Appendix B - Reflexive prediction

Appendix B - Reflexive prediction

Appendix B - Reflexive prediction..................................................................................... 1

Early discussions of reflexive prediction........................................................................ 2

Early discussions of reflexive prediction in sociology and the philosophy of science2

Early treatments of reflexivity in the economics literature......................................... 8

Articulating and debating reflexive prediction ............................................................. 14

Seminal contributions in the economics literature in the 1950s ............................... 14

Debating reflexive prediction in the philosophy of science literature ...................... 17

The American Economic Review discussions .......................................................... 23

Developments in the sociological literature in the mid-late twentieth century ........ 28

Rational expectations and reflexive prediction............................................................. 39

References ..................................................................................................................... 43

Copyright © Lauchlan Mackinnon 2003

Ph +61 (0)402 141 131 | Email Lmackinnon@Ozemail.com.au

Early discussions of reflexive prediction

Early discussions of reflexive prediction in sociology and the philosophy of science

Reflexive predictions have been discussed in the social science literature as far back as the nineteenth century. For example, reflexive prediction in the form of “suicidal predictions” have been identified in the contributions of logician John Venn (1866/1962), while some scholars (see for example Merton 1936: 903-904; Roshwald 1955; Grünbaum

1956; Hands 1998: 415) have suggested that reflexivity may be identified in Marx’s contributions to economics and sociology. Hands (1998) certainly seems to take reflexivity in Marx seriously as an example of reflexivity applied to economics.

Grunbaum (1956: 236-237) discusses a conflict between Marx's historical determinism and his pointed efforts to change the dynamics of the class struggle, to be resolved only by asserting that participants in a social system may, deliberately or inadvertently, change that system or its dynamics. Merton (1936: 904) considers the possibly reflexive effect that Marx may have had by identifying the disempowerment of the worker in relation to the capitalist, leading to the formation of collective bargaining and unions thus changing the socio-political landscape he was describing.

Similarly, reflexivity may be identified in early sociological contributions such as the work of Georg Simmel. For example, Nedelmann (2001) identifies a form of reflexivity in Simmel’s concept of

Zirkulare Verursachung , circular causation or self-referentiality . . .

Whenever studying self- referential processes of Wechselwirkung , Simmel examines the possibility of different sequences of circular causation giving rise to either vicious or virtuous circles. (Nedelmann 2001: 68)

Perhaps the earliest ‘modern’ statement of reflexivity in the sociological literature is with the “Thomas Theorem” due to

1

William Thomas (1923; 1928), suggesting that “if men define things as real, they are real in their consequences,” clearly suggesting that the conception that one has of a situation may become a constitutive factor in bringing about that situation conceived.

Perhaps the first specific articulation of the notion of reflexive prediction in the sociological literature comes however with the contributions of sociologist Robert K.

Merton (1936; 1948; 1957). Merton (1936) suggested that

1

Merton (see for example Merton 1949/1957: 475) identifies the sentiments of the Thomas Theorem in a variety of predecessors from the seventeenth century onwards, so that the Thomas Theorem might arguably be located in the literature before Thomas’s formulation of the principle, or the principle being attributed to

Thomas as the Thomas Theorem. In any case, Thomas provided a statement of the theorem and the theorem remains associated with Thomas.



Public predictions of future social developments are frequently not sustained precisely because the prediction has become a new element in the concrete situation, thus tending to change the initial course of developments. (Merton

1936: 903-904)

As Merton put it,

The “other things being equal” condition tacitly assumed in all forecasting is not fulfilled. Other things will not be equal just because the scientist has introduced a new “other thing” – his prediction. This contingency may often account for social movements developing in utterly unanticipated directions and hence it assumes considerable importance for social planning. (Merton

1936: 894)

Merton suggested that such self-altering predictions were fundamentally a feature of social systems involving people, as opposed to natural systems:

[selffulfilling prediction] is not true of prediction in fields which do not pertain to human conduct. Thus, the prediction of the return of Halley’s comet does not in any way influence the orbit of that comet; but . . . Marx’s prediction of the progressive concentration of wealth and increasing misery of the masses did influence the very process predicted . . . one of the consequences . . . was the spread of organization of labor which, made conscious of its unfavourable bargaining position in cases of individual contract, organized to enjoy the benefits of collective bargaining, thus slowing up, if not eliminating, the developments which Marx had predicted.

(Merton 1936: 904)

In later work, Merton (1948; 1957) further elaborates the notion of self-altering predictions. Since Merton’s 1948 paper is essentially the same as his 1957 chapter, it will be sufficient to refer only to the latter in the following discussion.

Merton begins his work on “the selffulfilling prophecy” by referring to the ‘Thomas

Theorem’ (1949/1957: 475-476) and articulates it by means of “a case in point,” namely a “sociological parable” - a story of a run on a bank. This parable “tells us that public definitions of a situation (prophecies or predictions) become an integral part of the situation and thus affect subsequent developments” (1949/1957: 477). Merton notes the ubiquity of such selffulfilling prophecies in social systems, before proceeding to offer a definition for the concept of a selffulfilling prophecy:

The selffulfilling prophecy is, in the beginning, a false definition of the situation evoking a new behavior which makes the originally false conception come true. (Merton 1957: 477)

This naturally has epistemological consequences:



The specious validity of the selffulfilling prophecy perpetuates a reign of error. For the prophet will cite the actual course of events as proof that he was right from the very beginning. (Merton 1957: 477)

It is pertinent to note that Merton (1949/1957: 477 n1) recognises that as well as the

“selffulfilling prophecy” there may also be the “suicidal prophecy.”

Merton is deeply concerned with the selffulfilling prophecy from the point of view of race relations, and from the point of vie of the economics literature, it is pertinent to note that in his work on selffulfilling prophecies, Merton (1957: 477) makes explicit connections with economist Gunnar Myrdal’s work, suggesting various possible connections between Merton’s selffulfilling prophecies and Myrdal’s consideration of processes of cumulative causation. Merton suggests that racial prejudices are part of

“deep-rooted definitions of the situation,” which perpetuate and validate themselves in a process of cumulative reinforcement, where “[we] have produced the very facts that [we] observe.” For example, Merton (1949/1957: 478) suggested that “Negroes were strikebreakers because they were excluded from unions (and from a wide range of jobs) rather than excluded because they were strikebreakers,” but excluding Negroes from jobs and unions had the selffulfilling effect of making them in to strike-breakers.

If the problem was a definition of the situation becoming deeply implicated in a process of cumulative causation, then Merton found the solution also to lie in the definition of the situation:

The application of the Thomas theorem also suggests how the tragic, often vicious, circle of selffulfilling prophecies can be broken. The initial definition of the situation which has set the circle in motion must be abandoned. Only when the original assumption is abandoned and a new definition of the situation introduced, does the consequent flow of events give the lie to the assumption. Only then does belief no longer father the reality.

(Merton 1949/1957: 478)

In addition to the ‘redefinition’ of the situation, Merton (1949/1957: 489-490) considered the use of institutional controls - both as a means to restore public confidence and thus avoid the negative vicious circles such as might occur in a run on the bank, and as a means of directly intervening in the vicious cycle of certain processes of selffulfilling prophecies. Merton concluded that:

The selffulfilling prophecy, whereby fears are translated into reality, operates only in the absence of deliberate institutional controls. And it is only with the rejection of social fatalism implied in the notion of unchangeable human nature that the tragic cycle of fear, social disaster, and reinforced fear can be broken. (Merton 1949/1957: 490)

Krishna (1971:1106) suggested that hopes, as well as fears, may be ‘translated into reality’ in a selffulfilling prophecy.



Merton’s discussion of selffulfilling prophecies provoked, as will be seen, a considerable amount of critical discussion. Grunbaum (1956) asked if reflexive prediction is necessarily a phenomenon restricted to social systems, and suggested a counter-example.

This issue was taken up in the literature and discussed by Buck (1963a), Grunbaum

(1963), Buck (1963b), Romanos (1973), Vetterling (1976), and others. Buck (1963a) was concerned with clarifying the definition of reflexive prediction over and above the notion of self fulfilling prophecy as introduced by Merton: the contributions in this strand of the literature also responded to Buck’s attempts to develop a more precise definition of when a prediction is or is not reflexive.

From a philosophical point of view it is pertinent to note that at the heart of Merton’s conception of reflexivity in the selffulfilling prophecy is a comparison of what actually happened after the reflexive prediction was publicly made and what would have happened if the reflexive prediction was not made. While this is certainly clear on a conceptual level, it raises issues on a practical and operational level, as in any reasonably sophisticated social system it is difficult to run an experiment both by making the public prediction and by not making a prediction, as it is difficult to set up a social system with exactly the same initial conditions including psychological states, plans and agendas of the participants, the current state of the social system and institutions, and so forth. In many cases one could make a clear inference as to what would have happened in the absence of a prediction (for example, supposing the system would have continued in its normal behaviour) but if the system is volatile and exhibits unpredictable dynamics, it may not be easy to make such inferences, and hence to determine the extent to which reflexivity can and does occur in a system. Henshel (Henshel 1971; Henshel and

Kennedy 1973; Henshel 1975, 1976, 1978, 1982, 1993, 1995) pursues a consideration of reflexive prediction, and amongst other contributions considers some of these issues in relation to the difficulty of assessing whether complex social doctrines such as the US constitution or the doctrine of US “manifest destiny” have a reflexive selffulfilling effect.

It is pertinent to note, in passing, two further early sociological contributions, namely the contributions of Thomas Eliot (1937) and Robert MacIver (1948). Eliot examined

“predictive assumptions,” by which he meant “any and all expressions of attitude and opinion which have a predictive character, or represent a readiness to act on the assumption of some probability” (1937: 508). Such predictive assumptions include

“expectant attitudes, gestures (significant incipient acts), prejudices, curses, hypotheses, prognoses, reputations, stereotypes, epithets, ‘conceptions of role,’ definitions of the situation, myths.” Eliot collected a sample of a “hundred and fifty or so” examples of sequences of predictive assumption, and noted four common elements of such sequences:

S

1

: a situation preliminary to the response

A: an assumption, hypothesis, prediction etc, further demarcated as (d) desired or

(u) undesired by the responding group

R: a reaction or response, demarcated as favourable (c) or unfavourable (o) to the fulfilment of A and



S

2

: the resultant situation confirming (c) or refuting (o) the assumption A.

Eliot was then able to characterise his various samples in terms of this sequence and notation, for example S

1

-Ad-Rc-cS

2 d. On examination of the sequences in his 150 examples, Eliot (1937: 511) introduced a five- fold classification of the sequence resulting from predictive assumptions, namely:

Type I : selffulfilling prophecies for a desirable outcome

Type II : self-denying prophecies for an undesirable outcome

Type IIa : situations where “the prediction and result are unfavorable to one group, but the prediction, reactions and result are all carried out by another group which desires or at least believes the worst, for the victims of the process”

Type III : situations where “unfavorable predictive assumptions . . . are corroborated by the fact that some respond by resisting or escaping the prediction

– leaving behind only those who fulfil it”

Type IV : A self-defeating prediction where an unfavourable prediction is

“marked by resistant, compensatory reactions sufficient to offset the prediction entirely”

Type V : a situation with “unfavorable prediction with supposedly resistant reactions which, however, prove insufficient to offset the prediction; or (Type Va) actually exacerbate or create the undesired condition.

These sequences were illustrated by examples (1937: 511-513). Eliot then notes that of these sequences of response in his examples,

(1) some are reactions within the person )autosuggestion, compensation mechanism), (2) some show person-to-person inter-reactions, (3) some are interaction from person-to-group-to-person, (4) some are group-to-person-togroup, and (5) some are group-to-group in corporate capacity. Finally, and most numerous, (6) some sequences show diffused like-response-to- likestimulus. (Eliot 1937: 513)

Eliot (1937: 513) distinguished between public and private prediction, and (1937: 514) noted that “one should not conclude from these selected examples that anything becomes true or feasible merely by saying so.” In particular, the degree of freedom in social construction is somewhat less in systems where the experiential facts of the physical sciences play a role in the issues being considered. Eliot (1937: 515) suggested that dynamics like those suggested in the consideration of predictive assumptions could play a role in the “reinforcement of cultural norms,” and suggested (1937: 516), along the lines of the Thomas Theorem, that (social) “reality has been defined in terms of corroboration.”

