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George Soros
by Michael Miller
Early Life
Our story begins in eastern Europe…
•
He was born György Schwartz on August 12, 1930 in Budapest, Hungary.
•
His father (Teodoro Schwartz, 1894 – 1968) was a Hungarian doctor, lawyer, author and editor. – – – – –
•
Fought in World War I Escaped from a Siberian Prison Camp. Edited a newspaper called “The Plank” Taught his son about “street smarts”. Was very gregarious.
His mother ( -1989) – Was a home maker. – Was very introspective.
•
His older brother (Paul Schwartz, 1926 - ) – Used to beat him up a lot (this taught György about injustice).
• In March 1944 the Germans occupied Hungary. was almost 14.
György
• Using his experience from the Russian Revolution, his father obtained false identity papers for the family, and found places for them to live (or hide). • In addition to saving his immediate family, his father saved other families as well during this time. • “George” learned the “art of survival” during this period. • Eventually the Russians expelled the Germans. • In 1947, at the age of 17, George went to England.
• Upon arrival in England, George worked various jobs. • Matriculated at the London School of Economics. • While ing himself, he finished the three year curriculum in two years. • In his third year, he did an independent study project under the renowned philosopher Karl Popper. George was greatly influenced by Popper’s ideas.
• Through reading Popper’s book, Open Society and it’s Enemies, George learned the difference between “Closed” and “Open” Societies. • Open Societies tended to be Democratic, whereas Closed socities were often Communist or Fascist.
• He was also influenced by the writings of Frederick Hayek, Alfred North Whitehead, and other great thinkers.
• In 1956 George immigrated to the United States. • He worked various jobs in numerous financial institutions for a number of years.
Philosopher
•
George wrote “The Burden of Consciousness”, an essay, in 1961. He was dissatisfied with it as he concluded it was mostly Popper’s ideas.
•
Karl Popper’s Philosophy of Science stated that our understanding of the world is imperfect. This became a central theme in Soros’ philosophy.
•
Soros adds that “this is because we are part of the world we are trying to understand. And we participate in making the world what it is.”
•
As a student of economics he found it ironic that classical economic theory assumed perfect knowledge (or at least perfect information) of the market participants.
• George concluded that classical economic theory was based on false premises.
• He wanted to find a way to combine economic theory with imperfect understanding.
• Starting with Popper’s model of Analytical Science…
Popper’s Model of Analytical Science Three Kinds of Statements:
Initial Conditions
Final Conditions
(Timeless) Generalizations (aka, Theories)
Popper’s Model of Analytical Science
Initial Conditions
+
Generalization
=
Prediction
Final Conditions
+
Generalization
=
Explanation
Initial Conditions
+
Final Conditions
=
Test
In Popper’s view the scientific method relies on testing. Only theories that can be tested are scientific.
Popper’s Model of Analytical Science Does
Test
confirm
Generalization
?
• In Popper’s model, we simply have to ask, does the test confirm the Generalization. • However, the assumption here is that the universe is deterministic. Each time you perform the same test you get the same results. • The world we live in, however, is not deterministic.
Heisenberg Uncertainty Principle
Test
The observer’s actions can influence the tests.
Heisenberg Uncertainty Principle Simplified: The observation of quantum phenomena affects their behavior.[1] • The only way to observe quantum phenomena is to “fire” a wave packet at the particle you’re trying to observe. – To measure location, use a narrow wave packet with high frequency which disturbs the particle’s momentum, so can’t measure direction. – To measure direction, use a wide wave packet with low frequency, in this case the direction will given but location cannot be measured.[2]
Heisenberg Uncertainty Principle
Test
The observer’s actions can influence the tests.
Soros’ Human Uncertainty Principle
Predictions
Test
The observer’s predictions can influence the tests. (similar to a self-fulfilling prophecy.)
Soros’ Human Uncertainty Principle •
“Human understanding is often incoherent and always incomplete.”
•
“People base their actions not on reality but on their view of the world. And the two are not identical.”
•
Therefore, outcomes are liable to diverge from people’s expectations.
