On The Idea Of Soros

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“Whereof one cannot speak, thereof one must remain silent” ... Wittgenstein In writing this brief summary on an Introduction to Soros I am breaking Wittgenstein's cardinal rule. Leo Melamed (Chairman Emeritus of the Chicago Mercantile Exchange- CME) in his autobiography “Escape to the Futures” said to become immortal one has to be part of something that transcends mortality. The question has always been, “What is that something?” That something was an ideal. In a literal sense this paper does not summarize Soros but rather seeks to summarize the idea of Soros. Possession of the ultimate truth is beyond human epistemological grasp. (Seeking the ultimate truth is Index sui et falsi). Championing the cause of Bertrand Russell's Principia Mathematica, with phalanxes of neo-conservatives on both sides, Bush with such bravery, eloquence and gallantry, gave the famous either/or speech, revoked the Kyoto agreement, withdrew from the Anti-Ballistic Missile Treaty and rejected the World Criminal court. His resolve was unshaken. To succeed by alchemy were Russell had failed. (Russell had tried to banish self referential and recursive statements from the human scientific language, hoping in to rid humanity of all paradoxes, mutatis mutandnis uncertainty). Soros publicly rejected such an ideology. He went so far as to state publicly, “Not only will I say that Bush's policies may be wrong, but I will go further and say they have to be wrong because they are based on a false ideology” The idea of binary thought, either/or, good/bad, Dionysian/Apollonian, imagination/rigor, black/white, strong/weak, kindness/ruthlessness has been pathological to the human race leaving a wake of figure eights and us chasing our own tail. Lets begin with a simple metaphor from Watzlawick's change: Consider the additive function **F(x) = a - a + a - a + a - a + a - a + a... ad infinitum Outline (1) F(x)

= =

a - a + a - a + a - a + a - a + a - a + a - a + a... (a - a) + (a – a) + (a - a) + (a – a) + (a – a)… (Addition is complementary)

=

0

Outline (2) F(x) = = = 2 F(x) = F(x) =

a – a + a – a + a – a + a – a + a – a + a... a – {a – a + a – a + a – a + a – a + a – a...} (What is in the Brackets is the function F(x)) a – {F(x)} a a/2

A mathematical paradox! This can't be! How can our Function return two different values 0 and a/2. When by deductive logic we arrive at such ends only two alternatives can liberate us from such a straitjacket. Our ontology places our epistemology in the wrong. Drawing outlines is what got us into this mess to begin with (those brackets). A gestalt view liberates us. Half the world swears on outline (1) while the other on outline (2). How right Blake was when he said: Madmen see outlines and draw them, Wise men see outlines and therefore draw them.

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Principia Mathematica failed because the tenet of all human relations are based on the creation of paradoxes. The geniality of Russell's work however was the idea born of Logical Types. This was further expanded on by Gregory Bateson and has come to explain the pattern that connects the jester, the Sage and the Artist **** (See Arthur Koestler's monumental work and Masterpiece 'The Act of Creation”.). This is a very important point for the “pattern that connects” is the meta level of learning that Soros has attained. Koestler referred to it as a Bisociative mind: The arrival at an idea from two consistent yet contradictory frames of reference. One could speak of a dual plane as opposed to a single plane of thought. Bateson called this deutero learning (Learning to learn – See Steps to An Ecology of Mind).

The Jester: Why do you laugh when in all seriousness? Mike Myers states: “They say money makes the world go around, (pause) but it is actually the sun's gravitational pull” Cedric the Entertainer: “When you see my show you are going to laugh so hard your pants will fall off. And when they do, send them to me” In each case there is a mixture of logical types. Type “1” is a figure of speech . “I laughed my pants off”. We recognize this and there is nothing funny about it. However before we have room to breath Type II “And when they do, send them to me” puts Type I's ontology in the wrong evoking laughter. The Sun's gravitational pull relates to actual physics and serious calculations. The phrase “Money makes the world go around” on the other hand deals simply with a figure of speech. We laugh as Mike Myers juxtaposes the two. Other examples include those cited by Koestler of the Husband who on coming home finds his wife in bed with a catholic priest. He picks up an ash tray and proceeds to the Window. Opens it and begins doing benediction. In puzzlement the wife inquires what he is doing. “I see the Priest is fulfilling my function so I am doing his”. In each case “Laughter” is the pattern that connects. It is a higher logical type – Deutero learning (Till now only known to be possessed by humans). Without a gestalt meta view of both logical types, laughter is impossible.