Some additional relevant early discussions of reflexive prediction were due to philosophers of science such as Karl Popper (1957: 12-14; 1974/1976: 121-122) and

Ernest Nagel (1961: 468-472), in the course of considering the social sciences in relation to the physical sciences. Popper suggested that:



. . . historicism argues that social prediction must be very difficult, not only on account of the complexity of social structures, but also on account of a peculiar complexity arising from the inter-connection between predictions and the predicted events. (Popper 1957: 13)

Popper elaborates:

The idea that a prediction may have influence upon the predicted event is a very old one. Oedipus, in the legend, killed his father whom he had never seen before; and this was the direct result of the prophecy which had caused his father to abandon him. This is why I suggest the name ‘Oedipus effect’ for the influence of the prediction on the predicted event (or, more generally, for the influence for the influence of an item of information upon the situation to which the information refers.), whether this influence tends to bring about the predicted event, or whether it tends to prevent it. (Popper 1957: 13)

The ‘Oedipus effect’ naturally has consequences for prediction in the social sciences:

Popper notes, articulating a line of argument similar to Morgenstern’s (1928) argument in economics (see below) that if precise predictions could be made in social sciences and became known, then such predictions would “certainly cause actions which would upset its predictions,” illustrating this claim with an example of predictions about share prices on the stock market. Popper (1957: 14-16) notes parallels between this situation in the social sciences, and Heisenberg’s uncertainty principle in quantum mechanics in the physical sciences.

Nagel (1961: 468-473) discussed issues of reflexive prediction in the social sciences along similar lines. Nagel noted that:

. . . even when generalizations about social phenomena and predictions of future social events are the conclusions of indisputably competent inquiries, the conclusions can literally be made invalid if they become matters of public knowledge and if, in the light of this knowledge, men alter the patterns of their behavior upon whose study the conclusions are based. (Nagel 1961: 468, emphasis in the original)

Nagel discusses both “suicidal prediction” and “selffulfilling prophecy” (giving economic examples for both) and, citing Merton’s (1949/1957) sociological work on self fulfilling prophecies, enters in to discussion regarding whether self fulfilling beliefs need be restricted only to occurring in social systems. Nagel (1961: 470) asserts that “the frequent occurrence of suicidal and selffulfilling predictions concerning human affairs is undeniable” before proceeding to argue (1961: 470-473) that this “does not eliminate, as is commonly alleged, the very possibility of establishing general social laws.” Nagel deploys three arguments to support this thesis, firstly that “a statement purporting to be a law is conditional in logical form,” such as is the case in economics with ceterus paribus clauses, secondly that there are “no sound reasons” for ruling out the possibility of



anticipating reactions to the new knowledge or laws and taking them into account, and thirdly that “although the influence of men’s beliefs and aspirations upon human history has been frequently underrated, it is equally easy to exaggerate the controlling role of deliberate choice in the determination of human events” and that, essentially, there are structural forces of history that may shape events regardless of what new information, ideas or theories are put forward that may shape human behaviour.

Early treatments of reflexivity in the economics literature

As noted above, the work of Karl Marx might be considered an early treatment of reflexive prediction, and Marx might be considered as both a sociologist and as an economist. Perhaps the first explicitly ‘economic’ treatment of reflexive prediction recognised in the ‘modern’ economics literature was however due to Oskar Morgenstern

(1928), in a work summarised in the English economics literature by Margert (1929).

Morgenstern’s contributions have been addressed by various authors (see for example

Margert 1929; Grunberg 1986; Giocoli 2003: 236-239).

While Giocoli (2003: 236-239) seems to identify Morgenstern discussing reflexive prediction in Morgenstern’s (1934/1937) The Limits of Economics , the passages cited by

Giocoli in Morgenstern’s 1937 book do not seem to me intended to refer to issues of reflexive prediction. In addition, Giocoli’s discussion is somewhat shaped by his focus on assessing Morgenstern’s work on reflexive prediction through the lens of Morgenstern’s later contributions to game theory.

Following Margert (1929), Leonard (1998:26-28), and Grunberg (1986) therefore, I will focus on Morgenstern’s discussion of reflexive prediction in terms of Morgenstern’s

(1928) work in his Wirtschaftsprognose . Since this work was written in German and has not, to my knowledge, been translated into English, I will confine myself to discussing

Morgenstern’s 1928 contribution in terms of secondary literature. Grunberg (1986) provides a succinct summary of Morgenstern’s general statement of the problem of reflexive prediction:

. . . Morgenstern . . . argues that once a correct private prediction has been made public, the agents to whose actions it refers will (partially or totally) incorporate it into their expectations and change their actions – this falsifying the prediction. He notes, however, the crucially important point hat the forecaster can anticipate the agents’ reaction and take it into account to adjust his prediction. But then, the agents will react to the amended prediction and falsify it. The attempt to make a correct public prediction by taking into account the agents’ reaction to it leads to an infinite regress. (Grunberg 1986:

477, emphasis in the original)

As will be seen later, the distinction between private and public predictions is pivotal to

Grunberg and Modigliani’s (1954) contribution regarding reflexive prediction, and

Grunberg, in later reviewing Morgenstern’s contribution, was therefore particularly



careful to assess Morgenstern’s position on the possibility of “correct private predictions.” Grunberg proceeded to suggest that:

Whether Morgenstern actually believed that correct private prediction in economics is routinely possible, is not clear. Nor does his later voluminous work give an unambiguous answer to that question. (Grunberg 1986: 478)

Margert (1929) gives English readers access to a more systematic account of

Morgenstern’s larger argument. Margert abstracts from Morgenstern’s work (drawing particularly from Morgenstern 1928: 108, 109ff) and presents Morgenstern as arguing that “forecast in economics by the methods of economic theory and statistics is ‘in principle’ impossible,” and furthermore that the reasons for this are threefold: firstly that

“the data with which the economic forecaster must deal are of such a nature as to make it certain that the prerequisites for adequate induction must always be lacking,” secondly that “economic processes, and therefore the data in which their action is registered, are not characterized by a degree of regularity sufficient to make their future course amenable to forecast, such ‘laws’ are as discoverable being by nature ‘inexact’ and loose, and therefore unreliable,” and thirdly, as noted above by Grunberg, that “forecasting in economics differs from forecasting in all other sciences in the characteristic that, in economics, the very fact of forecast leads to ‘anticipations’ which are bound to make the original forecast false” (Margert 1929: 313-314)

Since Morgenstern’s central argument (as recounted by Margert) was that consistently effective forecast (public or private) is to be considered “impossible,” and, in addition,

Morgenstern appeared to maintain a healthy scepticism (e.g. Morgenstern 1963) regarding whether an adequate amount of sufficiently accurate data was collected and available for making such predictions, it would seem to me to be reasonable to suppose, contra Grunberg, that Morgenstern’s position might not have been as ambiguous as

Grunberg supposed, and Morgenstern might be taken as viewing the possibility of making consistently accurate private predictions with some scepticism.

Grunberg further suggests that

[the possibility of accurate private prediction] seems, however, implied at least in the context of Wirtschaftsprognose by his assertion that the forecaster can anticipate the agents’ reaction and amend his position accordingly.

(Grunberg 1986: 478) but it does not seem to me that the fact that the forecaster adapts his or her prediction necessitates that the forecaster was in possession of a correct private forecast, or knowledge of the agents’ reactions. Grunberg seems to interpret “accordingly” as correctly , implying the forecaster has the knowledge to correctly compensate for reactions to his or he r forecast, while it might be just as accurate to interpret Morgenstern as suggesting that the forecaster accommodates to the reactions as best as is possible, for example as they see the results of responses from agents in the economy.



In any case, for the present purposes it is enough to note that Morgenstern clearly identified issues of reflexive prediction in social and economic systems and articulated their importance to the discipline of economics, and did so well before Merton (1936) articulated the notion of the self fulfilling prophecy. It may be noted that further scholarly work such as work due to Leonard (1998, especially pp. 26-28) is of further assistance in helping locate Morgenstern’s work in the intellectual context in which it was produced.

Reflexivity may also be found in the work of Pigou and Keynes.

Pigou (1929) considered a form of reflexive prediction, in the context of the business cycle, in attributing economic fluctuations at least in substantial part to “variations in the tone of mind of persons whose actions controls industry, emerging in errors of undue optimism or undue pessimism in their business forecasts” which then spread contagiously through a “quasi- hypnotic system of mutual suggestion.”

Dimand (1994: 125-126) considered the impact of Pigou’s work and similar work by a former pupil of Keynes (Frederick Lavington) on Keynes. Dimand suggested that Keynes was “not impressed” by Pigou’s work – that Pigou “just arranges in a logical order all the things that we knew before.” Dimand suggested that “Keynes was acquainted with confidence based explanations of economic fluctuations from Cambridge economists, but did not find them persuasive.”

Reflexivity may be identified in Keynes’s work in at least three forms.

Firstly, Keynes’s analogy comparing trading in the stock market to a newspaper beauty competition where the object is to guess what ‘average opinion’ will consider the most beautiful leads to a potential infinite regress, where for example

. . . in order to make decisions agents had to form expectations about unknown realizations of market outcomes. In order to do this agents may have to form beliefs about beliefs of others, so that this market evaluation becomes subject to an infinite regress of what the market will think the market evaluation to be. (Strassl 1986: 157)

The situation therefore is somewhat analogous to the infinite regress identified by

Morgenstern. The expectations of the first agent as to what other agents will do, conditional on the first agent taking some action, is analogous to Morgenstern’s infinite regress problem if the first agent’s action is regarded as playing a similar informational role to the forecaster’s prediction in Morgenstern’s discussion. This situation is reflexive for precisely the same reason that Morgenstern’s prediction paradox is reflexive: the agent’s expectation of what other people do depends on the agents’s understanding of other agents’s expectations of what the agent does, and perceived possible actions of the agent are therefore implicated into the agents’s evaluation of what other agents might do.

A second form of reflexivity may be found in Keynes’s notion of conventional expectations, for example in Keynes’s discussion of interest rates:



It might be more accurate, perhaps, to say that the rate of interest is a highly conventional, rather than a highly psychological phenomenon. For its actual value is largely governed by the prevailing view as to what its value is expected to be. Any level of interest which is accepted with sufficient conviction as likely to be durable will be durable . . . (Keynes 1936: 203, emphasis added)

In this case, Keynes seems to be suggesting that the “prevailing view” becomes some kind of selffulfilling prophecy. Such a selffulfilling prophecy is self-sustaining:

. . . it may fluctuate for decades about a level which is chronically too high for full employment – particularly if it is the prevailing opinion that the rate of interest is self adjusting, so that the level established in grounds much stronger than convention. (Keynes 1936: 204)

In any case, the above considerations in Keynes’s work have been taken (for example,

Rogers 1996) as suggesting that Keynes’s liquidity preference theory entailed “selffulfilling expectations.”

A third form of reflexivity may be identified in Keynes’s work in his discussion of animal spirits, namely in the supposition that more or less ‘random’ impulses to movement may pick up steam and become selffulfilling, changing the movement of the economy. For example:

Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes a bubble on a whirlpool of speculation. When the capital development of a country becomes a byproduct of the activities of such a casino, the job is likely to be ill-done.

(Keynes 1936: 159)

Certain contributions in the contemporary economics literature have attempted to recast these reflexive aspects of the Keynesian economy from the perspective of rational expectations equilibria. For example, Rogers (1996) treats Keynesian selffulfilling expectations from a rational expectations equilibria perspective, Strassl (1986) formalises

Keynes’s ‘beauty contest’ analogy using rational expectations equilibria, and Howitt and

McAfee (1992) construct a rational expectations equilibrium model in which animal spirits cause fluctuations in employment. These contributions in the rational expectations literature are, of course, typically premised on the assumption of the rational expectations hypothesis, considered further below.

