George Soros on Mistakes & Learning

©2012 Open Society Foundations. Some rights reserved. 400 West 59th Street | New York, NY 10019, U.S.A. | Tel 1-212-548-0600 | www.soros.org participants would have to recognize them as unrealistic. Nor can the iterative process occur without any change in the actual state of affairs, because it is in the nature of positive feedback that it reinforces whatever tendency prevails in the real world. Instead of equilibrium, we are faced with a dynamic disequilibrium or what may be described as far-from-equilibrium conditions. Usually in far-from-equilibrium situations the divergence between perceptions and reality leads to a climax which sets in motion a positive feedback process in the opposite direction. Such initially self-reinforcing but eventually self-defeating boom-bust processes or bubbles are characteristic of financial markets, but they can also be found in other spheres. There, I call them fertile fallacies-interpretations of reality that are distorted, yet produce results which reinforce the distortion. * * * I realize that this is all very abstract and difficult to follow. It would make it much easier if I gave some concrete examples. But you will have to bear with me. I want to make a different point and the fact that it is difficult to follow abstract arguments helps me make it. In dealing with subjects like reality or thinking or the relationship between the two, it's easy to get confused and formulate problems the wrong way.

©2012 Open Society Foundations. Some rights reserved. 400 West 59th Street | New York, NY 10019, U.S.A. | Tel 1-212-548-0600 | www.soros.org At this point, I need to emphasize that reflexivity is not the only source of uncertainty in human affairs. Yes, reflexivity does introduce an element of uncertainty both into the participants views and the actual course of events, but other factors may also have the same effect. For instance, the fact that participants cannot know what the other participants know, is something quite different from reflexivity, yet it is a source of uncertainty in human affairs. The fact that different participants have different interests, some of which may be in conflict with each other, is another source of uncertainty. Moreover, each individual participant may be guided by a multiplicity of values which may not be self-consistent, as Isaiah Berlin pointed out. The uncertainties created by these factors are likely to be even more extensive than those generated by reflexivity. I shall lump them all together and speak of the human uncertainty principle, which is an even broader concept than reflexivity. The human uncertainty principle I am talking about is much more specific and stringent than the subjective skepticism that pervades Cartesian philosophy. It gives us objective reasons to believe that our perceptions and expectations are-or at least may be-wrong.

Heisenberg's uncertainty principle does not interfere with that postulate but the reflexivity of social theories does. Why should social science confine itself to passively studying social phenomena when it can be used to actively change the state of affairs? As I remarked in The Alchemy of Finance, the alchemists made a mistake in trying to change the nature of base metals by incantation. Instead, they should have focused their attention on the financial markets where they could have succeeded. How could social science be protected against this interference? I propose a simple remedy: recognize a dichotomy between the natural and social sciences. This will ensure that social theories will be judged on their merits and not by a false analogy with natural science. I propose this as a convention for the protection of scientific method, not as a demotion or devaluation of social science. The convention sets no limits on what social science may be able to accomplish. On the contrary, by liberating social science from the slavish imitation of natural science and protecting it from being judged by the wrong standards, it should open up new vistas. It is in this spirit that I shall put forward my interpretation of financial markets tomorrow. I apologize for dwelling so long in the rarefied realm of abstractions. I promise to come down to earth in my next lecture.