The Artist: Van Gogh: Why does Van Gogh's most famous painting “Starry Night” to which a song “Starry, Starry Night” by Don McLean was written evoke such an emotional responses from us? In all his paintings he never used abstract concepts or painted out of Memory. On this occasion however he was locked up in an asylum in Saint-Remy, his behavior was erratic and the whole painting done out of Memory. He consequently strikes us on two planes. He poured his sorrow in a painting as he was no longer allowed to observe the natural world and at the same time the beauty of the world as he remembered it from a platonic view. He might have been mad but the emotive impact is beyond words. Escher: Escher once stated that anyone who applies himself from his early youth, to the practice of graphic techniques may well reach a stage at which he begins to hold as his highest ideal the complete mastery of his craft.

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A meta level was attained when Escher discovered that technical mastery was no longer his sole aim. Ideas and notions came into his head, quite unrelated from graphic art. These notions fascinated him. Previously he would pick from a pile of sketches one which appeared to him suitable for reproduction by means of some technique that was interesting to him at the time. However later in life a reflexive form set in. It was from amongst the techniques he had mastered that he choose the one which lent itself more than any other to the expression of the particular idea that had taken hold of his mind. Escher's brilliance was this two way feedback (reflexivity per excellence. It was at this stage that he began drawing the two hands, rising waterfalls, pictures that to the mind defied reason and yet were observable forms of view.

The Sage To avoid drifting too far off topic, I will use this example to clarify Meta levels of learning. Babies have the smallest vocabulary. By Rote learning parents struggle to get their babies to say “Papa” and “Mama”. His vocabulary can be easily counted. As the child grows the parent points to different objects and repeats them. The child's vocabulary grows very slowly to say 12 to 14 words. We call this zero learning. All of a sudden the child (on his own) makes his biggest discovery. That every single artifact in the world has a name (Meta Level of Learning – Learning to Learn). He goes on a rampage as he demands to know every single name of every object in the outside world. If he can't figure one out he is so adventurous and proceeds to make one up. His vocabulary learning curve jumps discontinuously to 100, 150 and proceeds on an exponential growth thereafter to over 1000 within the next six weeks. A clear discontinuity in learning occurs here. It goes from rote or zero learning to some higher form of consciousness. (Eureka). Such was what Einstein meant when he said we can't seek to solve the problems of today with the same level of thinking that got us into them in the first place. To the layman names such as Ashby, Norbert Weiner, Gregory Bateson, Heinz Von Forester, Warren S. McCulloch will not mean much, but these were among the greatest thinkers that have walked this earth in the 1900's. It became obvious to them to paraphrase Von Neumann that someone needed to provide a fiction for behavioral sciences that would work like the elegant fiction upon which physics was built, its Newtonian particle. The fictional particle invented for social sciences was the “recursive loop” (emanating recursive networks with feedback structures) and the idea of Cybernetics was born. A short crash course in cybernetic thought would be as such. Scientific thought stems from two beginnings. The paradigm diverges from nascent cybernetic thought in that the former stays on a single plane. It proceeds to address the two beginnings (heuristics) as diametrically opposites and by a stochastic process struggles to make “the right” either/or choice. One heuristic has to be right and the other wrong. Cybernetic thought on the other hand struggles to move to a meta-level plane whereby what previously appears as opposites (drawing outlines and creating illusion of alternatives) becomes seen as complementary. In effect the cybernetician frees himself from the straitjacket of an either/or (Diametrically opposites) situation to a gestalt “Monadic” view. He doesn't stop there but proceeds again to find apparent “diametrically opposites” of this new gestalt complementary view (untying himself). Whereupon he seeks another complementary view (gestalt) that binds these new illusion of alternatives. The thought process is never ending moving from Form to process of form back to form, then to process of form etc. A recursive loop. (tantamount to what Douglas Hofstadter called the rising canons in that famous Ricercar fugue).