It is pertinent to note Morgenstern’s (1934/1937) critique of Keynes’s treatment of expectations: Morgenstern noted that

[Keynes] has given a prominent place to the role of expectations. But his analysis relating to this point is so vague that I think we shall have to wait for



further elucidations from his pen before delivering final judgement on it.

Obviously it is not sufficient merely to refer to expectations and anticipations.

We need to know how they are determined, on what factors they depend and the ways in which they are mutually interdependent.

Mr. Keynes gives no real analysis of these points. (Morgenstern 1934/1937: 158-159, emphasis added)

Keynes, and for that matter the majority of contemporary economic theory does not provide a satisfactory account of expectation formation, perhaps because an adequate realistic consideration of such matters might require a psychological and sociological treatment that would be difficult to accommodate into a mathematical model.

A detailed consideration of expectations in Keynes’s work is beyond the scope of the present discussion, particularly as there is already an extended discussion of Keynes’s treatment of expectations in the economics literature (see for example O'Donnell 1991;

Darity and Horn 1993). Similarly, a discussion of expectations in the economics literature from Keynes and Shackle onwards and encompassing heterodox (especially Post

Keynesian and Austrian) and orthodox economics literature is similarly beyond the scope of the present discussion. To cite but a couple of contemporary directions on the consideration of expectations in economics, one heterodox and the other orthodox,

Koutsobinas (2004) attempts to consider the conventional formation of expectations from a structure/agency perspective, while Hartley (2004: 438-439) argues that

“macroecono mists are currently looking for new ways to model the formation of expectations” as “rational expectations is no longer the monolith it once was” and points to Modigliani’s body of work on expectations as pointing to a “solution of the problem of how to model expectations that seeks to ground them in the way that real people form their expectations,” especially noting that “in forming their expectations, firms do not take into account all future information, but rather only that very small subset that they believe is relevant to making the best possible decision today.” Both from the heterodox and orthodox point of view, attempts to endogenise and discuss the formation of expectations in the model are welcome, but discussion of these attempts is beyond the scope of the present discussion.

Reflexive phenomena have also been discussed by Friedman (1943; 1951). Friedman

(1951: 232) suggested that “the exaggerated importance attached to unions may make it appear they are dominant long before they really are; or their ultimate dominance is so inevitable that it is hopeless to seek to curb further development.” Such a view could lead to inaction in opposing unions and, therefore, contribute in a selffulfilling way to the selffulfilling prophecy that unions were dominant.

On the other hand, a “second possible effect” is that “the exaggeration of the importance of labor unions will give rise to movements to limit their power and importance,” so that the perception of the rise of union power becomes a self-defeating prophecy.

Reflexivity has also been identified in the work of Frank Knight (see Vining (1950: 272),

Welty (1970a), Knight (1947: 38)), especially in Knight’s (1947) Freedom and Reform .



Vining identified reflexivity in the work of Frank Knight, for example in reviewing

Knight ’s (1947) work:

. . . it is an absurdity to entertain the notion of a scientist “intelligently” discovering and formulating a general law of human behavior by which all human behavior is predictable and explainable in terms of mechanical response. For if the “law” holds, the formulation of the law is mere noise and motion and there is no content for the idea of “intelligence” or of “discovery.”

The scientist’s thinking and behavior would be explained by the law which

“he” discovered.

Scientists, however, regard themselves as reasoning and intelligently searching out a solution . . . (Vining 1950: 272, emphasis added)

Similar statements about the reflexivity of social systems in comparison to physical or

‘mechanical’ systems were made elsewhere in the early twentieth century economics literature. For example, Christ (Spengler, Christ et al. 1953: 271-274) discusses the

‘mechanistic’ view and suggests that

. . . the mechanistic view will reach the limits of its useful applicability at an earlier stage in the development of economics than it did in the development of physics . . . for the interaction of the observer and the observed in economics makes its appearance as soon as one begins to discuss predictions and policy recommendations based on them. Thus the mechanistic view, if successful in leading to prediction, will bring about its own nemesis in economics.

(Christ in Spengler, Christ et al. 1953: 274, emphasis added)

Along similar lines, Morgenstern emphasised the differences between the natural and social scie nces:

The epistemological situation is most clearly demonstrated in the natural sciences. No pre-existing theorems are posited, in physics or chemistry, concerning the objects to be explained – for example, atoms and elements – whereby the atoms would need to make assumptions about the behavior and conditions of fellow atoms . . . With theoretical economics, as with the most developed of the social sciences, the situation is quite different.

The phenomenon of the economy cannot exist at all unless the individuals connected with economic objects are assumed to know at least a few simple elements of the science itself ; specifically, insight into (economic) relationships. Without this, the economy could not exist in any of its alternative forms . . . (Morgenstern 1935/1963: 50, emphasis added)

Interestingly, Christ suggests that

Perhaps the proper approach to this situation will be some adaptation of the theory of games, in which the economist or the policy maker is regarded as one player and the economy is regarded as another player or as a coalition of players. (Christ in Spengler, Christ et al. 1953: 274)



Articulating and debating reflexive prediction

Seminal contributions in the economics literature in the 1950s

While issues of reflexive prediction had been clearly articulated (in German) by

Morgenstern (1928), and may be identified in the English economics literature in the work of Keynes (1936), Knight (1947), and comments by Christ (in Spengler, Christ et al. 1953), issues of reflexive prediction received their first serious treatment in the

English economics literature with the contributions of Herbert Simon (1954) and Emile

Grunberg and Franco Modigliani (1954).

Both papers noted a previous consideration of reflexive prediction in the literature. Simon

(1954: 245 n1) suggested that one could “trace the history of [the reflexive prediction] problem back to Aristotle,” and referred to treatments of the reflexive prediction problem by Knight, Hayek and Milton Singer, in addition to the treatment by Grunberg and

Modigliani. Grunberg and Modigliani noted issues of reflexivity raised previously by

Christ (in Spengler, Christ et al. 1953), Knight (1947), Vining (1950) and (Grunberg and

Modigliani 1954: 465 n2) in Modigliani’s prior work on “Expectations and Business

Fluctuations.”

Both papers were concerned with essentially the same issue in the social sciences, namely, the possibility of accurate public predictions in the social sciences where private predictions of outcomes are distinguished from published or public predictions of outcomes. Simon (1954: 245) was concerned with the question of “under what conditions will a public prediction, although it influences behavior, still be confirmed?”

Similarly, Grunberg and Modigliani (1954: 465) were concerned with evaluating the proposition that “in reacting to the published prediction of a future event, individuals influence the course of events and thereby falsify the prediction,” and set out to consider, pre-supposing that successful private prediction (non-published forecasts or predictions) is possible, under what circumstances successful public (published forecasts or predictions) prediction might be possible.

The specific form of public prediction Simon was concerned with was “bandwagon” and

“underdog” effects in voting. These notions were introduced as follows:

If persons are more likely to vote for a candidate when they expect him to win than when they expect him to lose, we have a “bandwagon” effect; if the opposite holds, we have an “underdog” effect. (Simon 1954: 246)

Simon (1954: 246-250) demonstrated that “it is always possible in principle to take account of reactions to a published prediction in such a way that the prediction will be confirmed by the event” (1954: 250, emphasis added). To demonstrate this result, Simon made assumptions of continuity (1954: 249), to demonstrate the result both graphically and to use Brouwer’s fixed-point theorem. Essentially, Simon’s proof proceeded by constructing two curves, one for V, the percentage of voters who voted for candidate A after a public prediction (based on a private prediction which is explicitly assumed to be



accurate) of the percentage P that it is predicted would vote for A is made, and another curve representing “x=y” where the x-axis represents possible values of P and the y axis possible values of V, both bounded to being between 0 and 100 percent inclusive. Given the assumption of continuity, there must be a point of intersection between the two curves, and successful public prediction (a public prediction of an outcome that is confirmed by the actual outcome) is therefore in principle possible to make a public prediction even given the reactions of social agents to predictions.

It is not necessary to reproduce the details of Grunberg and Modigliani’s argument here: like Simon (1954), Grunberg and Modigliani (1954) use Brouwer’s fixed-point theorem to demonstrate the existence of a correct public prediction that may be made. The interested reader may consult Grunberg and Modigliani’s argument either in their (1954) paper or as the argument is reviewed in the subsequent discussion of the paper in the literature. It is however pertinent to the present discussion to note carefully the assumptions made by Grunberg and Modigliani, including that

(a) successful private prediction is possible (1954: 465)

(b) as a consequence, the reaction of the public to a forecaster’s prediction is predictable (1954: 466)

(c) the price is bounded by a lower bound k and upper bound K (1954: 472)

(d) the reaction function R is continuous on the interval [k,K] (1954: 472)

(e) the impact of various features of the actual system dynamics, such as lag times and other aspects of the actual processes of accommodation from the moment the prediction is made till the time the system has accommodated to the new information or inherent complexity and uncertainty in how agents or the system may respond to the prediction, may be neglected

The first four of these assumptions were made explicitly by Grunberg and Modigliani, the last implicitly.

Both Simon (1954) and Grunberg and Modigliani (1954) showed, therefo re, that if certain conditions such as accurate private forecasts and continuity are granted , then in principle successful public predictions may be made. Both papers, therefore, turned to addressing what conditions must be met in practice for successful public predictions to be made. Simon asked:

. . . can this procedure be carried out in practice by a pollster? Stated otherwise, what information would the pollster have to possess in order to adjust his prediction for the anticipated reaction? (Simon 1954: 250)

A key element in Simon’s analysis was the function V=f(I,P), where I is the initial percentage of voters who would have voted for A in the absence of the published information, and P is percentage predicted to vote for A. Simon therefore answers the question posed above by the following:



The answer is that [the pollster] wo uld have to know the function [V(I,P)] at least in the neighbourhood of the actual value of I, and that he would have to have an accurate estimate of I. (Simon 1954: 250)

Simon notes that while the poll may give the pollster an accurate estimate of I, it is “less obvious” where he could get an estimate of the function V. Simon finally proceeds to note that even if we do not know the function V precisely, it “may be possible to improve a prediction on the basis of knowledge of the direction of the reaction (the sign of (I-V)).”

Simon illustrates this with two examples, one where I is known and it is known that there is a “bandwagon” effect, and a second in which I is known and it is known there is an

“underdog” effect.

Grunberg and Modigliani (1954: 474) noted that “to complete the argument, it must be shown that the (sufficient) conditions for the possibility of correct public prediction derived from Brouwer’s theorem are likely to be fulfilled in the real world in which social events occur.” They did so by arguing that economic variables such as price and quantity are naturally in practice bounded, and that “normally the functions formulated in economic theory are conceived to be continuous.” While the first of these two claims might be allowable, it seems to me highly dubious to propose that the conditions are

“likely to be fulfilled in the real world ” simply because they are normally “conceived” to be continuous in economic theory .

In any case, Grunberg and Modigliani explicitly recognise (1954: 478) that their paper

“demonstrates no more than that public prediction is possible if the possibility of correct private prediction is accepted . . . in the end the major difficulties of predicting in the domain of social phenomena turn out to be those of private prediction,” a position later

(1965: 174) stated more forcefully as “the real difficulties encountered in the attempt to predict social events, are those of making correct private predictions . . . at present the major difficulties of predicting economic events are those of making private predictions.”

In addition, Grunberg and Modilgiani (1954: 475-478) noted that volitional, purposive agents could, if it were in their interests, take deliberate, collective action with the effect of invalidating the prediction (perhaps the examples cited above in relation to Marx provide just such an example).

It is also worth noting that Simon’s and Grunberg and Modigliani’s assumption of continuity has been questioned by Henshel (1995), and responded to by Simon (1997).

While Simon continues to maintain that continuity is a reasonable and justifiable assumption, it seems to me to clearly fail in at least one case – when the variables involved (such as voters) are discrete quanta, and there are a relatively small, finite number of voters, so they cannot be considered ‘as if’ they were continuous.

It is perhaps pertinent to venture my own thoughts on this issue before moving on, namely that the set of conditions for the Grunberg-Modigliani results to hold, in practice , such as perfectly successful private prediction, the public forecaster perfectly anticipating



the reaction of agents to the public prediction, and the requirement of continuity, render the results of little if any practical relevance for real world considerations.

