Monday, 22 April 2013

Your Life Can Be Proved to Be Illusory

We constantly construct stories about our reality in our minds. They may not be true – the future reality will show. Only when shown to be true, we say “I knew” it. But what if they are not shown to be true? We ignore. We build our understanding on what is known, but not on what is ignored. I have discovered the world of illusions!

By Olena Denysyuk

At night, this is one of the scariest areas for a single girl to enter. It might be dangerous, like a night with a vampire; devastating, like a fire in a nursing home; scaring like a wolf’s cry.  If you need a scary spice- you just go there. Anyhow, she got the courage to step in into this-by any standards- controversial area. Instead of buying any illegal substances she is buying scientific knowledge and a cocktail. Welcome to Christiania.

But the area is actually one the safest areas in Copenhagen. It’s just your brain that simulates this scary reality. You create an illusion of how you feel and what you see. However, in reality, it’s not what it seems like. Welcome to the world of illusion, created by your brain!

Please, don’t roll your eyes at me. I know “the world is a illusion” is a tough cliché to swallow but, don’t worry, I will not bother you with any philosophical theories.  What I write is just a symptom of a deeper issue.  Feel free to apply it in any other contexts.

I have met Bruce Hood, an experimental psychologist, who gave a lecture named “The Self Illusion: The greatest trick the brain plays”. The lecture is hosted by the “Science and Cocktails” at Byens Lys Christiania.
According to Bruce Hood,
 “rather than a single entity, the self is really a constellation of mechanisms and experiences that create the illusion of the internal you. We only emerge as a product of those around us as part of the different storylines we inhabit from the cot to the grave. It is an ever-changing character, created by the brain to provide a coherent interface between the multitude of internal processes and the external world demands that require different selves.”
 The conclusion from his studies is that everything we think we are is just an illusion. Today he has managed to play with my mind and my deceptions.

So, at the end of the lecture, these insights have just added even more understanding (or I should say more confusion) on what I know about my reality, on the social, the economic or individual level. It inspired me to share some reflections upon illusion, and how easy it is to demonstrate that our mind and our life is indeed an illusion.

So do you think you know your reality?

It is easy to demonstrate how optical and visual illusions deceive our brain. Cognitive illusions are more stubborn, and therefore, more difficult to reveal. But our thoughts, beliefs and understandings also deceive our brain. The brain creates an illusion all the time: You build the best possible story from the information available to you, and if it is a good story, you believe it. We also build stories about ourselves, in our minds- most of the time, they are also positive. And when there are things we don’t understand, we just interpret them to fit into our own account.

It seems like our understanding of economy is also an illusion, because we don't know how the current events will be understood later by history. We don't know how the history will connect our reality to the next reality. Only a random, often unpredictable, future event can verify the validity of our understanding. Take for example the American International Group, AIG, a multinational insurance corporation, the biggest issuer of loan protection in the form of credit default swaps (CDSs), collateralized debt obligations (CDOs) and other sub-prime mortgage- backed securities. AIG packaged, sold and resold these securities in sophisticated ways to insurance buyers around the globe. Combined with the incentive systems, bonuses, AIG had greedily sold the securities across financial institutions, taking tens of billions of the underlying risk associated with these securities.

AIG insured derivatives against default, but did not purchase reinsurance on that risk. When insurance buyers (banks) faced millions of defaults on loans, the AIG was not able to meet their insurance obligations on these loans. It resulted in a liquidity crisis succeeded by the downgrade of its credit rating, which in turn, started the economic downward spiral of 2008.

The risk- management institutions (credit rating agencies) had lucked to support the buyers of the financial instruments (banks, mortgage institutions) with the adequate and reliable financial information needed to support the understanding of these complex securities. From another side, the buyers - banks - have not asked for this information, neither had the investors, credit rating agencies and borrowers. The risk in financial industry was hidden behind the sophisticated instruments, which nobody understood properly, creating belief that the risk was efficiently spread, and no default will result in harsh economic lending. So, everybody had failed to understand financial risk, and everybody interpreted this information to fit into their account.

Banks, insurance securities issuers, hedge funds and investors had created a perfect story about the perfect risk spread: it was a good story at that time. The whole industry believed it, as an universal truth upon which it could make money.  Everybody needed that perfect story to feed up the bonus schemes, promotions, speculation.

Only the occurring events of September 2008 eventually revealed  the  degree of illusion we were living in.

There were people, who “knew well before it had happened that the 2008 financial crisis was expected”. Well, the majority actually did not know – they thought it would happen.

Only after the turmoil, did they claim they saw it coming. If the financial crisis didn’t happen, they wouldn’t say, “I knew it”, because it couldn’t be shown to be true.

