourselves. Or, more accurately, I am the story I tell myself. You are, too. The work of Popper has, in this last week, cemented these beliefs. Having a purpose has renewed importance when we think about the potential to change complex systems (even ones as complex as those surrounding Soros' ERM). The actors in the show shape the show's conclusion; the characters in the book decide where the chapter goes. Yet, I often think this is a lesson missed at school. We're taught about fixed institutions and the status quo, not about what might be and how straightforward it may be to change.
The emergent question is: how do we leverage the Oedipus effect? What tools do we have at our disposal to make fantasies our reality? In 1994, two years after Black Wednesday, Soros spoke at MIT. He said, "Most of the time I am a trend follower, but all the time I am aware that I am a member of the herd and I am on the lookout for inflexion points … Most of the time the trend prevails; only occasionally are the errors corrected. It is only on those occasions that one should go against the trend … [to be] ahead of the curve." There is nothing radical about his proposition, and we all can see trends (and follow them). Trends such as working from home, or global warming, or smartphone addiction: I doubt many would question their reality. We can seek out trends that align with our purpose, which might be the bloom in crypto or, in our case, the shift to data-led remote care. It's these trends that we can ride and, in doing so, look for inflexion points to leverage.
My week in books 📚
The Square and the Tower by Niall Ferguson
I was taken by Niall Ferguson when I met him on a politics trip to New York in 2010. As an academic, while he may not be a 'master of the universe' himself, he hangs around those who are (on Wall Street, at least). This book charts the parallels between the fall-out from the printing press in 1450 and today's internet. Gutenberg's invention enabled a proliferation of radical ideas which challenged extant authorities. The Church quickly regretted teaching everyone to read the bible when books on other topics started to appear, which challenged the establishment. The exponential growth in books led to the Reformation and one hundred years of European violence. Today, the change (falling data costs, increasing smartphone penetration) is happening ten times faster than half a millenia ago. Ferguson predicts doom as our (now antiquidated) nation-states battle to maintain control, and as rogue political activists (such as Cummings—who now has a Substack) make hay with these powerful tools.
Have a great week all,
Hector