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“In ruling out the disasters of Reality, Eternity rules out the triumphs as well. It is in meeting the great tests that mankind can most successfully rise to great heights. Out of the danger and restless insecurity comes the force that pushes mankind to newer and loftier conquests. Can you understand that? Can you understand that in averting the pitfalls and miseries that beset man, Eternity prevents men from finding their own bitter and better solutions, the real solutions that come from conquering difficulty, not avoiding it.” ... Isaac Asimov End of Eternity R.G Collingwood said the difference between Art and Entertainment is that Entertainment doesn't require discipline to attend to it in the beginning. We like it instantaneously but it leaves us feeling sort of dead at the end. With the real thing however (Art) it requires us to pay discipline to it at the beginning. We don't like it instantaneously but it leaves us feeling rich and good about ourselves at the end. •

We see this in books: From those written on such mundane topics (literally any book with the title “How to” or An Experts guide ...), are quick and very easy to read. But they leave us with little more than rote learning. Compare these to those such as Steps to an Ecology of Mind by Gregory Bateson, Embodiments of Mind by Warren McCullough or the Alchemy of Finance by Soros. Half way into the book you still can't fathom what the writer is talking about or why you even are wasting time reading it. The Author at times will even give you a hint that you are not crazy. Bateson's famous quote “If you can't understand my writing it wasn't meant for you”. Or Soros in Alchemy. “I wonder if you will even be reading this book had I not been so successful in Markets”. However slowly but surely every time you re-read the book your mind climbs meta-levels of consciousness with various hierarchical levels of understanding. You come away in deep contemplation, feeling good about yourself.

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Take education. Children prefer video games, T.V and Arcades to books. We however bribe them with sweets, chocolates and candy into reading. Stirring them away from quick Entertainment and instant gratification. For Deep down we understand that Education will in the long run leave them feeling rich and good about themselves.

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Relationships: Those almost naked dressed girls one sees running the floors in Vegas. On first sight they drive men to the erogenous zone. Should this pursuit be carried to its very conclusion the gentleman soon tires of the lady, neither enriched nor uplifted. Compare this with the girl one meets on an apparent friendship level. She doesn't drive one instantaneously to the erogenous zone. Over time however we become entranced by her beauty, enraptured by her smile, overwhelmed by her good nature, seeing ourselves in her, that we drop to our knees and ask for her hand in marriage.

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Movies: From the Good Guy/ Bad Guy screen play proceeded by shooting and high speed car chases. The Audience stares at the screen for 1 ½ hours. They are simply in a Pavlovian context. You come out of the movie and rather than feeling fresh, one is tired and exhausted. You can hardly remember what the movie was about. Compare this to movies such as a Beautiful Mind, of Nash chasing Figure 8 moves of human paradox, a schizophrenic, or “The Pianist” of a Polish Jew dancing around death in Nazi occupied Poland, coming to terms with the Orwellian “Ubermensch”. We leave the theater in deep contemplation, feeling rich inside, with our minds seeing glimpses of that elusive learning to learn to learn state. Music: From those quick samplings of previous hits, the one hit wonders, quick melodies that grab the billboard charts, to a particular album titled “Louder than words” composed by Lionel Ritchie. He must have applied himself from his early youth to the practice of music techniques. Dabbling in songs from Reggae, Country, Love, Pop to the plethora of music genders available. Trying with each song to master a certain technique. Each of his song had an underlying “pattern that connects” of him following the causal relation of induction, from data to hypothesis. That is to say, a certain instrument or music style technique intrigued him and after chosen he would then seek ideas or words that best made the arrangement. Reflexivity Capital Group Phone number: +49 30 916 875 73 Fax: +49 30 916 875 87 USA Tel: +1 702 992 0389 Fax: +1 720 269 0153 Internet link: www.Reflexivityfund.com E-mail: [email protected]

