(this is part 1. The theories discussed here are applied to Covid, news, cognitive disequilibrium, spectacles, social media ‘and more’ in part 2. COMING SOON)

Preamble

Disequilibrated Dark City

Or, every time we think we’re out, they drag us back in.

I’ve learned through trial and error that thinking something smart is easy, but, to have that smart thought, idea or thesis cross the transom, to leave me and make contact with someone outside of my mind, is hard.

Once that thing that I had possessed only in my mushy noodle has expressed itself, it’s often discovered, by me first and the listener second, to be unimpressive, unimaginative, dull. So then, this is my best effort to make that smart thing inside my head equally as smart on the outside.

I have to start with the start, these upcoming first few thousand words are the foundation, from that, a whole bunch of jibber jabber later, is where it begins.

We live in an interesting time in Interesting Times.

Prologue

The complexity of the world in which we live exceeds our capacity to comprehend it. The main source of difficulties is that participants are part of the situation they have to deal with. 

Confronted by a reality of extreme complexity we are obliged to resort to various methods of simplification: generalizations, dichotomies, metaphors, decision-rules, moral precepts and so on. These mental constructs take on an existence of their own, further complicating the situation.

As the brain is bombarded by millions of sensory impulses we know that our ‘consciousness’ can process only seven or eight subjects concurrently. 

We can essentially hold only a few active, ‘front of brain’ thoughts at a time. The impulses, ideas, thoughts and actions they provoke all need to be condensed, ordered and interpreted under immense time pressure, defects and imperfections. 

This post is about the distortion field between reality and the mind. And the markets. And covid and so on and so on.

Let’s begin..

Enlightenment

The philosophers of the Enlightenment put their faith in reason, which they supposed behaved like a searchlight illuminating a reality that was passively awaiting to be discovered. 

This dichotomy between reason and reality worked very well for the study of natural phenomena but it was misleading in the study of human affairs. 

• In natural phenomena thinking plays no causal role and serves only a cognitive function.
• In human affairs thinking is part of the subject matter and serves both a cognitive and a manipulative function.

Their view of the world largely ignored the manipulative function of the mind, treating it as persistently subservient to the cognitive function.

The mistake(s) made by the Enlightenment has been given a name: Enlightenment fallacy. 

Theory of Reflexivity

The Theory of Reflexivity is a creation of George Soros and heavily influenced by Karl Popper and many foundational contributors, so rather than cite who said what and why, it’s easier for both of us if you think of the whole thing as a composite.

The Theory of Reflexivity applies exclusively to situations that have thinking participants. 

The participants’ thinking serves two functions:

1. The Cognitive Function must understand the world in which it lives. The direction of causation is from the world  → to the mind.

• The aim of the cognitive function is to produce knowledge. Knowledge is expressed by statements that correspond to the facts. 
• To establish correspondence, statements and facts have to be separate and distinct. Hence the pursuit of knowledge requires that thoughts should be distinguished from their subject matter. 

1. The Manipulative Function (also called the Participating Function) attempts to change the situation to our advantage. The direction of causation is from the mind →  to the world

The two functions connect thinking and reality in opposite directions →  ← and when both functions operate at the same time they can interfere with each other. 

How?

• By depriving each function of the independent variable that would be needed to determine the value of the dependent variable.
• Because, when the independent variable of one function is the dependent variable of the other, neither function has a genuinely independent variable.
• This means that the cognitive function can’t produce enough knowledge to serve as the basis of the participants’ decisions.
• Similarly, the manipulative function can have an effect on the outcome, but can’t determine it. In other words, the outcome is liable to diverge from the participants’ intentions.

There is bound to be some slippage between intentions and actions and further slippage between actions and outcomes. As a result, there is an element of uncertainty both in our understanding of reality and in the actual course of events.

If the cognitive function operated in isolation without any interference from the manipulative function, it could produce knowledge. Knowledge is represented by true statements.

True Statements

A statement is true if it corresponds to the facts, that is what the correspondence theory of truth tells us.

But, if there is interference from the manipulative function, the facts no longer serve as an independent criterion by which the truth of a statement can be judged because the correspondence may have been brought about by the statement changing the facts.

• Consider the statement: “it is raining.”  That statement is true or false depending on whether it is, in fact, raining.
• Now consider the statement: “This is a revolutionary moment.” That statement is reflexive, and its truth value depends on the impact it makes.

Reflexive statements

Participants’ thinking finds expression not only in statements but also in action and behavior.

• The participants’ views influence the course of events, and;
• the course of events influences the participants’ views.

The influence is continuous and circular; that is what turns it into a feedback loop.

Let us discriminate between the objective and subjective aspects of reality.

• Thinking constitutes the subjective aspect, it is what takes place in the minds of the participants
• Events constitutes the objective aspect. The objective aspect denotes what takes place in external reality

There is only one external reality but many different subjective views.