It will be noted [references] that later researchers have attempted to loosen the requirements of the Grunberg-Modigliani results to deal with more general circumstances.

Debating reflexive prediction in the philosophy of science literature

After reflexive prediction had been discussed in sociology by Merton (1936; 1948;

1949/1957) and econo mics by Simon (1954) and Grunberg and Modigliani (1954), the next significant discussion of reflexive prediction was in the philosophy of science literature (Grünbaum 1956; Buck 1963a, 1963b; Grünbaum 1963; Grunberg and

Modigliani 1965; Romanos 1973; Vetterling 1976)

The work in this strand of reflexive prediction literature was primarily concerned with addressing three issues: firstly the extent to which phenomena of reflexive prediction must be restricted to the social sciences, as suggested by Merton (1936; 1948; 1949/1957) or whether phenomena of reflexive prediction might validly be identified in the physical sciences or artificial man- made systems as well; secondly, further consideration of the definition or concept of reflexive prediction; and thirdly with a consideration of what methodological issues might be raised by reflexive prediction, and the extent to which these are of significant consequence for the social sciences.

The discussion regarding the extent to which reflexive prediction might or might not apply in the physical sciences or artificial, man- made systems stems from Grunbaum

(1956) addressing Merton’s (1936; 1948; 1949/1957) claim that, as Grunbaum puts it,

“self-stultifying and selffulfilling prophecies are endemic to the domain of human affairs and ‘are not found among predictions about the world of nature.’” Grunbaum frames the issue by asking the reader to consider an example where “the goal-directed behaviour of a servo-mechanism like a homing device which employs feedback and is subject to automatic fire control.” The example Grunbaum uses is a case where:

. . . a computer predicts that, in its present course, the missile will miss its target, and the communication of this information to the missile in the form of a new set of instructions induces it to alter its course and thereby to reach its target, contrary to the computer’s original prediction. (Grünbaum 1956: 240)

Buck (1963a: 366), perhaps, identifies the nub of the issue, asking to what extent any

“information” or “orders” provided to the missile system by a computer is “really an example of prediction at all?” This point is further taken up by Vetterling (1976: 281-

282), who suggested that the “controversy . . . centers around the answers to two questions: (1) can computers properly said “to predict” anything at all? and (2) if they can be properly be said to “predict events,” is the sense in which they can be said “to predict” different from the sense in which people are said to predict?”



Vetterling suggested that

If one answers “no” to the first question or “yes” to both questions, one has grounds for affirming Buck’s [social science] cases as “real” cases of reflexive predictions and for rejecting Grunbaum’s [missile control] case as either of being one of no prediction at all, or of being one of a very “peculiar” sort of reflexive prediction. (Vetterling 1976: 281)

Vetterling approached the issue by identifying two senses in which the term “to predict” is used in language, namely a “generic” sense of the term “as it is ordinarily used” and in which “both computers and people can be said ‘to predict.’” That is,

. . . both Jones and a machine predict when they write, type, or otherwise disseminate symbols, at t

1

, which are in the form (or translatable into the form) ‘E will (will not) occur at t

2

’ where ‘E’ stands for an event, and where t

2

is later than t

1

. (Vetterling 1976: 281)

In this sense, therefore, Vetterling asserts that “Grunbaum’s computer does predict.” Note however this is not a very interesting sense of the term prediction: a computer could predict the orbit of the moon, the time of sunset or sunrise, or various other events, based on the data available and the algorithms entered into it. But the computer itself is not aware of the significance of the data: the computer is simply processing bits and bytes, in a fairly mechanical manner. If erroneous data is entered, or the algorithms are faulty, then the computers prediction will be false and the computer will be none the wiser, and the missile will continue to do precisely as instructed (and miss the target). The missile guidance system in this case would clearly not be reflexive, as the missile would not accommodate to the “prediction” that it is of course appropriately, and would not hit the target.

Vetterling then proposed, following John Searle, a second and more specific sense of “to predict,” that is an “illocutionary act” occurring during the process of writing, typing or otherwise disseminating symbols, that is to assert that ‘E will (will not) occur at t

2

’. Since

“machines do not assert anything,” then “Grunbaum’s case cannot be said to be one of a reflexive prediction” in this specific sense of “to predict.”

Clearly, whether the phenomenon of reflexive prediction is restricted to social systems depends to a significant extent on what exactly is meant by prediction in general and reflexive prediction in particular. Before proceeding to discuss the issue of to what extent reflexive prediction may occur outside of social systems, it is pertinent, therefore, to turn to the discussion regarding the notion of reflexive prediction.

Elaboration of the concept and definition of reflexive prediction was taken up most strongly by Buck (1963a), Romanos (1973) and Vetterling (1976). Buck discussed the

“truth- value” of a proposition or ‘prophecy’ as depending on its “dissemination status”



(whether it had been effectively published or not), and introduced the following “criteria” for reflexive prediction:

A prediction is reflexive if and only

(1) Its truth- value would have been different had its dissemination status been different,

The dissemination status it actually had was causally necessary for the social actors involved to hold relevant and causally efficacious beliefs,

(3) The prediction was, or if disseminated, would have been believed and acted upon, and finally

(4) Something about the dissemination status or its causal consequences was abnormal, or at the very least unexpected by the predictor, by whoever calls it reflexive, or by those to whose attention its reflexive character is called.

With Buck’s definition of reflexive prediction in mind, it is possible to articulate further the discussion relating to Grunbaum’s proposed example of reflexive prediction in a missile system. In his reply to Buck (1963a), Grunbaum (1963: 370) argued that his counter-example was “intended to adduce cybernetic phenomena from physics as a counter-example to Merton’s denial.” Grunbaum’s counter-example, therefore, was in relation to Merton’s presentation of reflexive prediction and not Buck’s definition of reflexive prediction. Buck (1963a: 366) had noted that while serious issues were raised by the question of whether a machine could be said to “predict” at all, that even granting for the purposes of discussion that “the behavior of machines can be in relevant ways analogous to human behavior,” there were still problems with Grunbaum’s account, and the “key lies in the difference between acting on a belief and giving orders.” Buck

(1963b) summarised his position: A (self-stultifying) prediction is reflexive

. . . in virtue of the causal mechanisms which mediate between the event which is the issuance of that prediction and the non-occurrence of the event predicted . If these causal mechanisms involve that people come to believe the prediction, if their holding such beliefs is a necessary or at least nonredundant element in the set of conditions for the predictions failure – then it is reflexive and self-stultifying. (Buck 1963b: 373)

Clearly, Grunbaum’s example is not reflexive in this sense, as a machine is not normally held to maintain “beliefs.” However, Merton did not explicitly articulate that beliefs must play a role in the causal mechanisms of reflexive prediction. Vetterling elaborates this point, suggesting the consideration of the following three definitions of reflexive prediction

A prediction is reflexive if a) its dissemination status caused the social actors to falsify (fulfil) it, b) its dissemination status caused the machine to falsify (fulfil) it, c) its dissemination status was a causal factor relative to its falsity (truth)

(Vetterling 1976: 280)



As Vetterling noted, accepting either of the first two definitions clearly commits one to a thesis regarding the domain in which reflexive prediction occurs, while the third does not.

Romanos (1973: 103-104) addressed Buck’s (1963a) definition of reflexive prediction, and argued that

Buck . . . attempts to justify the necessity of the acting-on-belief model be applicable by appealing to the same notion of a “standard” case of reflexive prediction. It is clear that the reasoning by which Buck restricts the class of

“standard” is hopelessly circular. (Romanos 1973: 103)

Romanos therefore suggested that Buck’s insistence on beliefs as a mediating mechanism in reflexive prediction is, in general, unwarranted, and suggested instead the following

“more or less general condition as necessary and sufficient which a prediction must meet if it is to be correctly classed as reflexive”:

R: The dissemination status of the prediction must be a causal factor relative to the prediction coming out true or false. (Romanos 1973: 104)

Romanos (1973: 105-109) further pursues a more general approach in which beliefs need not necessarily play a central role with his introduction (1973: 105) of a

“formulation/dissemination style.” Thus, “every prediction will have a formal or

‘syntactical’ property,” which Romanos calls a “formulation style (F-style).” Such prediction formulations need not be restricted to spoken or written languages, but may also include “electric impulses, bodily movements, puffs of smoke, or anything else that may be interpreted as expressing a prediction.” Similarly, the dissemination style is “the manner of reproduction and/or transmission of a given prediction in a certain formulation style,” and a formulation/dissemination style (F/D style) is any combination of a formulation style and a dissemination style. Romanos then restates his definition for reflexive prediction as

R

1

The formulation/dissemination style of the prediction must be a causal factor relative to the prediction’s coming out true or false. (Romanos 1973:

106)

Romanos then argued that reflexivity is a

. . . property which, properly speaking, cannot be simply possessed by a prediction as such, but only by a prediction in a certain F/D style. (Romanos

1973: 108) and that this formulation of reflexivity in relation to prediction allows for a wider generality of treatment of reflexive prediction in a variety of domains.



The remaining issue addressed in the philosophy of science literature considered here is the extent to which reflexive prediction poses a methodological issue for the social sciences. Buck (1963a: 363-365) argued that

Prima facie the answer must be “yes.” . . . predictions play a crucial role in the processes of science. The adequacy of theory and law is tested by deriving predictions from statements of initial conditions in conjunction with such theories and laws. If you call into question the legitimacy of confirmation following on success in prediction, or of disconfirmation following on failure in prediction, you strike at something very fundamental indeed in science.

(Buck 1963a: 363)

After, however, raising the concern that reflexive prediction may raise problems for the testing of theories or hypotheses, Buck did not address that issue in general, but instead chose to focus on one particular “fanciful example,” namely an “expert in the study of crime and of prisons” who faces of the dilemma of how his announcement of how an announcement of a rise in crime but no rise in prison space might affect felons, and what the expert should do.

Buck proceeded by supposing that the expert makes a series of predictions where “any given prediction in the series . . . can in principle take account of the social consequences of the dissemination of all earlier predictions.” It is not, however, clear that Buck’s line of reasoning is permissible. Once a given prediction is made, it is ‘in the system,’ and it is not clear it can be completely accounted for or compensated for with the ‘next’ prediction, at least not without the kind of omniscience on the part of the forecaster presupposed in Grunberg and Modigliani’s (1954) paper. The actual mechanisms of diffusion of the prediction and of potentially complex and unpredictable processes over time of reaction(s) to the prediction(s) would need to be taken into account. The forecaster would need to be able to assess the reflexive impact that their prediction has had which involves not only a requirement for information regarding the reflexive impact their statement has had but also a sufficient knowledge of the system to be able to compensate for the system – as it is continuing to react to and process the information from the previous reflexive prediction. In real systems, such a level of omniscience on the part of the reflexive forecaster seems unlikely. It might also be noted in passing that

Grunberg and Modigliani (1965) argue that Buck “misconstrues” their argument, and that rather than looking at a series of predictions converging to a correct prediction, they were looking at making one correct prediction, accounting already for the reaction(s) to the prediction by agents.

In any case, Buck proceeds to conclude that the “methodological problem for the social scientist” is “not very” serious, for two reasons: the social scientist (i) “can always investigate the question whether any specific prediction is likely to operate reflexively,” and that such investigations may reveal that a prediction is not reflexive, or (ii) suggest an appropriate course of action such as limiting the reflexive prediction only to colleagues or policy makers, effectively making the prediction private and hence not reflexive.



Both of these claims are problematic. It is not in practice always easy to ascertain whether a given prediction will be reflexive or not without actually publicly making the prediction (or a related prediction) and observing a result – and even then, it is difficult in principle to determine what effect the public prediction itself had as c causative factor, and this information is not available in that experiment because the prediction in fact was made. In a given system, one can follow one of two paths of action: make a public prediction or don’t make a public prediction – one cannot do both. It is impossible then, in practice to compare the actual results of making a prediction with the outcome when the prediction is not made. One can compare the actual outcome after a public prediction with the privately predicted outcome, or compare the actual outcome after a public prediction was held back with the privately forecast outcome, but never the actual outcome after a public prediction with the actual outcome after no public prediction.

