Reflexivity and Narratives

By Greg Fisher

When someone mentioned to me a couple of months ago that the US launch of Prof. David Tuckett’s book Minding the Markets was held in George Soros’ own house, this seemed to make eminent sense to me.  Recently I began to reflect on why I reacted that way and it centres on the relationship between reflexivity and narratives, which I’d like to explore in this blog.

Reflexivity is a profoundly important concept for people studying social systems.  Anybody interested in how society works, especially those studying economics, should wrap their head around it.  I came at it from two directions – first through my reading of complex systems and the nature of human interaction; and second because I have worked in finance for most of my career, including 9 years at the Bank of England and 3 years in a hedge fund.  Dr. Soros, a world-renowned investment manager, has gone to great lengths to emphasise reflexivity in his writings about economics and finance.  For those not familiar with reflexivity, I will flesh it out here before relating it to narratives.

George Soros

In his book The Credit Crisis of 2008 and What it Means, Dr. Soros wrote

“The role that intentions and expectations about the future play in social situations sets up a two-way connection between the participants’ thinking and the situation in which they participate, which has a deleterious effect on both: it introduces an element of contingency or uncertainty into the course of events, and it prevents the participants’ views from qualifying as knowledge.”

In simpler terms, suppose you and I are engaged in some interaction, say a game of some sort, in which my decisions are contingent on yours.  And vice versa.  In most types of game it will be impossible for me to determine – or calculate – the optimal thing to do because any plausible expectations of mine concerning your actions are contingent on your expectations of my actions, which are in turn contingent on your expectation of my actions, which are contingent on my expectations of your actions, etc. etc. etc.  Wikipedia refers to reflexivity as “bidirectional with both the cause and the effect affecting one another in a situation that does not render both functions causes and effects.”  Think of two mirrors positioned exactly opposite each other.  For those more mathematically minded, you might think of a set of simultaneous equations which have more dependent than independent variables.

The important implication of reflexivity is that the formation of expectations concerning – and the outcome of – human interaction are inherently indeterminable.  And in this context of determinism, it is worth noting that reflexivity is yet another source of inherent uncertainty in the world around us.  Quantum uncertainty and emergence are also sources of uncertainty.

Clearly reflexivity is relevant whenever there are at least two people whose actions and expectations are contingent on others.  It is true of people playing a game, operating in an economy and it is true of people in financial markets.  As Dr. Soros has emphasised for many years, orthodox finance, which is built around deterministic models, is flawed in part because of reflexivity in human systems.

If reflexivity is so important in social systems one might ask why it is not emphasised more in theories concerning social systems, including in economics and finance.  Why indeed.  Dr. Soros posits that “reflexivity prevents economists from producing theories that would explain and predict the behaviour of financial markets in the same way that natural scientists can explain and predict natural phenomena.” (ibid).  I would agree and add that traditional economists orientate themselves this way because they base their thinking around reductionism, to understand what is in fact a complex system.  This is an oxymoron: reductionism gives economists permission to use Newtonian mechanics and in so doing they make a framing error.

Moreover, ignoring reflexivity is another example of what I call the Law of Ostriches, which I define as when a comforting yet inaccurate narrative is believed ahead of an awkward truth.  In designing theories, tractability is highly desirable whereas reflexivity is precisely the opposite of this – it is an “awkward truth”.

If this is true, how on earth do we make sense of things like the world of finance?  After all, market prices do exist – presumably they are “determined” somehow?  So perhaps reality is not as indeterminable as reflexivity would have us believe?  Well, instead of pontificating about insolvable simultaneous equations, why don’t we go and study how human cognition and psychology actually work.  Fortunately we have a literature built up over years in the field of psychology and, more recently, Prof. Tuckett conducted some related research in the financial system, which informed his book Minding the Markets.

David Tuckett, Author of "Minding the Markets".

In his book, Prof. Tuckett developed a framework, based on concepts from the field of psychoanalysis, that suggested investment managers made sense of the present and the potential future through narratives.  An example of such a narrative would be “Greece has a history of fiscal mis-management, it is in the process of defaulting and will take the European financial system with it” – note how the past, and future are combined in a coherent “whole”.  In today’s world of finance, there is too much information for any one individual to process; and, within constantly evolving systems, there are a large number of plausible future scenarios at any moment in time because we live in an indeterminable, reflexive world.  Again, these points stand in contrast to conventional thinking in which one future scenario is expected to transpire, which ought to be identifiable with enough information.

I believe very strongly, in light of my experience in the financial system and given my study of complex systems, that narratives play an important role in “solving” the reflexivity problem.  Of course, the idea of “solving” reflexivity is another oxymoron because it tells us that human systems are indeterminable.  But you know what I mean.  It is perhaps preferable to say that narratives narrow down the range of expected future scenarios.  For those wanting to dig further in to how narratives and complex social systems combine, I explored this in a separate blog on emergent recessions.

In effect what we do, cognitively, is to negotiate our collective understanding (“the meaning”) of the past, present, and expected future with each other through the medium of narratives.  This (mostly sub-conscious) negotiation can involve multiple forms of interaction, including every day conversation, blogs, chat shows, web pages, conventional media, etc.  And we negotiate over a portfolio of plausible narratives (“the economy is now in the recovery phase”, “the world is about to end”, etc.) rather than just one.  Indeed, I would say that often a consensus narrative emerges, which we might call “public sentiment” (equivalently, in the financial markets we would call this “market sentiment”).

To conclude, it seemed poetic that Dr. Soros hosted Prof. Tuckett’s book launch in his own home.  The concept of narratives sits neatly within the context of reflexivity.  Human cognition and communication have evolved to facilitate the negotiation of meaning and narratives, which makes the problem of reflexivity less intractable.

2 Responses to “Reflexivity and Narratives”

  1. Toby Lindsay says:

    Interesting and stimulating post! Addressing a very significant theme which I agree is not as well represented as it could be.
    I found myself thinking of the role reflexivity or an awareness of this, plays in my internal dialogue – my meaning making when alone and thinking, is often comprised of narratives with imagined others… And I believe this narratives both develop my sense-making and influence me at the same time. Raising awareness of what I am focusing on, how and why is as useful as doing the focusing activity itself….
    Once we progress into dialogue and relations with others and groups the idea of form, meaning and movement emerging from this complexity is, for me, irresistible…

  2. Peter Dick says:


    This (and your post on recessions as collective action problems) are interesting and thought-provoking. It seems to me that narratives do aid sense-making; and are part and parcel of reflexivity – the vehicles through which reflexivity operates?

    However (at least now and again) reality matters; and narratives (perhaps particularly narratives which have come to be shared) can be false – or at least can become no longer operative, no longer able to do the job of sense-making or supporting mutual action in a complex, reflexive world.

    It seems to me that a rich source of insight about the role of narratives might be found in examining those situations when the narrratives stopped working.

    Perhaps there are such cases in the recent history of the financial system !


  3. […] He then suggested that I take a look at his post, Reflexivity and Narratives (available here- ) (Fisher, 2012). Often in the search for objectifying truth to a socially accepted level, we need […]

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