How's my Luck now?

Reflections, views and descriptions during my stay at IIM Lucknow from July 2004 to March 2006

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Location: India

Monday, December 26, 2005

'Soros on Soros'

I completed the reading of this highly interesting book by famed international investor George Soros (John Wiley & Sons, 1995) today. The book, as Soros says, is a summing up of his life's work. Set in an interview format, the book has three parts: the first part on 'Investing & Global Finance' (with Byron Wien); the second part on 'Geopolitics, Philanthropy and Global Change' (with Krisztina Koenen) ; and the third part on 'Philosophy' (with Byron Wien again). But in this description, I think I will start with the third part first.

Soros comes across as a 'first-rate mind' (as Henry Kissinger has said, on the back cover of the book) when one reads his philosophy - not only his theory itself but also the clarity with which he has expressed it. At a time in life when he had made more money than he could possibly use in his lifetime through investing, he decided to pursue philanthropy by using his excess money for a worthy cause. That worthy cause was that of helping countries of Eastern Europe develop into 'open societies' after the collapse of communism around 1989. Soros unifies these two main fields of his activity - investing & philanthropy - by means of the theory of reflexivity that he developed several years ago (around 1962), after he had studied under the great Karl Popper.

The theory of reflexivity relates to socio-economic fields of activity, as opposed to the pursuit of natural science. According to Soros, and unlike Popper's assertion, theories of natural science cannot and should not be applied to the 'social sciences', including economics. This is because, in socio-economic fields, human beings are thinking participants and not objective observers. Their perceptions influence reality, and in turn, reality influences their perceptions (reflexivity). When this realization is combined with the assumption made by Soros that all human understanding is imperfect (and hence all mental constructs flawed in some way), it means that participants' perceptions and reality can never be identical. However, the gap between thinking and reality tends not to be very large much of the time (near-equilibrium conditions). This is particularly so when participants adhere to some fundamental values or purpose. But occasionally, the gap becomes large (far-from-equilibrium conditions). The latter kind of conditions can in turn be of two types - static disequilibrium (when the thinking is systematically following, or being forced to follow, a dogma while reality is something else); and dynamic disequilibrium (when continuing self-reinforcing biases reach a peak and turn self-defeating).

Using this theory, he explains, in the first part of the book, the boom/bust sequence that is observed in many financial markets. Here, we see Soros' great financial acumen in picking the far-from-equilibrium conditions to speculate and make money. In the second part of the book, we see the same theory being used to justify his advocacy of an 'open society' (where man's imperfect understanding leads him to respect other views and where human beings have genuine alternatives in life), as opposed to 'closed society' (e.g. communism). In this part, we see his superb grasp of international economics, as well as of the politics and socio-economic conditions prevailing in particular European countries after the collapse of communism and the reunification of Germany.

The book gives a detailed look inside a complex mind capable of thinking critically, by his own admission, and in terms of abstractions. Soros' development of the idea of open society and its desirability, benefits and pitfalls is highly readable. Also interesting are: the speech he gave in Berlin in 1993 on how he could predict the breakdown of the European exchange rate mechanism after Germany's reunification and make money on it, and the testimony before a US House of Representatives committee on hedge funds and the inherent instability of financial markets, increased by sophisticated new instruments like derivatives.

I miss mentioning a few important points, but I think I have captured the gist. Although the book may not be that easy to read for a wide audience - the aim of the book - I definitely think it is worth a committed attempt for anyone who wishes to understand the perspective on a changing world and the right attitude towards it, of a man who has been in the thick of change.

2 Comments:

Anonymous Anonymous said...

Must say you also have a "first-rate" mind as soros :). In such a concise review you have brilliantly brought out the essence of the book. When I read this book before I could just make out fuzzily the gist of what soros was trying to say. But after reading your review my mind has also become clear.
-Sam

6:18 AM  
Blogger Tadatmya Vaishnav said...

> Must say you also have a "first-rate" mind as soros :).

So you see Soros is correct...there is a gap between your perception and reality :). But seriously, glad that u benefited from reading the summary (I won't call it a review), in spite of having read the book.

7:49 PM  

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