There are, therefore, difficulties in principle in demonstrating that a system is reflexive, and in measuring how reflexive it is. It would be difficult, therefore, to anticipate the exact reaction, in an actual system, to a given prediction (unless one makes claims of omniscience on the part of the forecaster). Similarly, it is not clear that it is always possible to detach the scientific content of predictions from the domain in which the prediction refers to, for example when social scientific theories or predictions are widely reported in the media.

In addition to the problems cited above with these claims, there is a further difficulty with

Buck’s argument: it is not enough to simply suppose that sometimes predictions are not reflexive and that sometimes the reflexivity may be minimised, it would be necessary to show that in every case issues of reflexivity can be avoided or dealt with. Buck does not set out an argument establishing this. It would certainly be the case that if it were always knowable in advance whether any given prediction was reflexive and that there was always a mechanism, in such cases, for minimising the reflexive impact of the prediction by restricting the public dissemination of the prediction appropriately, the impact of reflexive prediction on scientific hypothesis testing would indeed be very much minimised. It is not clear, however, that Buck has offered any substantial supported for either of these two claims.

Romanos (1973) summarises Buck’s two claims (above) and states that he does “not disagree with this argument or its conclusion.” Buck is taken by Romanos to be arguing that “reflexive predictions need not present insuperable obstacles to the social scientist, that there exist ways of dealing with this problem.” Romanos then argued that the

“implication” of Buck’s argument is that “there is no logical connection between a prediction’s being reflexive and its being a problem for the scientist in the process of theory testing” and that, therefore, “the problem . . . is only technical and not methodological .” Romanos does however note (Romanos 1973: 99) that there are instances where Buck’s second claim (that the public dissemination of the reflexive prediction may be suitable restricted so that it is, in effect, private and not reflexive) breaks down, such as for example in the case where there are enormous pressures bearing on the social scientist to public the prediction in the public interest. Even here, however,

Romanos continues to argue that there is no scientific, methodological reason why the



prediction must be published and, therefore, that the issue is still a technical rather than methodological problem.

It may be noted that Romanos’s argument does not take into account the publication of theories or predictions that significantly alter the behaviour or beliefs of agents or dynamics in the system. Even if one allows that the predictions of any given theory are testable in principle by limiting the dissemination of the scientific predictions, the theories, once published and influencing actors in the social systems such as business leaders and policy makers, may well begin to shape the beliefs, agendas and actions of agents, and the dynamical behaviours in the system being considered. Romanos does not consider these issues of reflexivity.

The American Economic Review discussions

Reflexive prediction was next taken up in the economics literature by Devletogou

(1961), Kemp (1962), Chiang (1963), Grunberg and Modigliani (1963), Kemp (1963),

Rothschild (1964), and Galatin (1976).

Before discussing the above papers, it is pertinent to say a few words about some shared themes running through the various contributions.

Firstly, almost all of the above papers accept Grunberg and Modigliani’s (1954) paper rather uncritically as a starting point for their discussions. For example, Devletogou

(1961) wrote that “E. Grunberg and F. Modigliani” have shown that “correct public forecasting [is] conceptually possible.”

Secondly, following Grunberg and Modigliani (1954), all of the papers mentioned above present the discussion of issues of reflexive prediction in economic systems in terms of a mathematical model. The set of papers, therefore, are susceptible to a methodological problem that may be identified in relation to many or most mainstream economic models built over the last 70 years. The problem arises from the fact that such technical economic models are typically developed based on a range of implicit and explicit assumptions that are typically abstract and unrealistic but, in any case, are rarely justified (or, indeed, justifiable) in relation to any real economic systems during the process of economic model building. The intuitions and insights arising from the model are then (implicitly or explicitly) asserted as being relevant and informative in the real world, without any further steps of argumentation or verification to justify this proposition (Sugden 1991;

Backhouse 1999; Viskovatoff 2003). In other words, it is left unclear as to what relationship, if any, the conclusions and insights from these models have in relation to the real world.

The problem is further compounded by the fact that of the many possible theoretical model worlds that might be created, the various assumptions for the model are typically arbitrarily chosen to produce the kind of outcomes the model builder wishes to produce, such as for example in Galatin’s (1976) paper:



The assumption of such detailed knowledge by the forecaster of the conditional probability distributions of outcomes given the forecasts is admittedly unrealistic, but it was found necessary in order to be able to obtain interesting results . (Galatin 1976: 291, emphasis added)

The question naturally arises of the extent to which similar results might be produced at all in a model with less unrealistic assumptions, and in particular in real world systems containing real world agents and institutions. The model simply provides no logical evidence or argumentation to establish that this might be so in the real world, instead it develops the intuition that this is so in the model world, and leaves it to the reader to infer that similar dynamics might be at play in the real world

Thirdly, the various economic models that are presented are not only simple but simplistic, in that most of the papers present simple, linear, and, except for Galatin

(1976), non-stochastic models, that do not take into account actual effects of forecasts in actual systems with agents that process and respond to information in any realistic manner. They do not represent very interesting systems, do not contain very realistic agents such as agents with a complex set of beliefs and the ability to learn and adapt to new information in complex manners, and do not abstract and represent any interesting economic institutions.

Since I consider the various models presented in the above series of papers to be totally unrealistic, I will not consider the precise details of any of the models provides, but will discuss the papers on a philosophical level, focusing on the philosophical issues relating to reflexive prediction raised in the various papers, that may well have a much wider applicability than the specific model or paper in which the issue was raised.

As mentioned, each of the papers built on or extended Grunberg and Modigliani’s results in some way. Devletoglou (1961) was concerned with the “effects of correct public forecasting on the stability of equilibrium,” emphasising that “the discussion is carried on at the theoretical level only” and that “it assumes throughout perfectly accurate public forecasts and neglects the practical problems involved in securing the necessary expectational statistics” (let alone the problem of developing an economic model adequate to the task of making accurate predictions).

Kemp (1962) was concerned with showing, when “the variable to be forecast is itself influenced by the forecast” that

(a) the announcement of the forecast does not necessarily validate, or tend to validate, the forecast (b) accurate forecasting may be impossible (c) even perfectly accurate forecasting, if it were possible, may add to the instability of the economy. (Kemp 1962: 492)

Kemp introduced a “grossly unrealistic” model “of the simplest multiplier-accelerator type” to model of central bank forecasts. Kemps argued that in this model, “announced forecasts are . . . self- validating only if increases in income are forecast; if decreases are



forecast, the forecasts are self-destructive,” hence establishing his first claim with regard to his model. Kemp then distinguished between “point” forecasts and “direction of change” forecasts, and argued that, in his model, direction of change forecasts “could not possibly be self destructive.” Kemp then shows that in his model, there are cases when accurate forecasting is not possible. Kemp then turns to stability, and argued that in his model,

. . . the announcement of accurate forecasts might stabilize an otherwise unstable economy . . . or render an already stable economy “more stable” . . .

[or] convert an otherwise stable economy into a violently unstable one, with jagged, period-by-period oscillations of increasing amplitude. (Kemp 1962:

496)

Finally, Kemp raises the point that for the central bank, “forecasts are merely means to ends,” and from the point of view of achieving these ends, “the most efficacious forecasts may be wildly and deliberately inaccurate.” It therefore “poses a technical dilemma” as

“to achieve technical objectives it may be necessary to hoodwink the public; but the possibility of hoodwinking derives from gullibility, and even the most gullible will not be deceived indefinitely by the same confidence trick.” Kemp therefore suggested that “the more vigorously the control is exercised, the more ineffective it becomes.”

Before moving on from Kemp’s paper, it is pertinent to note that Kemp himself characterised his model as “grossly unrealistic.” Kemp did not set out to establish that the dynamics he observed in his model might be observed in any real economic system. In any case, Kemps results at the end of his modelling were that a prediction might be self validating or self defeating; that accurate forecasting may be impossible, and that that if it were possible (and there is no evidence to believe that it is) then it might have a positive, adverse or other effect on stability – and all of these results limited in scope to only one

“grossly unrealistic” technical model. In other words, Kemp’s model has not advanced us very far in understanding reflexive dynamics in real economic systems. On the other hand, Kemp’s differentiating between point forecasts and direction of change forecasts and his recognition that forecasts may not be ends in themselves but means to the fulfilment of larger objectives are useful points to raise in the wider philosophical context.

Chiang (1963: 730) picks up Kemp’s points about point forecasts and direction of change forecasts, recognizing that forecasts may be “self- validating” in a “directional sense.”

Chiang refers to this as directional “self- validation” as “self-reinforcement.”

Chiang further suggested that directional forecasts might be more useful than numerical forecasts from a control point of view, because “when forecasts influence economic behavior they may serve as instruments of control,” and, in this context, “the numerical accuracy of forecasts loses its relevance, and the reinforcement effect takes on major significance.”



Chiang (1963: 730-731) introduced a “simple multiplier-accelerator model” along similar lines to Kemp, and argued that in his “simple model” that “although official forecasts may not always be self- validating in the numerical sense (as Kemp demonstrated), they nevertheless do always reinforce themselves.” Chiang then noted that

In reality, the business community may not always accept official forecasts unquestioningly, and, moreover, private predic tions regarding the future may not be simply be of the static variety. In the interest of greater realism, we must modify these assumptions to permit alternative situations. (Chiang 1963:

731)

Chiang therefore assumed that businessmen “will as a rule temper an official forecast with a private prediction of their own” and allowed for the possibility of “nonstatic private predictions” by assuming that “the business community believes in a sort of intertia in the short-term trend of income, and therefore tends habitually to extrapolate the current change into the future.” If business doesn’t do this, Chiang refers to the private predictions as static, if they do, as non-static. In Chiang’s model, if “private predictions are static, official forecasts are always self-reinforcing” while “if private predictions are non-static . . . there will arise the possibility of self- nullifying official forecasts.”

Chiang’s results apply, of course, only in his model, and Chiang provides little reason to suppose that his results might apply mo re generally. In any case he provides no support or argumentation for it, and he adds little of more general validity or philosophical interest to the discussion.

The primary thrust of Grunberg and Modigliani’s (1963) paper in response to Kemp was to suggest that Kemp attempted to provide a counter-example to their (1954) theorem regarding the possibility of accurate public prediction, and to argue that “Kemp’s illustration does not constitute a valid counter-example because the model which he uses violates one of the sufficient conditions we stated, namely that the variable to be predicted . . . should have a lower and upper bound.” Grunberg and Modigliani proceeded to demonstrate that “correct public prediction is not impossible even under Kemp’s model, once his model is modified to give it slightly more economic content.” Grunberg and Modigliani (1963: 736) reiterate again that in the real world, it is unlikely that the

Central Bank would “have the knowledge required to make an accurate forecast.”

Grunberg and Modigliani then turn to Devletoglou’s (1961) and Kemp’s (1962) treatme nt of this consequences of correct public prediction for stability, and suggested (1963: 736-

737) that they had “been aware of this possibility for some time but have hesitated to publish our results because – rightly or wrongly – we regard this result as too baffling to be taken seriously.” Indeed, “at least in the case of complete belief, this result would imply that perfect foresight may cause or increase oscillatory disturbances.” They further suspected that these results “may arise from the fact that the macroeconomic models from which they are derived fail to take properly into account relevant aspects of economic behavior.”



Kemp (1963) replies to the comments by Chiang (1963) Grunberg and Modigliani

(1963), essentially arguing that “the two main conclusions of the earlier paper,” that “the announcement of point forecasts may be either self- validating or self-destriuctive” and

“the announcement of direction of change forecasts can never be self-destructive” (in

Kemp’s model) “emerge unscathed.” There is no need to comment on Kemp’s reply in any detail, except to note that Kemp (1963: 739) responded to Grunberg and Modigliani’s charge that he did not “take seriously into account rationality in the formation of expectations” by asking “if the forecaster is in the habit of making perfectly accurate forecasts, is it preposterous to suppose that the public acquires an equally perfect trust in him?” Indeed, if one is prepared to make totally unrealistic assumptions about accurate private predictions and accurate anticipations by a forecaster of agents’ reactions to public predictions, then it is hardly much of an additional stretch to make similarly unrealistic expectations that may be justified (to the extent that they can be justified at all) as consequences of the ability to make perfect private forecasts.

