Theory of Reflexivity

Heuristics aren’t science, but I do find them useful for staying grounded. One heuristic I really like is the Theory of Reflexivity. This is technically an investment concept from George Soros, but I find it works really well for companies and culture.

Now the Theory of Reflexivity is not the same thing as the property of reflexivity, a mathematical concept describing a thing being related to itself. The Theory of Reflexivity, source below, is a dynamic disequilibrium state where a positive feedback loop between what people believe and what is actually happening leads to belief and reality getting further and further away from each other until the distance is so great that there is a moment of climax, after which the same thing starts happening again via a positive feedback loop between belief and reality in the opposite direction.

In simple terms: what people believe shapes the direction of what happens, and then things go so far in that direction that it leads to a moment of collapse, after which what people believe then changes to the opposite of the previous belief and the same thing happens again. And this happens because the world is full of uncertainty, because people have imperfect knowledge, and because saying something is true tends to change what happens.

Here’s an example that may resonate with you: I worked with a company who told me that they made data-driven decisions. They’d decided some time ago that making decisions based on data was central to how they worked. So over time they’d become more and more of what they thought of as data-driven decision-makers… but what I observed, coming in, was that people had fully stopped making decisions. In their minds they were gathering data to drive their decision, but in actual reality they were just constantly gathering data without getting to the decision part. Over time, the company began to fail and eventually the entire leadership team was replaced. I don’t know what their next pendulum swing was, but if I had to guess I’d say it was something about being decisive.

Now Soros doesn’t think you can stop these pendulum swings; they happen and you have to make the best of it. And I have to say, having seen many companies do many things that became more and more irrational and illogical before they changed direction, I tend to agree. So I hope having an understanding of the Theory of Reflexivity helps you, as it’s helped me, better deal with this kind of organizational disconnect from reality. Thanks for listening.

Source: https://www.ft.com/content/0ca06172-bfe9-11de-aed2-00144feab49a