Reflexivity

I’ve always been fascinated by the concept of reflexivity. What is reflexivity? It is the bidirectional relationship of a subject as both a participant (manipulative function) and observer (cognitive function) between “cause and effect”. As an observer I watch a fire burn; as a participant I add fuel to the fire or stifle its flame: my beliefs about the observed fire, if it is growing or dwindling, influence how I engage with it.  Maybe a more accurate example relates to prices: my current willingness to buy a good is influenced by the price I observe and, in turn, the act of buying drives up demand which increases the price and influences my price observations, affecting my future willingness to buy (I’ll work on a clearer example).

While I’m fascinated with the sociological implications, I’m even more fascinated with how these implications manifest within economic decision making. I really need to investigate and read up on behavioral economics more thoroughly.

I’ve been aware of the concept of reflexivity for quite awhile but only recently has it perked my interest in the context of economics and finance. Before that my understanding was confined to the psychological decision making aspects. What really brought these two together was my recent interest in how mass speculation affects the market place. Two books cultivated this interest, specifically “A Short History of Financial Euphoria” and “The Big Short”.

So reflexivity. Karl Popper introduced this idea into social theory, and social theory and economics, as you can imagine, are intimately linked. George Soros, a pupil of Popper, really capitalized on the utility of synthesizing and applying the two concepts to finance. That’s where I want to continue my study.

There are three areas of study that fascinate me at the moment: Evolutionary Economics, Reflexivity and Social Theory, and Disequilibrium States (more specifically, the process of creative destruction as coined by Schumpeter).  I’d really like to apply some philosophy and social theory to economics and come up with a qualitative economic system that capitalizes on the current short comings of neoclassical thought and market structures. Soros has done it, but I’d like to master his ideas and continue progressing with them. There’s gotta be some piece of the puzzle, or pie, that I can really develop and utilize for gain. I found this lil’ power point to be a helpful introduction to some of Soro’s ideas. My next readings will involve the works of Karl Popper (Philosophy of Science), Robert Schiller (Behavioral Economics), George Soros (Reflexivity), and Hyman Minsky (Disequilibrium States).

Soro’s provides a brief introduction to his concept of reflexivity in his book The Age of Fallibility:

”On the one hand, we seek to understand our situation. I call this the cognitive function. On the other hand, we seek to make an impact on the world. I call this the participating function. The two functions work in opposite directions and they can interfere with each other. The cognitive function seeks to improve our understanding. The participating function seeks to improve our position in the world. If the two functions operated independently of each other, they could in theory serve their purpose perfectly well. If reality were independently given our views could correspond to reality. And if our decisions were based on knowledge, the outcomes would correspond to our expectations. But that is not the case because the two functions intersect, and where they intersect they may interfere with each other. I have given the interference a name: reflexivity. . . .”

Here’s a video where Soro’s goes further in depth with his thoughts on reflexivity titled The New Paradigm for Financial Markets.

http://mitworld.mit.edu/flash/player/Main.swf?host=cp58255.edgefcs.net&flv=mitw-01094-sloan-econ-soros-financial-mkts-28oct2008&preview=http://mitworld.mit.edu//uploads/mitw01094sloaneconsorosfinancialmkts28oct2008.jpg

 

Why I think this concept is so interesting is that it incorporates a multitude of qualitative cognitive functions as well as mechanisms that result from enculturation and socialization that guide choice and action.

All that aside, today I read an amazing article on evolutionary economics titled Evolutionary Economics and the Extension of Evolution to the Economy. I’d recommend the read if nothing else but to expand your knowledge on the promising subject of evolutionary economics.

More thoughts later.

I’m never sold on one person’s theory or another’s. My aim is always to understand and synthesize them all into my own unique perspective that I can successfully apply.

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