The remaining papers in this strand of the reflexive prediction literature by Rothschild

(1964) and Galatin (1976) seek to extend Grunberg and Modigliani’s (1954)results.

Rothschild asserts that Grumberg and Modigliani “proved the possibility and the conditions of successful forecasting in cases where the actors on the scene are influenced by the public forecasts,” and suggests that he is extending Grunberg and Modigliani’s

(1954) and Devletoglou’s (1961) results “a small step further” by “investigating the consequences of introducing the more realistic assumption of less-than-perfect forecasting.” By this, Rothschild means “expert forecasters . . . have a fair knowledge of the underlying relationships but are not able to make exact predictions.” This is modelled by assuming that “their forecasts will deviate from the actual event by some error term which we shall assume to be free from any systematic bias.” Rothschild’s results are summarised in his Table 1 (1964: 304). The central thrust of Rothschild’s conclusions are that, in his cobweb model with partially correct forecasts, “even if forecasts are not quite correct they will exert an equally strong dampening effect on the original cobweb cycle as correct forecasts” but, of course, the “‘equilibrium value’ itself is not stable . . . there will be continuous random fluctuations round the stable long-term equilibrium.”

Depending to the extent to which the forecasts are accepted, a range of outcomes may be found, ranging from a cycling behaviour when the forecast is ignored to no oscillations and a stable equilibrium when the forecast is fully accepted.

Galatin (1976) was concerned that the work by Grunberg and Modigliani (1954),

Devletogou (1961) and Kemp (1962) was set “in a context of a world without uncertainty” and sought “to extend the analysis of these earlier studies into a world with certainty.” After Galatin extends Grunberg and Modigliani’s (1954) cobweb model to accommodate uncertainty, then “the deterministic reaction functions of Grunberg and

Modigliani are replaced by a set of probability distributions of outcomes conditional on the choice of public forecast made by the forecaster.” Galatin then asks “how the forecaster, if he knows all those probability distributions and just how they depend on his forecasts, can make ‘accurate’ forecasts under these circumstances and what these accurate forecasts will be.” In this scenario, “any desire for an accurate forecast must take into account the supposedly known relationship between the forecaster’s public forecast



and the resulting outcome distribution” so that “the degree of accuracy of a chosen forecast a priori can be framed in probabilistic terms,” and the forecaster may choose which criteria to maximise, for example to “choose that forecast that maximises the probability that the absolute forecast error . . . is less than or equal to some specified number.” Galatin calls the forecasts which result from these “decision rules” (choices of criteria) “optimal public forecasts,” replacing “correct public forecasts” in Grunberg and

Modigliani’s framework.

Galatin then proceeds to examine the “exact nature of the announcement effects of forecasts within the context of a market model” and argues that “the actual announcement of an optimal price forecast will change the probability of price increases from these probabilities in situations when no forecasts are announced.” Galatin concludes by revisiting the theme in this strand of literature that “it is possible that forecasts may become important tools of economic control when the forecaster wishes to influence the value of the outcome by his choice of forecast.”

It is important to reiterate that Grunerg and Modigliani’s (1954) results regarding the possibility of accurate public prediction were premised on, among other prerequisites, the assumed ability to generate perfectly accurate private predictions. It is clear that, as

Grunberg and Modigliani themselves emphasised, such conditions are rarely if ever attainable in relation to real economic systems. Similarly, each of the models articulated by Devletogou (1961), Kemp (1962), Chiang (1963), Rothschild (1964), and Galatin

(1976) are grossly unrealistic in their assumptions. The value of these models, therefore, is not in any claimed relevance to real world economic systems, but in a further philosophical exploration of the issue raised by Grunberg and Modigliani – namely, to what extent in principle can public predictions be accurate, taking into account the reactions of agents in the system to the prediction? In additions, this strand of the literature differentiated between point and direction-of-change forecasts, and highlighted that forecasts might be useful not as an end in themselves, but as a means to achieving goals of economic control.

Developments in the sociological literature in the mid-late twentieth century

Sociologist Richard Henshel (Henshel 1971; Henshel and Kennedy 1973; Henshel 1975,

1976, 1978, 1982, 1993, 1995) pursued the implications of reflexive prediction over the course of his academic career. Henshel provided a number of examples of self-altering predictions (see for example Henshel and Kennedy 1973: 122).

The central problem of reflexive prediction is outlined by Henshel (e.g. 1982: 514), quoting Werkmeister (1959):

Prediction in the social sciences finds its inevitable limitation in the fact that, knowing the predicted course of events, man can alter that course, thereby nullifying the prediction itself. The conscious and deliberate actions of man thus create special problems for the social scientist – problems not



encountered in the realms of physics or chemistry, or even in biology.

(Werkmeister 1959: 490)

Henshel (e.g. 1982: 514) noted that contributors to the literature such as Watkins (1969:

605), Friedrichs (1970) and Giddens (1977) argued that social systems are fundamentally mutable and, therefore, subject to the possibility of reflexive predictions. Thus for example: while

Watkins, adopting a position of “methodological individualism,” states that

“ no social law exists which could not be altered if the individuals concerned both wanted to alter it and possessed the appropriate information ”

Friedrichs (1970) reiterates at length the mutability of all social laws

While Henshel raised various issues of reflexivity in his first paper (1971) on the subject, his early contributions are best articulated in his (1973) paper co-authored with Leslie

Kennedy. Henshel and Kennedy (1973: 119-120) noted that self-altering predictions raised substantial methodological issues for the social sciences, and that existing explorations of the issue in the literature had “barely scratched the surface of the problem.” In particular, existing explorations of the issue in the literature “have invariably concentrated on the effects for single predictions.” Although the consequences in relation to even single predictions may be “severe” for social science, Henshel and

Kennedy turned their theoretical attention to what the effect of a series or “train” of selfaltering predictions might be on the credibility of the predictions from a discipline, and on the level of reflexivity of those predictions. Henshel and Kennedy suggested that the level of credence placed in these predictions may itself affect the degree of ‘self-altering’ potentiality of the predictions, so that

If the predictions of social scientists are heeded and become self-defeating, social science should eventually decline in respect. Predictions will no longer be listened to, so fewer will be suic idal, and their accuracy, therefore, should rise. But when this occurs, social science prestige might also rise again, leading to a new wave of self-defeating predictions, and so on. We can call this the “oscillation” . . . possibility. (Henshel and Kennedy 1973: 120)

On the other hand,

If . . . social science predictions generally become selffulfilling, we must anticipate a different course. Where before we had a cyclic possibility, we now have an intensifying or “multiplier” effect. The more self- fulfillment, the stronger the faith in social science, and the stronger the latter, the more selffulfilling prophecies occur (Henshel and Kennedy 1973: 120)

Henshel and Kennedy presented a third option:



Alternatively . . . there could be no strong trends toward either self- fulfilment or self-defeat . . . If people will work for predicted states they approve of and against those they detest, then in the long run social scientists would create more selffulfilling predictions if they forecast futures which people find appealing than if they forecast unpleasantness. (Hens hel and Kennedy 1973:

120)

Henshel cites Merton (1949) to the effect that:

The repute of applied social science, as of any other intellectual resource, is in part a product of its accomplishments. This is an interlocking system, in which social status and utilization interact endlessly. Not only does ut ilization affect esteem but esteem also affects utilization. (Merton 1949: 164)

Henshel (1975: 108) summarised these results as suggesting that “the prestige of the discipline affects via one of several paths the accuracy of the prediction.” Henshel and

Kennedy further illustrated this dynamic in their (1973: 121) figure 1.

Henshel and Kennedy suggested that in order for social science to generate more selffulfilling prophecies and to gain prestige, perhaps it should “tell the people what they want to hear.” Henshel also considered the possibility suggested by Sjoberg and Nett

(1968: 143) that “the most effective forecaster might be a man who was right 60 or 70 percent of the time. Then his forecasts probably wouldn’t be affected by people acting upon them.”

Henshel and Kennedy (1973) suggested that social sciences such as sociology face a dilemma:

If sociology invariably hides its predictions in specialized texts, it becomes difficult to justify its existence; if it announces its findings only to decision makers, it becomes a “servant of power”; but as it encounters its predictions publicly, it encounters self-alteration. Even if “understandings” are considered the proper goal rather than predictions, we still risk the possibility of self-alteration if the “understandings” are disseminated. (Henshel and

Kennedy 1973: 125)

A similar dilemma may, of course, may be raised in relation to economics.

Henshel and Kennedy then turned their attention to larger belief systems and patterns of thought and noted that:

. . . although it is relatively easy to demonstrate the existence of [self-altering prophecies] at the interpersonal level and even at the repetitive institutional level exemplified by stock markets and bank runs, it is virtually impossible to determine whether a unique historical event was altered by a response to



earlier prophecy . This is unfortunate, because we would certainly like to know the effects, for example, of the doctrine of Manifest Destiny on the subsequent diplomatic history of the United States, or . . . the doctrine of historical inevitability on the [then] successes of communism. (Henshel and

Kennedy 1973: 121, emphasis added).

Henshel (1978: 105) cited Sorel (1950) to support the argument that “students of history have long noted the importance of ‘myth’ as a key ingredient in moving masses of people to action” According to this view, according to the successes or failures of the prevailing

‘myth’ or ‘ideology’ (and capitalism and globalisation could certainly be taken as contemporary examples) “waves of confidence or despair move across a great culture” and a “very slow but massive shift occurs in the plans of millions of individuals.” Such shifts “can render optimism or pessimism selffulfilling at the societal level.”

Henshel (1975; 1976; 1978) further articulated the theme of the relationship between reflexive prediction, the reputation or credibility of a discipline, and predictive accuracy in that discipline. Henshel presents this “schematically” as: prediction

à

mechanism based on prestige

à

accuracy of the prediction

à

alterations in prestige

Citing Biderman (1969: 130), Henshel argues that “a disciplines perspectives [may] become embodied in the social arrangements and cultural assumptions of a given society,” so that a “discipline with sufficient prestige can eventually shape the institutional forms of its subject matter and so far pervade the thinking on the subject that many of its postulates appear obvious a priori .” Thus:

The life of the society produces data that accord directly with the models of economics with regard to the units, processes, and relationships, precisely because these models are the ones used to guide and rationalize so much of social activity. (Biderman 1969: 129)

Henshel argues that

. . . the criteria by which an event is evaluated in society become, unconsciously, quite close to the mode of thinking of the scientist, so that the predictive validity of his instruments becomes increasingly easy to demonstrate. (Henshel 1975: 93)

Henshel provides an example in the organizational context:

. . . if an employer unconsciously uses virtually the same standards to determine whether a new employee has “fitted in well” as did the personality tester who examined him, then the test and criterion situations are influenced by the same systems of thought. It should not be surprising if in such a case the predictive validity of the personnel measure is quite high. (Henshel 1975:

93)



Henshel gives similar examples in relation to IQ testing, juvenile delinquency, and the

Freudian view of the human psyche. Generally, Henshel proposes the existence of

“prestige loops” composed of:

(1) a frame of reference for human nature with associated general predictions;

(2) a widespread acceptance of the view and the predictions;

(3) corresponding change in thinking and behaviour;

(4) observations by the experts that people do indeed conform to the model proposed;

(5) heightened prestige and authoritiveness of the viewpoint;

(6) greater popular acceptance of the view; and

(7) more changes in thinking and behaviour

(Henshel 1975: 97)

Obvious examples for consideration within economics include notions such as rationality and the marketplace, and it is interesting to note that Henshel suggests

As a case in point, we might consider the impact of changes in views of man’s rationality on cultural practices and, perhaps, on the phenomenon of rationality itself. (Henshel 1975: 97)

Henshel (1978: 105) cites Polak (1973) and Gabor (1963) to the effect that our “image of the future, our level of “faith” in the future and the level of belief in the extent to which people’s “own actions would be efficacious” or “fruitless.” Using two axes, a ‘y’ axis of optimism vs. pessimism in the prevailing myth and a ‘x’ axis of the degree to which individual’s actions are believed to be efficacious, Henshel suggests four orientations to the future of “visionary,” “heroic sacrifice,” “complacency,” and “fatalism.”

