You Better Believe It: The Reflexive Theory of Everything
N.B. A version of this article first appeared on O’Shaughnessy Ventures’ wonderful Infinite Loops Newsletter. Special thanks to Ed William for his superhuman patience and diligent editing.
Babe Ruth batting in Dugdale Park, Seattle | University of Washington, Public domain, via Wikimedia Commons
We can easily represent things as we wish them to be. —Aesop
Here we go again, Perception trumping reality once more. —Dick Fuld
The belief that one’s own view of reality is the only reality is the most dangerous of all delusions. —Paul Watzlawick
Outlined against a blue-gray October sky, Babe Ruth stood tall at Wrigley Field’s home plate.
The stakes were high: it was Game Three of the 1932 World Series.
The count was against him: no balls, two strikes. Worse, the Chicago Cubs were riding him unmercifully from their dugout.
And yet there he stood, silent and determined as he clenched his jaw. Slowly, methodically, he raised his arm and pointed to a tall flagpole rising from the crowded bleachers that occupied deep center field.
It was show time.
As he settled back in the batter’s box, pitcher Charlie Root wound up and hurled a heater Ruth’s way.
The rest, as they say, was history. In Ruth’s telling:
Root threw me a fast ball. If I had let it go, it would have been called a strike. But this was it. I swung from the ground with everything I had and as I hit the ball every muscle in my system, every sense I had, told me that I had never hit a better one, that as long as I lived nothing would ever feel as good as this.
I didn't have to look. But I did. That ball just went on and on and on and hit far up in the centerfield bleachers in exactly the spot I had pointed to.
To me, it was the funniest, proudest moment I had ever had in baseball. I jogged down toward first base, rounded it, looked back at the Cub bench and suddenly got convulsed with laughter.
You should have seen those Cubs. As Combs said later, ‘There they were-all out on the top step and yelling their brains out - and then you connected and they watched it and then fell back as if they were being machine-gunned.’
That home run - the most famous one I ever hit - did us some good. It was worth two runs, and we won that ball game, 7 to 5.
Ruth’s legendary called shot has entered the American sporting canon. Its influence continues to this day where, emulating the Great Bambino, batters at home plates across the world still raise their arms to point before facing a pitch.
But Ruth’s greatest moment carries a lesson that extends well beyond baseball. To understand, we must avert our eyes from the bleachers and gaze instead at the madcap world of financial markets.
Much like Ruth's famous called shot, the concept of reflexivity suggests a potent link between our beliefs and our reality.
Popularized by financier-cum-philosopher-cum-philanthropist George Soros, reflexivity posits that our perceptions do not just reflect the world around us but shape it. He argues that financial markets are not merely passive mirrors of reality but are instead shaped by the perceptions and beliefs of the participants. This creates a feedback loop where initial beliefs influence actions that change outcomes, thus reinforcing or altering the original beliefs.
In Soros’ words, “Stock prices are not merely passive reflections; they are active ingredients in the process in which both stock prices and the fortunes of companies whose stocks are traded are determined.”
The investor Howard Marks goes further, writing: "Security prices are determined by events and how investors react to those events, which is largely a function of how the events stack up against investors’ expectations.”
Much ink has been spilled about the reality - perceived or otherwise - of market reflexivity. Some may see events like the Silicon Valley Bank collapse and Theranos saga as reflexivity in action.
Others may point to the Amazon bestseller list as a self-perpetuating reflexive loop that keeps top books at the top and bottom books at the bottom. Even humble toilet paper can be analyzed through the reflexivity microscope: recall the sudden spike of panic-buying and hoarding during COVID, a wave of activity caused by fears of shortages that led to, you guessed it, actual shortages.
But this theory carries a wider implication. In a behavioral context, reflexivity suggests that our expectations (e.g. Ruth's prematurely triumphant finger) can mold our future outcomes (e.g. the ball sailing into the bleachers).
In other words, across the chaotic variety of our daily lives, a simple but seismic fact holds true: Reality is a lot more malleable than we think.
Take the happy story of the Confident Job Seeker. She believes she is highly qualified and deserving of a job and, therefore, oozes steady confidence during her interview. This wows her interviewer, who proceeds to offer her the job, once again shaping reality in line with her initial belief.
Or, if you prefer non-hypotheticals, upcoming Infinite Loops guest Nir Eyal has a great series of pieces exploring the different ways that research has shown our beliefs can impact our outcomes. For example, did you know that feeling lucky can improve our performance, it may be possible to “think yourself thinner”, and thinking positively about aging may improve your lifespan?
Sounds great, doesn’t it?
But it’s not all sunshine and roses. Sometimes, our beliefs and perceptions can entrap us, instead of liberating us.
For example, the sad tale of the Nervous Public Speaker. He is convinced that the audience will find his topic excruciatingly dull—so convinced, in fact, that the poor fellow proceeds to read his speech as quickly as possible from his notes, stumbling over his words and not once making eye contact. The audience, picking up on his discomfort, disengages, thus confirming his initial belief.
Even positive behaviors and beliefs can become self-defeating. If you’re a creator, you don’t need me to tell you about the scourge of audience capture. No one warns you that when you’re known for being a certain way, the pressure to live up to, reinforce, and further your reputation can become so overwhelming that the mask becomes the face and the theory the practice. We create personal myths and stories about who we are, and these myths gain a life of their own. They shape how others perceive us and how we perceive ourselves. Over time, we begin to conform to these narratives, even when they no longer serve us. The initial belief about who we are becomes a self-fulfilling prophecy, dictating our actions and limiting our potential.
In this way, the celebrated artist becomes shackled by her particular style, and the bold executive tethered to her reputation for decisiveness.
The self-mythology that once empowered them becomes a constraint, a cage in which the fear of shattering the myth outweighs the desire for growth, evolution, or change.
Understanding reflexivity allows us to see that, like Ruth's called shot, we often set the stage for our outcomes through our beliefs and expectations.
The Reflexive Theory of Everything, then, plays on the "first principle" of René Descartes's philosophy. In place of Cogito, ergo sum (I think, therefore I am), I propose Credo, ergo erit (I believe, therefore it will be).
Belief is not just a passive reflection of inner thoughts but a powerful force that actively shapes reality. When we believe in something fervently, our actions and behaviors align with that belief, influencing those around us and creating a ripple effect that transforms our environment. Collective perception and shared beliefs can drive cultural shifts, economic booms, and societal changes.
The world is not just a mirror reflecting our thoughts; it is a canvas painted by our beliefs.
Like gravity, reflexivity is all around us but barely noticed unless we pay it attention. It exerts pressure that brings perception and reality ever closer.
Though the past is analytic, the future is reflexive. I imagine both Dunning and Kruger are beside themselves.
We are all umpires in our personal game of life, calling balls and strikes, deciding what is real and what’s not based on our perceptions. Reflexivity teaches that our understanding of the world is not merely a passive reflection of reality but an active creation. Like Ruth, we must be mindful of the power of our beliefs to shape our actions and, in turn, our reality.
Derek Sivers once wrote: “Since almost nothing is absolutely indisputably true, you should choose beliefs and ideas that are useful to you now — that help you take the right actions.” If you take one thing away from this essay, it’s this. Choose your beliefs wisely.
When this is understood and used well, you can call your shot and send a ball over the left-field wall; however, beware of swinging at pitches that just aren’t there.
Batter up and be careful what you wish for, lest it come true.
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