Reflexivity can then connect any two or more aspects of reality, setting up two-way feedback loops between them.

We may then distinguish between two broad categories:

1. reflexive relationships which connect the subjective aspects. Marriage is a reflexive relationship
2. reflexive events which involve the objective aspect. The Stock Market Crash of 2020 was a reflexive event.

Feedback loops

Feedback loops can be either negative or positive.

1. Negative feedback loops brings the participants’ views and the actual situation closer together. Negative feedback loops are self-correcting thus they set up a tendency toward equilibrium. It can go on forever and if there are no significant changes in external reality the participants’ views will come to correspond to the actual state of affairs.
2. Positive feedback loops drives the participants’ views and the actual situation further apart. Positive feedback loops produce dynamic (large and volatile) disequilibrium.

A positive feedback process is self-reinforcing. It cannot go on forever because eventually the participants’ views would become so far removed from objective reality that the participants would have to recognize them as unrealistic. 

Instead of equilibrium, we are faced with a dynamic disequilibrium or what may be described as far-from-equilibrium conditions. 

In the financial markets, let’s look at a stock: 

A positive feedback loop process that runs its full course is initially self reinforcing as the stock moves higher, but eventually it is liable to reach a climax or reversal point, after which it becomes self reinforcing in the opposite direction, the stock moves lower. 

Positive feedback loop processes do not necessarily run their full course; they may be aborted at any time by negative feedback loops.

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.

Let’s look at ‘bubbles’.

Financial markets and so on and so on

Financial markets provide an excellent laboratory, the course of events is easier to observe than in most other places. Many of the facts take a quantitative form, and the data are well recorded and preserved.

Occasionally, the price distortions set in motion a boom-bust process. More often, they are corrected by negative feedback. In these cases market fluctuations have a random character. George Soros compares them to the waves sloshing around in a swimming pool as opposed to a tidal wave.

Obviously, the latter are more significant but the former are more ubiquitous. 

It will be useful to distinguish between near equilibrium conditions, which are characterized by random fluctuations, and far-from-equilibrium situations where a bubble predominates. 

• Near equilibrium is characterized by humdrum, everyday events which are repetitive and lend themselves to statistical generalizations
• Far-from-equilibrium conditions give rise to unique, historical events where outcomes are generally uncertain but have the capacity to disrupt the generalizations based on everyday events.

The rules that can guide decisions in near equilibrium conditions do not apply in far-from equilibrium situations. 

In far-from-equilibrium conditions a participant is made to act under immense time pressure and therefore can not gather all of the information that would have been available. That is how far-from-equilibrium situations can spin out of control.

BUBBLES

Every bubble has two components: 

1. an underlying trend (momentum) that prevails in reality, and; 
2. a misconception relating to that trend. 

A boom-bust process is set in motion when a trend (momentum) and a misconception positively reinforce each other. The process is liable to be tested by negative feedback loops along the way. If the trend is strong enough to survive the test, both the trend and the misconception will be further reinforced. 

Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved:

Bubbles that conform to this pattern go through distinct stages: 

1. Inception; a period of acceleration, interrupted and reinforced by successful tests 
2. Twilight period
3. Reversal point or climax, followed by acceleration on the downside culminating in a financial crisis (in the example of financial markets) or loss of faith in institutions (in the political and news market).

The length and strength of each stage is unpredictable, but there is an internal logic to the sequence of stages. The sequence is predictable-but even that can be terminated by an intervention or some other form of negative feedback. 

Typically, bubbles have an asymmetric shape. 

1. slow to start
2. accelerates gradually until it flattens out during the twilight period
3. bust is short and steep because it is reinforced by the forced liquidation of unsound positions/ideas. Disillusionment turns into panic, reaching its climax in a crisis

Time

1. Time causes distortions (my dark city stuff should go here)

In the sense of the financial markets, participants cannot possibly base their decisions on ‘knowledge’, because knowledge requires that they have to anticipate the future, and the future is contingent on decisions that people have not yet made. 

What those decisions are going to be and what effect they will have cannot be accurately anticipated. Nevertheless, people are forced to make decisions under conditions of duress and emotional strain. To guess correctly, people would have to know the decisions of all of the other participants, their imperfections and reality distortions and incomplete information and perceptions of consequences.

Rational expectations theory postulates that there is a single correct set of expectations and people’s views will converge around it. It’s obviously wrong, some may say it’s bonkers. 

In the financial markets and so on and so on, participants are obliged to make their decisions in conditions of uncertainty. Their decisions are bound to be tentative and biased. That is the generic cause of distortions.

Uncertainty manifests itself in both functions:

• The participants’ act on the basis of imperfect understanding,  and;
• The results of their actions will not correspond to their expectations

How can a correct interpretation of reality be reconciled with the principle of inherently imperfect understanding?