Henshel and Kennedy (1973: 123-125) considered various methodological issues in the social sciences raised by the possibility of reflexive prediction, tackling issues such as whether positivism may or may not be relevant to social sciences exhibiting phenomena of reflexive prediction and the issues raised by Grunbaum (1956), Nagel (1961: 469),

Buck (1969: 60) and others regarding the extent to which phenomena of reflexive prediction might be held to occur in physical or artificial systems as well as social systems. Henshel and Kennedy concluded by agreeing with Buck that reflexive prediction is “a phenomenon which . . . is strictly confined to social science.”

Henshel and Kennedy (1973: 124) suggested that it is “in economics . . . acknowledgement of the problem” of reflexive prediction and “efforts towards resolution” of this problem “are most advanced,” citing “possibility theorems” such as those by Grunberg and Modigliani (1954), Simon (1954) and Rothschild (1964) and in organizational research by Welty (1970b), in a later paper (1978) citing Welty and

Beradino (1971). The problem, however with such possibility theorems is that “the theorems, however, hold only for those particular social predictions that meet their specified conditions” (Henshel 1978: 111) and, as has been seen, these requirements are



fairly onerous - including a requirement that perfect private forecasts may be made. The possibility theorems, therefore, are of questionable practical value.

Henshel (1993) elaborated on two issues raised in the economics literature by Kemp

(1962) and Chiang (1963), namely the issues of “point” forecasts versus “direction of change” forecasts and the extent to which reflexive predictions might be used as a mechanism for control. Henshel argued (1993: 93) that the treatment of reflexive prediction in economics and in the wider social sciences was quite different due to the greater weighting on precise (point) predictive accuracy in economic science, because:

Economics . . . takes its forecasting and prediction take far more seriously than do the other social sciences. Economists continually strive to improve their predictive accuracy, and economics alone, among the social sciences, typically tries to render its predictions in quantified form. It tries to say not merely that the gross national product will rise in some period but that the gross national product will rise by 3.6 percent, which is, of course, far more difficult . . . this, a fundamental distinction appears between the condition of prediction in economics and the condition of prediction in the other social disciplines, arising out of the tasks which they have set themselves. (Henshel

1993: 101)

Henshel proposed four categories for prediction, namely scalar predictions and three categories of ordinal predictions. Scalar predictions are “numerical,” “quantified” predictions such as

“The GNP will rise by 3.6% in the next three months.”

“The industrial average will be between 2100 and 2250 three months from now”

“Candidate A will receive 68% pf the vote in the election.”

(Henshel 1993: 94)

The three categories of ordinal prediction are directional prediction , relational prediction , and rank order prediction . Directional prediction makes predictions regarding the direction of change, such as “the GNP will be higher in 3 months than it is now.”

Relational predictions set some benchmark that the parameter of interest will have passed, such as for example “the industrial average will exceed 2000 three months from now” or “in 6 months this bank will have failed. In each case the benchmark will have been passed but no assertion is made regarding how much or what happens then. Rank order predictions make assertions ranking outcomes, such as “candidate A will win over candidate B in the election” or “army A will succeed in taking the city from army B.”

Henshel (1993: 94) relates these categories to Kahneman and Tversky’s

(1982)“numerical” and “category” classes of prediction.

Following the line of argument sketched out by Kemp (1962) and Chiang (1963),

Henshel considers cases such as the following:



In a two candidate election, the prediction is made that candidate A will win.

Without the prediction, A would have received 20% of the vote. With the prediction, A receives 40%, and still loses. (Henshel 1993: 95)

Clearly, this is not a selffulfilling prophecy, as the prophecy was not fulfilled (i.e., it did not become true). Yet, “surely something significant happened nonetheless.” Henshel terms this case a self-fulfilling tendency (SFT) that was not quite sufficient for a Self

Fulfilling prophecy (SFP). Henshel defined self-defeating tendencies (SDTs) in an analogous fashion. Henshel then claimed that the result after a prediction is a joint effect of the “predominant self-altering tendency (SFT or SDT)” and the “predictions’s form

(scalar or ordinal).” Henshel summarised the results given the various forms of prediction and the selffulfilling or defeating tendencies prevalent in his figure 1 (1993: 98). In brief,

Henshel suggests that selffulfilling tendencies tend to increase accuracy for ordinal predictions when selffulfilling tendencies are prevalent and decrease accuracy when selfdefeating tendencies are at work, while selffulfilling tendencies have an uncertain effect on accuracy for scalar predictions and self-defeating tendencies tend to decrease accuracy for scalar predictions.

With regard to the issue of control, Henshel (1978: 117-118) cited various contributors to the literature (Seeley 1951: 85-86; Popper 1957; Wolf 1957; Toch 1958; Michael 1967;

Friedrichs 1970; Wrong 1974: 29) in support of the proposition that “observers of the reactive nature of social prophecy have predicted that social science will eventually employ the self-altering phenomenon to further objectives favored by the social scientist” where through either “Machiavellian” or “humanitarian” motives, social scientists can withhold or generate forecasts which themselves have some bearing on future reality.”

For example, Seeley advocates such action, while Wrong points out that taken to extremes this would result in social science forecasts becoming inevitably “political.”

The question arises of ‘under exactly what set of circumstances do issues of reflexive prediction become significant?’ Henshel termed this problem of demarcation a “boundary problem,” and turned to a consideration of three “boundary” questions: (i) the extent to which refle xive predictions might be found in the natural sciences, (ii) are there specific areas in the social sciences free from the possibility of reflexive prediction, and (iii) are large-scale social processes free from issues of reflexive prediction?

As has been noted above, an example of reflexive prediction in artificial systems was proposed by Grunbaum (1956) and discussed in subsequent contributions in the literature by Nagel (1961: 470), Buck (1963a), Romanos (1973), and Vetterling (1976). Nagel

(1961: 470) proposed an example along similar lines with an anti-aircraft gun example;

Edel (1959) provided an example where a man created an avalanche by shouting a prediction that such an avalanche will occur. Clearly, the number of examples of reflexive prediction in a domain outside of social systems proposed in the literature was small: Henshel (1978: 112) suggested tha t “the examples that have been offered as instances of [reflexive prediction] in natural phenomena are pathetically few,” and this

“might itself be regarded as indicative.” Henshel may be taken broadly to deny that reflexive prediction occurs outside of social systems. In any case, as noted above,



Romanos (1973) and Vetterling (1976) clarified the issue from a philosophical point of view, demonstrating that the issue is dependent to a large extent on what is being meant by “prediction” and by “reflexive prediction.”

While the issue of to what extent phenomena of reflexive prediction may occur in natural systems is of considerable philosophical interest, Henshel’s second two issues of boundary demarcation – the question of what classes of phenomena in social science are subject to reflexive prediction and whether problems of reflexive prediction apply on the aggregate level – are of considerably greater immediate practical interest to social scientists. The issue of reflexive prediction on the aggregate level has largely been addressed with Henshel’s concern (considered above) with ‘macro’ social predictions such as the extent to which the doctrine of US “manifest destiny” or of communism might be selffulfilling and does not need further consideration here. It is, however pertinent to note that Henshel expended quite some effort on the consideration of under what circumstances social predictions might or might not be reflexive.

It may be readily recalled that Henshel had already argued that the level of reflexivity a prediction entails may be related to the credibility granted to the predictor (i.e., the credibility of both the particular forecaster and the discipline from which the forecaster is making the prediction). Henshel (1982: 516-517) extended this argument by identifying two cases in which predictions in a social system might not be reflexive, firstly when there is “what we might call the real-time factor,” where prediction . . . cannot be altered due to the impossibility of making the required changes to bring around the self-alteration required in the time available. The essential component is “any behaviour of sufficient complexity and rapidity- in-use that volitional alteration due to reactance to prediction is ruled out.” This would seem to include behaviour or skills or functions that are deeply internalised in either or both of the individual and society, such as for example the use of language. The second case is the “ sealed prediction ,” where the prediction is

“unpublicised in any fashion.” Henshel cites commentary in the literature to argue that even in this case, the prediction could still be reflexive, as the behaviour of the predictor, including tacit body language signals may in some manner and in some circumstances still affect the outcome. In any case, such predictions are likely not to be very reflexive.

In any case, private predictions are of less practical interest – the primary focus of interest is to what extent public predictions are reflexive.

Henshel (1982: 518-523) addresses this concern by discussing a number of situations in social science where Henshel asserts that prediction would not be reflexive. Henshel

(1982: 518) summarised these cases in his table II, reproduced below:

A.

Alteration requiring unlikely skills

Prediction incorporating unknown magnitude of variables

Prediction employing higher mathematics

Prediction employing esoteric conceptualization

B.

Alteration requiring unlikely collusion

Prediction about cross-cultural regularities

Prediction about competition or conflict



C.

Alteration requiring unlikely communication

Prediction hostile to gate-keeper interests

Prediction about social isolates

Prediction about persons with limited comprehension

D.

Alteration requiring unlikely flaunting of interpretations

Prediction interpreted as ‘unimportant’

Prediction interpreted as ‘unbelievable’

Prediction interpreted as ‘unalterable’

Henshel’s Table II (Henshel 1982: 518)

These categories are articulated in detail by Henshel (1982: 518-523), and it is not necessary to consider these cases extensively here. It is pertinent to note however that the reason that these cases are not considered to be likely to be reflexive is because there is a given factor that makes the changes required for the self- fulfilment or self-denial to occur unlikely. For example, if agents would be required to think in terms of esoteric economic models or to have an unrealistic amount of computational power in order to take the actions required that would lead to the prediction becoming self- fulfiling or self-denying, then it would be unlikely that the prediction would ultimately be self- fulfiling or selfdenying, as the causal mechanisms for this to come about would be lacking.

Henshel and Kennedy (1973: 124) considered future directions for research, such as attempting to develop a psychologically and sociologically “sophisticated theory of precisely who would attempt to alter exactly which kinds of predictions, citing work such as that of Archibald (1971; 1974) as a useful step in this direction. Henshe l (1982: 523) suggested that such empirically grounded research into reflexive prediction and

“reactions to predictions” is “at once a most obvious approach and yet one only slightly advanced.” Similarly, “there is no reason why experimental and quasi-experimental research cannot be carried out on various aspects of the [selffulfilling prophecy].” Such investigation would “explore motivational and personality variables, social arrangements conducive to self-alteration, the prestige and credibility of the predictor, and the mode and media of prediction dissemination.” However, “by and large this has not been done” -

“very little seems to have been done relative to the magnitude of the problem.”

Whether or not the social science literature might have ‘moved on’ to some extent in this regard, it is possible to assert that the mathematical- model oriented mainstream economics discipline has not. Henshel’s 1982 paper sketches out a number of useful research directions for investigating demarcating which social systems and phenomena would be likely to exhibit reflexivity, and which would not.

Along similar lines, Henshel (1978: 104) suggested that “of special interest as a topical concern is the [selffulfilling prophecy] in inflation”: that economic inflation might be explained in terms of a “selffulfilling prophecy,” as the selffulfilling prophecy may be viewed as a “key ingredient in inflation (as workers demand higher wages because they predict higher prices, and prices rise to take care of anticipated wage demands).” Henshel



proceeded to note that this view “effectively removes the central problem from the realm of pure economics and transfers it to the realm of social psychology.” Perhaps this point of view suggests one reason why economists rarely consider inflation in these social and psychological terms, but instead look to other levels of explanation such as the money supply and the demand for money!

Another interesting sociological contribution to the phenomenon of reflexive prediction was made by Stack (1975; 1978). Stack (1978: 91) considered the “paradox of prediction,” regarding not only the information in a prediction as having a reflexive impact but suggesting more broadly that the “ understanding of the nature of events in the social world” that may function “as a ‘new variable that changes the results’.” That is,

“an increase of knowledge of political or economic processes ” may “change a given situation and thereby affect the way in which events subsequently occur” (emphases added). Broadly speaking, Stack’s contribution is to articulate reflexivity in general and reflexive prediction in particular in socio-economic systems by examining the process through which symbols and knowledge are recursively implicated into the continuing social construction of the socio-economic system.