•
Events that have thinking participants cannot be understood without taking that divergence into .[3]
•
Moreover, any statements made about reality, automatically influence reality because they influence the observers’ / participants’ thinking about reality.
Soros Theory of Reflexivity
Fact
Fact
Fact
Fact
Fact
“We are accustomed to think of events as a sequence of facts, one set of facts follows another in a never ending chain..” [1]
Soros Theory of Reflexivity
Fact
Fact
Fact
“When a situation has thinking participants, the chain does not lead directly from fact to fact. It links a fact to the participants’ thinking, … and then to the next set of facts.”[1] “People possess both a Cognitive (thinking) function, and a participatory function with respect to the world.”[3]
Soros Theory of Reflexivity
a&b
a&d
a&r
j
r&y
“Instead of correspondence, there is almost always a discrepancy between the participants’ perceptions and the actual state of affairs.”[1]
Soros Theory of Reflexivity
a&b
a&d
a&r
j
r&y
“And a divergence between the participant’s [predictions] and the actual outcomes.”[1]
Soros Theory of Reflexivity
a&b
a&d b
z&r
a&r
j
r&y
h&y
f&r
“Participants’ cannot confine their thinking to facts. They must take into the thinking of [other] participants, including themselves.”[1]
Soros Theory of Reflexivity
a&b
a&d b
z&r
a&r
j
r&y
h&y
f&r
“That introduces an element of uncertainty in a sense that the participants’ thinking does not correspond to the facts -- yet it plays a role in shaping the facts.”[1]
Soros Theory of Reflexivity
a&b
a&d b
z&r
a&r
j
r&y
h&y
f&r
“In [Soros’] view, the divergences are [because of] our imperfect understanding”[1]
Soros Theory of Reflexivity “The prevailing wisdom is that financial markets are in equilibrium (i.e., balance) There are divergences … but … they tend to be corrected by … random events. This view is based on a false analogy with Newtonian Physics.”[1]
According to Soros, “Financial markets are [actually] characterized by the discrepancy between the participants’ perceptions and the actual state of affairs.” [1]
Soros Theory of Reflexivity
Thinking Reality
Near Equilibrium Conditions “In the normal situation the discrepancy between thinking and reality is not very large and there are forces at play that tend to bring them closer together, partly because people can learn from experience, and partly because people can change and shape social conditions according to their desires.”[1]
Soros Theory of Reflexivity Thinking
Reality
Far-from-Equilibrium Conditions “When peoples’ thinking and the actual state of affairs are very far removed from each other, and have no tendency to come closer together.” [1]
Soros Theory of Reflexivity
Thinking Reality
Far-from-Equilibrium Conditions Dynamic Disequilibrium “When thinking and reality reinforce each other to diverge until the gap between them becomes so wide it brings a catastrophic collapse.”[1]
Soros Theory of Reflexivity Thinking
Reality
Far-from-Equilibrium Conditions Static Disequilibrium “Characterized by rigid, dogmatic thinking and rigid social conditions; neither of which change so that dogma and reality remain very far apart. When reality changes, the dogma doesn’t change, and thinking and reality drift even further apart.”[1]
Soros Theory of Reflexivity Inflection point
Thinking Reality
•Reflexivity occurs when near-equilibrium conditions become farfrom-equilibrium conditions. •When the discrepancies start out as minor then become major through an initially self-reinforcing then eventually self-defeating spiral.
Soros Theory of Reflexivity
•“The divergence between the participants’ intentions and actual outcomes …is key to understanding historical processes in general, and the dynamics of financial markets in particular.”[1] •“[Ultimately] Peoples’ thinking shapes reality.”[3]
Soros’ Human Uncertainty Principle
Predictions
Test
The observer’s predictions can influence the tests. (similar to a self-fulfilling prophecy.)
Speculat or
• Started an offshore hedge fund, “The Soros Fund”, in 1973. • It was later renamed to “The Quantum Fund”. • Hired Jim Rogers as his first Analyst. – Later became an expert Currency Speculator in his own right.