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A threshold was reached in Mr. Ritchie's life (What the cause was no one can fathom but him) when he transcended the dichotomy from induction to deduction. Ideas and notions came into his head, quite unrelated from music. Grasping at heuristics and hypothesis drawn from all works of life, he began now by deduction (juxtaposing all the instruments available in his subconscious mind) to best express his ideas. This was reflexivity per excellence!). Transcending the straitjacket of subjectivity, ignoring accolades, temporary recognition, album sales, or what the mundane public demanded, it was tantamount to a rocket that by chance finds itself outside the orbit of the gravitational pull and for a moment floats in zero gravity while looking back at planet earth. Here in this infinitesimal moment Lionel juxtaposed Russell's logical types creating his greatest masterpiece. The titled of the album itself sent a Meta Message (Louder than words – A self referential statement) of what one was to expect. The climax was a Meta-symphony, mixed with melancholy, hope, reason, idiosyncrasies, ideologies of life's forking path all in a masterful piece titled “Climbing”. Chart the volatility on the song and it reveals a very strong correlation with traders during a Market Crash followed by a recovery and then bliss. Interestingly years later I got to see him in concert at the Mirage Hotel & Casino in Las Vegas (Showroom of Siegfried and Roy). He did not play a single song from this masterpiece album nor from his follow up album of “Time”. The Artist for that moment of bliss, treads sacred ground where his ontology has no correlation to his logical epistemology. Upon returning to the subjective world, he wonders why he journeyed to the unknown and seeks to never talk about the strangeness of what he produced, of a period which he can't recreate. Unbeknownst to him he paraphrases Wittgenstein after his Tractatus logico philosophicus: “whereof one cannot speak, one should remain silent”. There were songs of contemplation, written for those who would seek them. Quarendo Invenietis (By Seeking you will discover). Posterity will judge that those songs left whoever found them feeling rich and good about themselves (I revisit the album everytime after a bad day on the Financial Market to gain equanimity of the situation. I recommend it to my fellow traders .) . •

Below are themes, each exposing the flaws of binary thought exposed by reflexivity and showing created paradoxes.

RELEGION: The Christians think they possess the only correct faith. Asked about Muslims they merely tolerate having them around. Ask the Muslims and they will tell you they “know” all Christians are sinners. Take the Jewish and you will hear the orthodox Jewish rabbi tell you theirs is the only true way. They are the chosen ones. Don't forget the “Jehovah's witness” who “KNOW” that at the end of time, they are the only ones going to be saved. Accordingly the Catholics, Protestants, Anglicans, Methodists, Baptists, Jewish, Moslem's are all sinners! What is the pattern that connects the above pathological train of thought! The idea of one being in possession of the “ultimate truth”. That either/or ideology. Elucidate events committed by terrorists. They believe they are martyrs. Upon Dieing the kingdom of heaven is supposedly open to them. They gain a V.I.P pass. What leads one to such insanity. Amazingly on a second level of abstraction they are connected by the same higher laws. “Love for one another, Kindness to one another, etc” The cybernetic definition of an illusion: “When an observer believes his perception perfectly corresponds to reality”. We appear to suffer from such.