So, there is a big difference between words know and think. This also fosters the illusion we create. When we think, it doesn’t mean we know it. But often, these two words are merged, creating an illusion of understanding.

We think we understand something, when it can be proved. Before the crisis, we had created an illusion of healthy risk spread. Then that illusion collapsed.  We created an illusion again – now we believe we understand the past, because now it can be shown to be true. If the financial crisis didn’t happen, the people, who “know it will happen”, would just ignore what they believed to be true. If cannot be proved- must be false, right? But, what if it can be proved later? The illusion that we have understood the past further feeds our illusion that we can predict and control the future (the logic behind asset bubbles). The evidence from economic history had demonstrated that nobody understood the economic reality prior to 2008, because important element of markets and risk were ignored.

So, again we have created the illusion of understanding of our reality, like we did before the crisis. Those, who thought of the potential crisis, now say “I knew it”. It is their” good luck” that they can prove it now. If they couldn’t, they would just ignore it. In fact, the whole financial industry is built on how we understand our reality – the objective opinions shape the equity prices, housing prices, bank loans and trade deals. Today other elements are being ignored.

We also create an illusion of friendship and our social life. Won't you agree, when you see updates and photos of a friend on Facebook, you create a story? This story will just be an illusion, created by elements from social media. We create illusionary friends, illusionary life and illusionary “I” and “me”. We like to create stories about ourselves -in our mind- and mostly of the time they are positive. What you see on Facebook or other social media, nothing what it like in reality. This is why we like Facebook so much.

What can we do about it?
The fact that our predictions are no better, than random guesses has little effect on individuals. What can we do about it? However, we create an illusion about our current state of being, the illusion of our future, our past, our fears, our confidence - we create an illusion of our own mind. We think we understand the reality. But we have no clue what is going on around us. Only the future will show.

 Fortunately for the people, our minds work similarly, meaning that the majority of people create similar stories about the reality we live in now. So my message here is simple: we may well construct stories in our heads, we just need to be aware that the story may not necessarily be true. Also when we hear stories, they don’t necessarily have to be true.

The same applies for management decision making, strategic proposal, economy forecasting. Only future will show whether the state of decision making appears to be either qualified and adequate, or poor and over- optimistic.

Having said that, it is possible to create an illusion out of everything. So, if it's possible to create an illusion almost from everything- it should be also possible to create an illusion of an illusion? And an illusion of an illusion of an illusion. And an illusion of an illusion of an illusion of an illusion….Then it is proved- life is an illusion.

Have a great illusory day!


  1. My life is an illusion! I knew it!

    Good article. However, there were a great many people predicting the burst of the housing bubble and the incoming recession/depression. Most notable, for me, was Lyndon LaRouche, who runs for US president every chance he gets and was the first to report on the Joseph Wilson IV, yellow cake uranium issue that occurred prior to the Iraq War.

    I think the major problem was that someone, if not many someones, at AIG knew, but they kept it a secret. They created an illusion and others, who knew less, maintained it.

    1. You are absolutely right about the fact that many financial and non-financial transactions and actions were and still are being kept secret from the market participants – the common principal- agent problem on the markets. But what is more alarming is that the market participants do not recognize these information asymmetries and still cannot find sufficient ways to bring it to public (if they do- they are even at risk to go to jail). For example, the report on Financial Stability in Denmark by Danmarks Nationalbank, in 2007 stated: “there is no immediate risk to financial stability from the general economic development and falling housing prices” . So even people, like LaRouche got the ability to assess the situation critically, the majority of market agents are so “smart” (while thinking that they are rational), that they themselves choose to assess the situation to fit it into their own account. Unfortunately, the majority of population is not critical thinkers at all to recognize the degree of integrity and wishful thinking.

  2. I've visited Copenhagen not so long ago and while there I visited Christiania and it was a horrible place. How you can say its one of the safest places in Copenhagen is beyond me given the fact that people have been murdered there in relation to drugs - wouldn't you just know it! Christiania, when it was originally conceived was done so with the intention of freeing its self from the rat race and leading their own community within a community but over the years it has lost its original meaning and its now nothing but a hangout for selling drugs and I'm not just talking about grass either.

    The people are scary the place is scary and you feel your about to be attacked at any given time. The place is full of freeloaders whom have no intention of making any contribution to society other than to sell them illegal drugs and then drink themselves into oblivion. In your article you wrote - Instead of buying any illegal substances she is buying scientific knowledge and a cocktail - I would consider this very dangerous advice its almost as if you're saying lets not fear what there is to be really feared and dress it up as buying scientific knowledge and a cocktail! Perhaps you're the one under the illusion.