• Investment Style: Global Macroeconomic
Investment Method: • Create a Generalization about Financial Events. Generalization
Generalization
Generalization
Generalization
Generalization
Generalization
Investment Method: • Monitor world events for facts.
Fact
Fact
Fact
Investment Method: • When facts relate to a Generalization, then make a specific prediction about those facts.
Generalization
=
+
Fact
Generalization
Generalization
Prediction
Fact
Fact
Investment Method: • Establish a small “bet” to test the prediction.
Prediction
Fact
Test: $1
Fact
Fact
Investment Method: • If the final conditions satisfy the prediction, then increase the “bet”.
Test: $1
Fact
Test: $10,000
Fact
Fact
Investment InvestmentMethod: Method: • • If the final conditions do not satisfy the prediction, then If the final conditions do not satisfy the prediction, then STOP. STOP.
Test: $1
Fact
Fact
Fact
Application of the Investment Method: • In late 1980’s German Mark was the Anchor for the European Exchange Rate Mechanism (ERM). • The British Pound Sterling was part of the ERM, along with the Italian Lira, and other currencies. • Europe was going through a recession in late 1980’s. • Reunification of in 1989. • Soros established a prediction about German interest rates and their impact on currencies in the ERM. • raised interest rates causing currencies within the ERM to fall. • Soros took advantage and bet that Sterling would fall. • It did.
Philanthro pist
In 1979 he Started a fund to to provide scholarships to Black Students at the University of Cape Town in South Africa. Then established a fund to help culture and education in Hungary, hoping that his organization could transform Hungary into an “Open Society”. His efforts then extended to Poland and Romania. Now the Open Society Institute operates in Africa, Asia, the Americas, and Europe. More information at www.Soros.org.
Publications • • • • • • • • •
The Age of Fallibility (2006) The Bubble of American Supremacy (2005) George Soros on Globalization (2002) Open Society: Reforming Global Capitalism (2000) The Crisis of Global Capitalism: Open Society Endangered (1998) Soros on Soros: Staying Ahead of the Curve (1995) Underwriting Democracy (1991) Opening the Soviet System (1990) The Alchemy of Finance (1987)
by Michael Miller
Early Life
Our story begins in eastern Europe…
•
He was born György Schwartz on August 12, 1930 in Budapest, Hungary.
•
His father (Teodoro Schwartz, 1894 – 1968) was a Hungarian doctor, lawyer, author and editor. – – – – –
•
Fought in World War I Escaped from a Siberian Prison Camp. Edited a newspaper called “The Plank” Taught his son about “street smarts”. Was very gregarious.
His mother ( -1989) – Was a home maker. – Was very introspective.
•
His older brother (Paul Schwartz, 1926 - ) – Used to beat him up a lot (this taught György about injustice).
• In March 1944 the Germans occupied Hungary. was almost 14.
György
• Using his experience from the Russian Revolution, his father obtained false identity papers for the family, and found places for them to live (or hide). • In addition to saving his immediate family, his father saved other families as well during this time. • “George” learned the “art of survival” during this period. • Eventually the Russians expelled the Germans. • In 1947, at the age of 17, George went to England.
• Upon arrival in England, George worked various jobs. • Matriculated at the London School of Economics. • While ing himself, he finished the three year curriculum in two years. • In his third year, he did an independent study project under the renowned philosopher Karl Popper. George was greatly influenced by Popper’s ideas.
• Through reading Popper’s book, Open Society and it’s Enemies, George learned the difference between “Closed” and “Open” Societies. • Open Societies tended to be Democratic, whereas Closed socities were often Communist or Fascist.
• He was also influenced by the writings of Frederick Hayek, Alfred North Whitehead, and other great thinkers.
• In 1956 George immigrated to the United States. • He worked various jobs in numerous financial institutions for a number of years.
Philosopher
•
George wrote “The Burden of Consciousness”, an essay, in 1961. He was dissatisfied with it as he concluded it was mostly Popper’s ideas.
•
Karl Popper’s Philosophy of Science stated that our understanding of the world is imperfect. This became a central theme in Soros’ philosophy.
•
Soros adds that “this is because we are part of the world we are trying to understand. And we participate in making the world what it is.”