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IMMIGRATION: Pim Fortuyn of the Netherlands, Jean Marie Le Pen of France, Ronald Schill “Judge Merciless” of Germany, Austria's Jorg Haider, Belgium's Vlaams Blok and the list goes on learnt one lesson that the rest of the world never quite got from the famous movie “The third man”. ... “In Italy for 30 years under the Borgias they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland they had brotherly love, they had 500 years of democracy and peace, and what did that produce? The cuckoo clock”... That speech was not quite right. Switzerland showed also by closing its borders and preventing immigration in relation to the rest of the world its citizens could enjoy a much higher standard of living equitable to paradise. The average swiss citizen considers himself a humanitarian, a liberal and will swear to the motto “Die Würde des Menschen ist unantastbar.” Yet after donating SF 500 to some cause in Bosnia, Somalia etc he or she will be the first to rally behind the likes of the above named groups. Pim Fortuyn of the Netherlands had a huge following for his anti immigration policies. Likewise does Jean Marie Le Pen of France, Jorg Haider of Austria, “Judge Merciless” of Germany etc The common slogans for their cause is “imported unemployment”, “imported crime”. These words take on meanings of their own. They cease to be relations and become tangible objects.

HEAVEN / HELL The idea of heaven someplace in the sky and Hell some place down below, filled with heat of inexhaustible proportions is an extension of the either/or distinction. Yet if one were to show you the life led by a crowned prince, or a member of the Forbes richest list in relation to that of a third world country's starving kid, or one suppressed by religious beliefs, tortured for his political ideologies you end up with a different view that heaven and hell exists on earth Take the life of the average person living in the first world. “Obesity” (The sickness attributed to accumulation of excessive fat from good living) has become a serious problem in the developed world. Gyms and fitness studios, sport equipment makers charge as much as $5000 USD for treadmill exercise equipment. One recognizes another as unhealthy if they have gained weight. On the other side of the globe, a place considered by many as primitive (The Third world Countries), a person is considered healthy based on their weight and size. Fat people are not “obese” but very healthy. They have the money to buy food. Numerous images flash across First world country T.V Screens (Germany, UK, USA, Canada) of pictures from children dying of starvation in Ethiopia, Somalia and large parts of Africa. But the world moves on. The average amount donated to third world countries. The US Department of Defense has estimated the U.S Military spending for 2004 at about 390 Billion Dollars, rising to projected 400 Billion Dollars in 2005. Compare this with the maximum (after much congressional debate) of 5 Billion USD being given to third world countries to alleviate poverty.

