Recently while reading George Soros’ book on the Crash of 2008, he discusses something he calls “Fertile Fallacies” which I found quite interesting. The basic idea is that there is some knowledge that seems very true and early experiments in that information continue to confirm it’s veracity, but eventually the fallacy catches up with you and you end up in a situation worse than you started.
George Soros, regarded as one of the best or luckiest (depending on your point of view) speculative investors, wrote a book trying to codify, in part, his view of the world. He has been trying to be taken seriously as a business philosopher, but has struggled for adoption (see previous parenthetical statement).
Much of his point of view, relies on the fact that we are not able to full comprehend the complex systems around us. Our western thinking wants us to break every complexity into it’s component pieces so that we can study and understand it. This works well in some contexts, but there are many systems that can not be so simply reduced – Macoreconomics being one of them. One of the reasons is that, like the Heisenburg Uncertainty Principle, when we has humans start to understand a system that we are integrally a part of, that understanding fundementally changes the system. Douglas Adams, of Hitchhikers Guide to the Galaxy fame, stated this same concept: If one were to both know the answer to the meaning of life (42) and the question, then everything would suddently changes such that those two facts were no longer true.
Back to the term “Fertile Fallacy”, it is a type of knowledge that creates first a self-reinforcing cycle, and then subsequently a self-defeating cycle. For example, look at the most recent set of mortgage problems: Lenders noticed that real estate prices tend to only go up. Once you make this assumption, it allows you to start offering increasingly risky loans to home buyers, because even if they default, the home will be worth the same or more. Once you decide this as a lender, your knowledge creates a self reinforcing cycle, more home loans equals higher home prices, but eventually the falacy is reached, the end of the ponzie scheme is attained, and the number of buyers in foreclosure starts snowballing – thereby creating a self defeating cycle. Banks don’t want to or can’t lend money to buyers who are willing to pay the current prices, which only causes the prices to slip further, causing the banks not to be able to lend money, etc. Think about this for a second, when banks were coming to the understanding of the real estate market, they DID NOT understand how they affected that market!
Soros points this out as a critique of Perfect Market theory – that we will always strive toward equilibrim. The problem of course is that we are limited and falable, and that when we think we know something, it often ends up creating some success followed by catastrophic failure.
As thought leaders, we simply don’t have all the answers. We strive to make sense of the world around us, but need to know our limitations and not bet the farm on things we think we know for sure, and instead be continually striving for the understanding of our own fallacies.