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This is George Soros’ latest book. It draws upon a structure which he describes as “reflexivity”, which includes a “cognitive function” and a “manipulative function”. The best example I can think of to relate the two, is that it is a two part process; the cognitive function is the recognition of objective data, like “Oil is over $100”, and the manipulative function is our way of trying to come up for an explanation for this fact. the problem is that we use, what he describes as, an incorrect framework which allows us to predict and explain social phenomena, when we can’t accurately do so. In short, his thesis is really a counterpoint to all economic theory relating to equilibrium and the laws of supply and demand.

There is also a great 10 page synopsis/introduction describing the current financial condition (probably the most accurate articulation of the problem I’ve ever read). The book itself is around 100 pages, but its a surprisingly difficult read – I think It’s clear he didn’t have any help in writing it. For much of the book, however, he is pleading to make a mark in the philosophical world (this part can be skipped).

If you decide to read this book, It really heats up around p. 75, when he actually begins relating his strategy to this current financial crisis. Here are some memorable insights from that section:

Concerning Modeling:

“By endowing social science with the prestige of natural science it allows scientific theories to be used for manipulative rather than cognitive purposes.”

His New Paradigm:

“By applying the postulate of radical fallibility to financial markets, one can assert that, instead of being always right, financial markets are always wrong…they cannot predict economic downturns accurately, but they can cause them…Markets move away from a theoretical equilibrium almost as often as they move towards it, and they can get caught up in initially self-reinforcing but eventually self-defeating processes.”

This is my interpretation of his message: markets do not operate on a set of principles predicated on rationality, mainly because the participants within it are not rational. This stems from a number of problems, but mainly from a lack of true understanding of the market’s condition, especially during boom-bust scenarios. Since we as market participants, cannot obtain absolute knowledge, and because we base our decisions on our own perception of a situation, we “are obliged to act on the basis of beliefs which are not rooted in reality.”

Also of note: He thinks that his philosophies have not been accepted in academic circles because Economists would be forced to relinquish some of their stature as, the “all knowing”.

Definitely worth reading.

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