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FINANCE Before Soros the Financial Market as known today consisted of two camps. The Technicians and the Fundamentalists. The technicians dwelt on past prices and patterns as predictive of future market performances. Books exist such as the bible of Market patterns. Technicians swear by their methods: There is a right way of drawing a support line (you only connect bottoms for a rally and tops for a decline line) and a wrong way. The Fundamentalists believe all that is mambo jumbo. You have to search for facts. To quote Bernard Baruch's definition of a speculator “A speculator is like a surgeon, he must learn to cut through a mass of complex and contradictory details until he gets the significant facts. Then he must learn to act coldly, wisely and skillfully based on the facts before him”. The facts and fundamentalists are independent on how one draws outlines.There is a reality out there independent of how they view it and they can be in possession of it. The pathology inherent in both frameworks is the thought process of induction. Market participants were trained to think by induction from data to hypothesis. Along comes a Hungarian Jewish immigrant, seeking patterns that connect with a radical form of thought process. A heretic as many thought him. He proceeds by deduction taking his ideas from the laws of philosophy and of nature. (Bateson by the way used a similar process). This distinction allows him to use Financial hermeneutics and apply philosophical concepts to them. He is not the only one who uses Financial hermeneutics, others include Henry Kaufmann (On money and Markets). Soros however was the first to bridge the gap articulating his ideas in that monumental masterpiece (Alchemy of Finance). Consider the Paradox problem with Brazil's Financial crisis a few years ago. The Equity Markets (Bovespa) was plunging, and long term Bond yields were more than 20 percent. The best the single plane thinker would do was seek Funds from the IMF. The question on every ones mind was how much was required to slow down or stop this vicious cycle. The illusion of alternatives was either default or get more money from the IMF. As the situation unfolded I remember how struck in awe I was when Soros with a meta-level of thought process explained the pattern-that-connects as a Confidence issue. He suggested having the Federal reserve, The ECB and BOE open a discount window to Brazilian debt. With a lender of last resort available interest rates would drop drastically and make the country solvent. A sealing would be placed on how high rates can go. Take the Paradox of whether Markets are efficient or inefficient. This to many market participants is an either/or proposal. But from the SFI (Santa Fe Institute) in the studies of complexity, “Asset Pricing Under Endogenous Expectations in an Artificial Stock market” a paper by W. Brian Arthur, John H. Holland (Author of Hidden order), Blake LeBaron, Richard Palmer and Paul Tayler that appeared in the Second edition of the Book “The Economy as an Evolving Complex System II” the pattern that connects this apparent either/or (efficient/inefficient) was found. Amazingly none other than Soros was quoted as a basis for their experiment. For the Full experiment in PostScript (Worth the read for every Financial Market participant) visit: http://www.santafe.edu/sfi/publications/Working-Papers/96-12-093.ps To paraphrase the conclusion: “Standard theory tends to see markets as efficient, with no rationale for herd effects, and no possibility of systematic speculative profit, whereas traders tend to view the market as exhibiting a “psychology”, bandwagon effects, and opportunities for speculative profit. They showed without behavioral assumptions that both views are correct. Under a low enough rate of exploration of alternative forecasts, the market settles into simple regime which corresponds to the rational-expectations equilibrium of the efficient market literature. Under a more realistic rate of exploration of alternative forecasts, the market self-organizes into a complex regime in which rich psychological behavior emerges. Technical trading appears, as do temporary bubbles and crashes.”

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Based on the volatility of today’s financial markets we are safe to assume the rate of exploration (For working hypothesis) is a lost higher and consequently the distribution curve is skewed towards inefficient markets. What is important is this experiment that is “the pattern that connects” doesn't discard the efficient market hypothesis but rather shows its complementary to inefficient markets based on the rate at which agents use and discard heuristics in trying to predict a reality in which they by participation create. (Soros reflexivity theory). Soros's reflexivity theory is a special case of Cybernetics applied to Financial Markets. Staying in Financial Markets, Soros idea of Regan's imperial circle became an orthodox concept among market participants. The Idea of Speculative Capital flows, interest rates and budget deficits interconnected in a recursive loop. Those famous formula's made famous in his real time experiment have become a standard in the Hedge Fund industry. Till date everyone agreed the Breton wood's accord ended in 1971. The bulk of market participants predicted the dollar demise with several books on the dollar crisis in stores. The pattern that connects reappears again in the working paper by Michael P. Dooley, David Folkerts-Landau and Peter Garber titled “The Revived Bretton Wood's System: The Effects of Periphery Intervention and Reserve Management on Interest Rates & Exchange Rates in Center Countries. 2004” http://papers.nber.org/papers/w10332 It explains the system based on Functionality rather than causal relations. Explaining the functionality of centerperiphery and it's framework as a shifted Breton woods systems will take me way of course. Needless to mention the idea of a story “Pattern that connects” is what separates such valid hypothesis from those that seek to rid themselves of the “apparent” opposite of what should be a complementary view. Proceeding into various works of human relations, elucidating what at first view appears as diametrically opposites but on further elucidation emerge as parts of a complementary higher order could have me writing ad infinitum, from problems on global poverty, commodity curse, the growth illusion, terrorism, religion, the paradox of free will etc. It is very hard to speak on Financial Markets as a participant without releasing information such as charts and

specific positions . Free Will (Freedom) / Destiny This is best elucidated with a two box experiment. It consists of taking two boxes before an audience. An omnipotence being who can predict your moves explains the game to you. In one box..

The above are all Excepts from my upcoming book “On Life & Financial Markets” Andrew Shawn Reflexivity Capital Group

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