Why can finance be hacked?
There are lots of reasons why finance is different from normal markets, but I am particularly interested in why it is difficult to model economically. It's not fundamentally because "finance markets deal with money, which is essential to all other markets". On this basis, energy markets would have the same problems, as no other markets can operate without energy; equally, computer hardware or telephones. Instead, it's because finance has a special characteristic in information-theoretic terms: it creates contracts which operate on other contracts, which in turn operate on the first contract again. This is what George Soros calls reflexivity - but I will use another term: self-referential . Self-referential systems behave very differently to "normal" systems. Douglas Hofstadter has made a whole career out of analysing them. In his famous book Gödel, Escher, Bach he compares the self-referential patterns in Escher's art and Bach's music to Gödel...