•
As a student of economics he found it ironic that classical economic theory assumed perfect knowledge (or at least perfect information) of the market participants.
• George concluded that classical economic theory was based on false premises.
• He wanted to find a way to combine economic theory with imperfect understanding.
• Starting with Popper’s model of Analytical Science…
Popper’s Model of Analytical Science Three Kinds of Statements:
Initial Conditions
Final Conditions
(Timeless) Generalizations (aka, Theories)
Popper’s Model of Analytical Science
Initial Conditions
+
Generalization
=
Prediction
Final Conditions
+
Generalization
=
Explanation
Initial Conditions
+
Final Conditions
=
Test
In Popper’s view the scientific method relies on testing. Only theories that can be tested are scientific.
Popper’s Model of Analytical Science Does
Test
confirm
Generalization
?
• In Popper’s model, we simply have to ask, does the test confirm the Generalization. • However, the assumption here is that the universe is deterministic. Each time you perform the same test you get the same results. • The world we live in, however, is not deterministic.
Heisenberg Uncertainty Principle
Test
The observer’s actions can influence the tests.
Heisenberg Uncertainty Principle Simplified: The observation of quantum phenomena affects their behavior.[1] • The only way to observe quantum phenomena is to “fire” a wave packet at the particle you’re trying to observe. – To measure location, use a narrow wave packet with high frequency which disturbs the particle’s momentum, so can’t measure direction. – To measure direction, use a wide wave packet with low frequency, in this case the direction will given but location cannot be measured.[2]
Heisenberg Uncertainty Principle
Test
The observer’s actions can influence the tests.
Soros’ Human Uncertainty Principle
Predictions
Test
The observer’s predictions can influence the tests. (similar to a self-fulfilling prophecy.)
Soros’ Human Uncertainty Principle •
“Human understanding is often incoherent and always incomplete.”
•
“People base their actions not on reality but on their view of the world. And the two are not identical.”
•
Therefore, outcomes are liable to diverge from people’s expectations.
•
Events that have thinking participants cannot be understood without taking that divergence into .[3]
•
Moreover, any statements made about reality, automatically influence reality because they influence the observers’ / participants’ thinking about reality.
Soros Theory of Reflexivity
Fact
Fact
Fact
Fact
Fact
“We are accustomed to think of events as a sequence of facts, one set of facts follows another in a never ending chain..” [1]
Soros Theory of Reflexivity
Fact
Fact
Fact
“When a situation has thinking participants, the chain does not lead directly from fact to fact. It links a fact to the participants’ thinking, … and then to the next set of facts.”[1] “People possess both a Cognitive (thinking) function, and a participatory function with respect to the world.”[3]
Soros Theory of Reflexivity
a&b
a&d
a&r
j
r&y
“Instead of correspondence, there is almost always a discrepancy between the participants’ perceptions and the actual state of affairs.”[1]
Soros Theory of Reflexivity
a&b
a&d
a&r
j
r&y
“And a divergence between the participant’s [predictions] and the actual outcomes.”[1]
Soros Theory of Reflexivity
a&b
a&d b
z&r
a&r
j
r&y
h&y
f&r
“Participants’ cannot confine their thinking to facts. They must take into the thinking of [other] participants, including themselves.”[1]
Soros Theory of Reflexivity
a&b
a&d b
z&r
a&r
j
r&y
h&y
f&r
“That introduces an element of uncertainty in a sense that the participants’ thinking does not correspond to the facts -- yet it plays a role in shaping the facts.”[1]
Soros Theory of Reflexivity
a&b
a&d b
z&r
a&r
j
r&y
h&y
f&r
“In [Soros’] view, the divergences are [because of] our imperfect understanding”[1]
Soros Theory of Reflexivity “The prevailing wisdom is that financial markets are in equilibrium (i.e., balance) There are divergences … but … they tend to be corrected by … random events. This view is based on a false analogy with Newtonian Physics.”[1]
According to Soros, “Financial markets are [actually] characterized by the discrepancy between the participants’ perceptions and the actual state of affairs.” [1]
Soros Theory of Reflexivity
Thinking Reality