For Stack, the occurrence of selffulfilling or self- negating predictions in the social sciences is due to the fact that “the social scientist is an intervening social agent in the social system of which he is a part.” This occurs because agents act on the basis of predictions made by publicly announced predictions, and because “the presentation of hitherto obscured social facts” may “generate new social phenomena” as the new facts lead to changes in behaviours and practices (1978: 92). Stack reviews the work of the

‘usual suspects’ in the reflexive prediction literature, including Buck (1963a) and

Romanos (1973), and addresses a set of “significant causal factors” in relation to the phenomenon of reflexive prediction, including

(i) the credibility, social status, or prestige of the individual, representative or group disseminating information or presenting predictions

(ii) the circumstances and environment (for example, the time of year, the sociopolitical environment, etc) into which the prediction is disseminated

(iii) the manner (rhetorical style, persuasiveness, etc) in which the prediction is disseminated

Stack argued (1978: 93) that in practice, phenomena of reflexive prediction are more complex than is commonly understood, due to the “number of variables which enter into the complex social process” and, accordingly, Stack takes a rather process-oriented view of the processes involved in reflexive prediction. Stack begins his discussion with the sociology of Gouldner (1970: 488-500) and Parsons (1961: 325; 1967: 141-142), arguing that sociologists are deeply embedded in, and are participants in, the social systems that they are studying. The “reflexive sociologist” is therefore “urged to examine his own social role” and “be self-conscious about his own scientific activity.” Stack argues that the deeper the penetration of social analyses into social reality or socio-cultural structure, the “greater the degree of reflexivity” produced in the process. That is,



The dissemination of detailed sociological information concerning virtually all aspects of a social structure ineluctably becomes a causal and reflexive factor . . . in social change. (Stack 1978: 96-97)

It seems to me that Stack’s claim needs to be qualified somewhat: if policy makers, business leaders, social planners and other agents do not listen to and act on the ideas of sociologists, then those ideas cannot be all that reflexive.

In any case, Stack (1978: 97-101) pursues his thesis by grounding his argument strongly in Parson’s sociology, particularly “Parsons’ conception of the ‘interpenetration’ of a social system and a cultural system, of concrete systems of ‘interacting persons’ in a social and cultural system at the same time.” Suc h a cultural system is “organized about patterns of the meaning of objects and he expression of these meanings through symbols and signs.” Stack notes an “apparent growth of symbolization in contemporary societies,” where there has been a general increase in the availability of, and transmission of, societal knowledge, as well as pseudo-information, misinformation, and propaganda.”

The relatively high level of public discourse regarding economic matters, accompanied by a high level of economic disinformation from media pundits, might perhaps be taken as a contemporary example. Stack (1978: 98-99) therefore proses a “reflexive modernity” thesis, where:

The overall effect of increasing symbolization in society is a raising of the consciousness of societal units in reference specifically to the social environment. Or, simply put, symbolization increases self-consciousness about one’s social system. (Stack 1978: 98) and that, accordingly, with increasing symbolization, the reflexive character of sociological prescriptions, information dissemination and prediction would become more pervasive. (Stack 1978: 99)

The net effect is that

. . . reflexivity (in the broadest sense of the term) is part and parcel of the extent and depth of sociological analysis which is itself a significant contributor to the increased social symbolization which apparently makes sociological prediction more difficult. (Stack 1978: 101) and

. . . societal knowledge itself becomes a new factor in social reality which affects it sometimes in a minimal, sometimes in a maximal, sometimes in a positive, sometimes in a negative way. (Stack 1978: 101)

Ultimately,



. . . the increase in symbolization in society extends the potentialities for social control and, simultaneously, decreases the power of sociological prediction, thereby undermining the anticipation of the effects of social control. (Stack 1978: 100)

It is worth noting that if Stack’s thesis applies to sociology or social science in general, it applies even more strongly to economic science, for three reasons. Firstly, economic science is strongly symbolic, generally articulated and discussed in terms of highly mathematical models. The increasing abstraction mathematization of economics over time has been discussed elsewhere in this thesis. Secondly, economics tends to be much more quantitative than other social sciences. Thirdly, for better or worse, and perhaps because of its level of mathematical abstraction and it quantitative focus, economics is taken more seriously in relation to real world problems than ma ny other social sciences, and the ideas and recommendations of economists in industry, the academy, and policy positions are taken seriously and acted on by a variety of agents in the economy.

Stack’s (1975; 1978) articles were contemporaneous with the early structure/agency theory contributions of Giddens, Bhaskar and Bourdieu. While it is beyond the scope of this paper to pursue this topic, Stack’s contribution on reflexivity may be articulated and elaborated readily in terms of any of the major structure/agency theories, and each of the major structure/agency theories may be shown to explicitly raise and consider issues of reflexivity. It might be argued that any social system where institutions are socially constructed may be articulated in terms of struc ture/agency theory, and that any realistic framework for articulating this entails issues of reflexivity.

Rational expectations and reflexive prediction

The rational expectations hypothesis is normally attributed to Muth (1961), who wrote:

I would like to suggest that expectations, since they are informed predictions of future events, are essentially the same as the predictions of the relevant economic theory. . . we [shall] call such expectations “rational.” (Muth 1961:

316)

Muth restated this “more precisely” as the proposition that:

. . . expectations of firms (or more generally, the subjective probability distribution of outcomes) tend to be distributed, for the same information set, about the prediction of the theory (or the “objective” probability distributions of outcomes). (Muth 1961: 316)

Muth proceeded to state, on the same page as his definition of rational expectations, that this “hypothesis asserts three things,” the last two of which were that:

(2) The way expectations are formed depends specifically on the structure of the relevant system describing the economy. (3) A “public prediction,” in the



sense of Grunberg and Modigliani . . . will have no substantial effect on the operation of the economic system (unless it is based on inside information).

(Muth 1961: 316)

Muth’s reference to Grunberg and Modigliani’s (1954) paper has been (reasonably) interpreted (Hands 1990; Sent 1998: 51-52) as suggesting that because agents form rational expectations, a public prediction does not generally offer any new information – unless previously private “insider information” is used in forming the prediction. Hence, under the assumption of rational expectations, agents will have no reason to change their behaviours, and a public prediction will normally not have the “reflexive” selffulfilling or self-denying effect of the kind that Grunberg and Modigliani were concerned with.

Therefore, as Hands (1990: 215) and Sent (1998: 51) point out, not only will a public prediction have “no substantial effect,” it will have no effect at all. Clearly, this view depends on Hands’s and Sents’s views on the nature of rational expectations. Rosenberg

(1992: 76-77) seems to hold a different view of rational expectations to Muth (1961),

Hands (1990) or Sent (1998), namely that

The rational expectations view is not that all economic agents are omniscient about the future, nor even that most agents’ expectations are better than merely “adaptive.” It holds merely that at least some agents employ all information available in order to formulate their expectations; it holds that aggregated expectations about the future are on average correct, or at least that enough agents are correct enough of the time to take advantage of governmental policy cha nges, and that the economic incentives for doing so are great enough for their actions to affect the direction of the entire economy. (Rosenberg 1992: 76-77)

Consequently, Rosenberg (1992: 53) arrives at a different view regarding the possibility of reflexive predictions under the rational expectations hypothesis:

When all agents are informed about these plans and predictions and know the relevant theory, the reactions of at least some agents to these plans and predictions will result in some of the predictions being falsified and some of the plans going awry. Thus, economic predictions are reflexive in their effects: they undermine themselves. (Rosenberg 1992: 53-54)

Hoover (1988: 14-15) suggested that there are “at least” two interpretations of the rational expectations hypothesis – a “weak” form where it means that “people do the best with the information they have” and a “strong form” where “people actually know the structure of the model that truly describes the world and uses it to form their expectations.

Hoover suggests that Lucas rejects the first form as “vacuous” and the second form as

“silly.” A third possibility may be suggested: that people form their expectations “as if” they had access to the correct structure of the correct model, but there is certainly no reason to suppose that this might be so in practice; Rosenberg’s version of rational expectations presents another interpretation of the rational expectations hypotheses. Yet more interpretations may readily be found in the literature: perusing interviews with



eminent macroeconomists in Klamer (1984) reveals a variety of orientations towards the rational expectations hypothesis. Regardless of whether or not there might now be a clear modern understanding of what is meant by the rational expectations hypothesis, the point remains that the extent to which reflexive prediction is in principle possible under the assumption of the rational expectations hypothesis clearly depends on how exactly the rational expectations hypothesis is understood in the given discussion or model by the given theorist (and/or by the readers).

Under the standard interpretations of the versions of rational expectations hypothesis as assumed by Muth (1961) or Lucas (1976), theoretical models premised on the assumption of rationality, including the economic system modelled econometrically in the (1976)

Lucas critique, will not typically display reflexive prediction, as pointed out by Hands

(1990: 215) and Sent (1998: 51). This is not, however to say that the Lucas critique is not reflexive. As will be shown below, the Lucas critique indeed entails reflexivity as the new policy position, arrived at on the basis of econometric model, will change the structure of the appropriate underlying model as rational agents adjust their expectations, so that the change in policy position undertaken on the basis of the econometric model invalidates the validity of the model by reflexively changing the economic system the model refers to. This is not, however reflexive prediction, and therefore will be considered below under the category of “reflexive policy.”

As Hands (1990: 219-220) noted, Grunberg and Modigliani (1954) and rational expectations theorists were concerned with quite different types of problems. Grunberg and Modigliani did not assume rational expectations, and were concerned with the possibility of accurate public prediction given that agents may seek to adapt their behaviours following the public prediction. In addition, the rational expectatio ns hypothesis assumes, as noted above, that agents have a high level of information, in that they form expectations based on “the structure of the relevant system describing the economy.” The rational expectations literature and the Grunberg-Modigliani contribution regarding the possibility of reflexive prediction are, therefore, based on very different information and rationality assumptions, and pursue different agendas.

In reviewing Sargent’s work, Sent (1998) raised the interesting hypothesis that rational expectations ‘solves’ – or at least ignores and sweeps under the carpet – problems of reflexivity raised by reflexive prediction. Sent quotes Marcet and Sargent (1992):

In economic affairs, the way that the future unfolds from the past depends partly on how people expect it to unfold from the past. Economic systems can thus be described as self- referential, because outcomes depend partly on what people expect those outcomes to be. This self-referential aspect of economic systems gives rise to enormous theoretical problems of indeterminacy (i.e., multiple equilibria) when people’s expectations are left as “free variables” that are not restricted by economic theory. To fight that threat of indeterminacy, economists have embraced the hypothesis of rational expectations. (Marcet and Sargent 1992: 139)



As will be noted below, precisely these issues of indeterminacy have resurfaced in contemporary literature, as “rational expectations is no longer the monolith it once was,” and “macroeconomists are currently looking for new ways to model the formation of expectations” (Hartley 2004: 438).



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Appendix B - Reflexive prediction

Appendix B - Reflexive prediction

Early discussions of reflexive prediction

Early discussions of reflexive prediction in sociology and the philosophy of science

Early treatments of reflexivity in the economics literature

Articulating and debating reflexive prediction

Seminal contributions in the economics literature in the 1950s

Debating reflexive prediction in the philosophy of science literature

The American Economic Review discussions

Developments in the sociological literature in the mid-late twentieth century

Rational expectations and reflexive prediction

References

Related documents

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Appendix B - Reflexive prediction

Appendix B - Reflexive prediction

Early discussions of reflexive prediction

Early discussions of reflexive prediction in sociology and the philosophy of science

Early treatments of reflexivity in the economics literature

Articulating and debating reflexive prediction

Seminal contributions in the economics literature in the 1950s

Debating reflexive prediction in the philosophy of science literature

The American Economic Review discussions

Developments in the sociological literature in the mid-late twentieth century

Rational expectations and reflexive prediction

References

Related documents

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