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Recognising that our understanding of the world in which we live is inherently imperfect (fallible

for short) constitutes a major step forward. Instead of thinking in terms of a one-way relationship
in which our statements do or do not correspond to the facts, we need to take into account a
connection that is going in the opposite direction. One's thinking (subjective, taking place in the
privacy of the participants minds and not directly observable) makes an impact on the world in
which we live. Not all aspects of reality are affected but those that are can be best understood in
terms of a two-way relationship between thinking and reality.
My conceptual framework dealing with the relationship between thinking and reality is built on two
relatively simple propositions. The first is that in situations that have thinking participants, the
participants' views of the world never perfectly correspond to the actual state of affairs. The
complexity of the world in which we live exceeds our capacity to comprehend it. Confronted by a
reality of extreme complexity, we are obliged to resort to various methods of simplification:
generalizations, dichotomies, metaphors, decision rules, and moral precepts. These mental
constructs take on a (subjective) existence of their own, further complicating the situation. People
can gain knowledge of individual facts, but when it comes to formulating theories or forming an
overall view, their perspective is bound to be either biased or inconsistent or both. That is
the principle of fallibility.
The second proposition is that these imperfect views can influence the situation to which they
relate through the actions of the participants. For example, if investors believe that markets are
efficient then that belief will change the way they invest, which in turn will change the nature of
the markets in which they are participating. That is the principle of reflexivity. The two principles
are tied together like Siamese twins, but fallibility is the firstborn: without fallibility there would be
no reflexivity.
The concept of reflexivity needs further explication. On the one hand, we seek to understand our
situation: I call this the cognitive function. On the other hand, we seek to make an impact on the
world: I call this the participating or manipulating function. The two functions connect the
participants' thinking (subjective reality) and the actual state of affairs (objective reality) in
opposite directions. In the cognitive function, the participant is cast in the role of a passive
observer: the direction of causation is from the world to the mind. In the manipulative function,
the participants play an active role: the direction of causation is from the mind to the world. Both
functions are subject to fallibility.
The two functions work in opposite directions, and they can come in conflict with each other.
How? By depriving each function of the independent variable that would be needed to determine
the value of the dependent variable. The independent variable of one function is the
dependent variable of the other, thus neither function has a genuinely independent
variable the relationship is circular or recursive. It is like a partnership where each
partner's view of the other influences their behavior and vice-versa. If the two functions
operated independently of each other, they could in theory serve their purposes
perfectly well. If reality were independently given, our views could correspond to reality. And if
our decisions were based on knowledge, the outcomes would correspond to our expectations. But
that is not what happens because the two functions intersect: and where they intersect,
they can interfere with each other. This interference is reflexivity. And, reflexive situations are
characterized by fallibility: a lack of correspondence between the participants' view and the actual
state of affairs.
Fallibility has a negative sound. Indeed, every advance we make in better understanding the
relationship between thinking and reality has a negative connotation because it involves a retreat
from perfection. But this negative interpretation is itself a manifestation of our fallibility.
Recognising our fallibility has a positive aspect that ought to outweigh the loss of an illusory
perfection. What is imperfect can be improved, and the improvement can manifest itself not only

in our thinking but also in reality. If perfect understanding is beyond our reach, the room for
improvement is infinite.