Near Equilibrium Conditions “In the normal situation the discrepancy between thinking and reality is not very large and there are forces at play that tend to bring them closer together, partly because people can learn from experience, and partly because people can change and shape social conditions according to their desires.”[1]
Soros Theory of Reflexivity Thinking
Reality
Far-from-Equilibrium Conditions “When peoples’ thinking and the actual state of affairs are very far removed from each other, and have no tendency to come closer together.” [1]
Soros Theory of Reflexivity
Thinking Reality
Far-from-Equilibrium Conditions Dynamic Disequilibrium “When thinking and reality reinforce each other to diverge until the gap between them becomes so wide it brings a catastrophic collapse.”[1]
Soros Theory of Reflexivity Thinking
Reality
Far-from-Equilibrium Conditions Static Disequilibrium “Characterized by rigid, dogmatic thinking and rigid social conditions; neither of which change so that dogma and reality remain very far apart. When reality changes, the dogma doesn’t change, and thinking and reality drift even further apart.”[1]
Soros Theory of Reflexivity Inflection point
Thinking Reality
•Reflexivity occurs when near-equilibrium conditions become farfrom-equilibrium conditions. •When the discrepancies start out as minor then become major through an initially self-reinforcing then eventually self-defeating spiral.
Soros Theory of Reflexivity
•“The divergence between the participants’ intentions and actual outcomes …is key to understanding historical processes in general, and the dynamics of financial markets in particular.”[1] •“[Ultimately] Peoples’ thinking shapes reality.”[3]
Soros’ Human Uncertainty Principle
Predictions
Test
The observer’s predictions can influence the tests. (similar to a self-fulfilling prophecy.)
Speculat or
• Started an offshore hedge fund, “The Soros Fund”, in 1973. • It was later renamed to “The Quantum Fund”. • Hired Jim Rogers as his first Analyst. – Later became an expert Currency Speculator in his own right.
• Investment Style: Global Macroeconomic
Investment Method: • Create a Generalization about Financial Events. Generalization
Generalization
Generalization
Generalization
Generalization
Generalization
Investment Method: • Monitor world events for facts.
Fact
Fact
Fact
Investment Method: • When facts relate to a Generalization, then make a specific prediction about those facts.
Generalization
=
+
Fact
Generalization
Generalization
Prediction
Fact
Fact
Investment Method: • Establish a small “bet” to test the prediction.
Prediction
Fact
Test: $1
Fact
Fact
Investment Method: • If the final conditions satisfy the prediction, then increase the “bet”.
Test: $1
Fact
Test: $10,000
Fact
Fact
Investment InvestmentMethod: Method: • • If the final conditions do not satisfy the prediction, then If the final conditions do not satisfy the prediction, then STOP. STOP.
Test: $1
Fact
Fact
Fact
Application of the Investment Method: • In late 1980’s German Mark was the Anchor for the European Exchange Rate Mechanism (ERM). • The British Pound Sterling was part of the ERM, along with the Italian Lira, and other currencies. • Europe was going through a recession in late 1980’s. • Reunification of in 1989. • Soros established a prediction about German interest rates and their impact on currencies in the ERM. • raised interest rates causing currencies within the ERM to fall. • Soros took advantage and bet that Sterling would fall. • It did.
Philanthro pist
In 1979 he Started a fund to to provide scholarships to Black Students at the University of Cape Town in South Africa. Then established a fund to help culture and education in Hungary, hoping that his organization could transform Hungary into an “Open Society”. His efforts then extended to Poland and Romania. Now the Open Society Institute operates in Africa, Asia, the Americas, and Europe. More information at www.Soros.org.
Publications • • • • • • • • •
The Age of Fallibility (2006) The Bubble of American Supremacy (2005) George Soros on Globalization (2002) Open Society: Reforming Global Capitalism (2000) The Crisis of Global Capitalism: Open Society Endangered (1998) Soros on Soros: Staying Ahead of the Curve (1995) Underwriting Democracy (1991) Opening the Soviet System (1990) The Alchemy of Finance (1987)
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