Uncertainty is of course, a complex stack of dynamics. Different participants have different interests, some of which may be in conflict with each other, may be guided by a multiplicity of values which may not be self-consistent and so on and so on.

This is the Human Uncertainty Principle, it gives us objective reasons to believe that our perceptions and expectations are, or at least may be, wrong.

Although the primary impact of human uncertainty falls on the participants, it has far-reaching implications for the social sciences.

2. Time causes pain

In far-from-equilibrium conditions a participant is made to act under immense time pressure and therefore can not gather all of the information that would have been available. That is how far-from-equilibrium situations can spin out of control.

Popper. Falsification and Immunizing Tests

Karl Popper is considered the greatest philosopher of science of the twentieth century. 

Popper was struck by the ease with which one could find confirming evidence for these theories, despite their dubiousness. 

• A Marxist could find evidence of the class struggle in every event and every news item, and also in the absence of certain events or news items
• A Freudian could find confirming evidence of Freud’s psychological theories in every act performed by every person; and had a person acted differently, that behavior too could have been explained by the same theory. 

Any event seemed to fit quite naturally within these theories. In fact, one could not even imagine an event that would have contradicted them.

Popper held that it is impossible, in the empirical sciences, to prove a theory; so we can never be sure that our knowledge is correct or complete. 

We must treat all ideas and theories as tentative solutions, as mere conjectures, and we must never cease to doubt them. It is our responsibility, in fact, to attempt to refute our own theories – by subjecting them to severe tests. And we must always try to find better ones. In this way, our theories will keep improving, and we will get nearer and nearer to the truth.

Karl Popper was impressed by the asymmetry between trying to prove a theory and trying to refute it. 

1. A theory is a universal statement that makes a claim about a large, perhaps infinite, number of events.

Consequently, any number of confirmations are insufficient to prove its validity. At the same time, just one event that contradicts the theory is sufficient to refute it. 

Popper proposed that we must replace the principle of accepting a theory on the basis of confirming evidence, with the principle of rejecting the theory on the basis of refuting evidence. 

• So long as a theory stands up to the severest tests we can design, it is accepted; 
• if it does not, it is rejected. 

But it is never inferred, in any sense, from the empirical evidence. 

If the correct way to judge theories is by subjecting them to tests that try to falsify them, it follows that we cannot even consider theories that do not lend themselves to tests and falsification.

Most people think that to test a theory means to show that it works, so they choose for their tests situations that confirm the theory. But such tests are worthless: “It is easy to obtain confirmations, or verifications, for nearly every theory – if we look for confirmations”.

2. Scientific theories are falsifiable; theories that are unfalsifiable are pseudoscientific. 

Defenders find a way to save their precious Pseudoscience.

An invalid theory can be ‘saved’ by:

• avoiding tests
• by testing it without sincerely attempting to refute it
• by studying only situations that confirm it
• by ignoring the falsifications (claiming that the tests were wrong, or belittling their significance).

Although crude, these stratagems are effective.

But, the most dangerous and conniving stratagem are those employed by the academics and experts who created the subject pseudo-science. 

Their tricks:

• suppress the falsifications as they occur, one at a time
• suppress them by modifying the theory; specifically, they expand the theory so as to make the falsifying situations look like a natural part of it.

Thus, while the theory remains testable and falsifiable in principle, it is rendered unfalsifiable in fact, by incorporating into it every falsifying situation. 

What the pseudoscientists are doing is turning falsifications of the theory into new features of the theory. This stratagem may be difficult to detect, because the theory appears, at any given moment, very similar to the serious, scientific theories. It only differs from them when threatened by a falsifying situation. At that point, rather than being abandoned, it expands so as to swallow that situation – thus eliminating the threat. This task accomplished, it appears again to be a serious theory – until threatened by another falsifying situation, when the same trick is repeated.

3. Popper called the tricks used to avoid falsifications “immunizing tactics or stratagems”

since their purpose is to immunize the theory against falsifications. Popper anticipated some of these tactics, but recognized that new ones can be easily invented.

To combat these stratagems, Popper added a principle: 

The scientist must specify, when proposing his theory, what events or situations, if observed, would refute it. And if subsequent tests reveal such events or situations, the correct response is to declare that theory refuted, propose a new theory, and specify what events or situations would refute it.

A theory, once formulated, cannot be modified. If we want to modify our theory (to save it from being falsified by evidence), we must consider the original theory refuted and treat the modified one as a new theory: “We decide that if our system is threatened we will never save it by any kind of conventionalist stratagem…”

4. One failed test is sufficient to falsify a theory but no amount of confirming instances is sufficient to verify.

Theories turn into worthless pursuits when their supporters choose to ignore the falsifying evidence. Unlike true scientists – who seek the truth and know that their theories, even when apparently successful, may be mistaken – pseudoscientists believe their task is simply to defend their theories against criticism.