Observing Observers Observing Observers

“You can observe a lot just by watching.”   Yogi Berra*

This quote from one of my favorite American philosophers should be the motto of ethnographers.  Watching, being there, in situ, with eyes and ears open, in an attitude of curiosity, not knowing (especially not knowing in advance) what you are looking for but prepared to recognize it – this is still one of the very best techniques for data collection.  But, of course, ethnographers have no monopoly on observing others.

Three recent papers observe observers observing others.  The first, “From Dissonance to Resonance:  Cognitive Interdependence in Quantitative Finance” (Economy and Society, 2012), by Daniel Beunza and myself, asks the question: How do traders deal with the fallibility of their models? In particular, how do they deal with the fact that, in identifying patterns in the markets, these same instruments can also blind the trader from seeing some things.  As instruments of perception – and indeed, like the optic nerve itself which allows us to see but must also produce a blind spot – models that reveal also conceal.

How does the trader avoid such cognitive lock in? The answer is that traders leverage the fact that other traders are observing from a different vantage point.  The traders at the merger arbitrage desk we studied could not observe what is on their rivals’ screens.  But they can place on their screen an image of the “spread plot” which they skillfully use as a representation of the aggregate views of their rivals.  When the spread plot moves in a direction different from one’s own estimates, traders can ask, “What am I missing?”  and make corrections in their models.  Such “reflexive modeling” can help an individual trader to avoid disaster. But it should come with a warning label: when the system lacks requisite diversity, the cognitive interdependence can create positive feedback that yields an arbitrage disaster – such as the $2.8 billion in losses to merger arbitrageurs (including the team we studied) in the GE-Honeywell deal.  When the system lacks diversity of viewpoints, the same practices that do prove effective in mitigating individual cognitive lock in can lead to a collective lock in of enormous proportions.

The second paper observing observers observing is “The Structures of Uncertainty: Performativity and Unpredictability in Economic Operations”  (Economy & Society 2013) by Elena Esposito who argues that, “the real purpose and function of the market… is to provide an arena for the mutual observation of observers.”  This is a paper that rewards careful reading.  It is theoretically rich and dense. Yet, rare among such texts, it is very clearly written with some wonderful, strong sentences.  The essay ranges fairly widely, bringing in ideas about time from her book (see The Future of Futures: The Time of Money in Financing and Society, Edward Elgar, 2011), making a general argument about counter-performativity,  and concluding with insights about the limits of probabilistic orientation.

Most relevant for my purposes here is Esposito’s application of observation theory to the financial crisis. If you are not familiar with the concepts of first and second-order observations (from Luhmann but also from von Foerster’s Observing Systems), Esposito’s essay will serve as a useful introduction.  Like my paper with Beunza, Esposito is interested in the fallibility of models and the relationship of that to traders’ observations of other traders.  Any model would need to make assumptions about the actions of others.  Things get really interesting, Esposito argues, when models become more sophisticated and begin to take into account that others are not simply acting but are acting on the basis of models (which themselves take into account that others are using models, each of which is probability based). As models become more sophisticated, more powerful, and better able to take into account model risk, prices become more volatile and the system as a whole less predictable.  That is, the reliability of models contributes to the unpredictability of the system: “Under these conditions, every reliable forecast is destined to falsify itself, because the future reacts to the expectations imposed on it – where every additional reliable forecast contributes to an increased unpredictability of the future.”

At the core of Esposito’s paper is an interesting theory of financial markets:  “What is handled, in financial markets is uncertainty as such, resulting from a network of reciprocal observations of observers.”  The last in our trio of recent papers moves to studying empirically the effects of such social structures of observation on valuation.  “Attention Networks: A Two-Mode Network View on Valuation,” by Matteo Prato and myself, builds on the observational theory principle that valuation depends on the contingent viewpoint of the observer and on the views expressed by the observed. The observer’s viewpoints and observed views are for us embedded in the evolving two-mode (agents-assets) network structures of attention that characterize financial actors.  Our argument starts with a simple question: What does it mean to focus on a financial asset?

One way to think about this is as a singular relationship of an actor to the asset.  Another, quite popular way among sociologists, is to think about an actor examining an asset in relationship to an abstract category.  We take a different view: Instead of positing that it is the “structure of classification that guides valuation” (Zuckerman 2004: 411), we argue that it is the structure of attention that guides valuation. In place of arguing that valuation is embedded in socially constructed categories, we argue that it is shaped by networks of attention.

We define an attention network as an evolving network created by multiple agents allocating their attention and expressing their judgments across multiple situations. Valuation, we argue, is shaped by an actor’s location (or viewpoint) within such an attention network.  That is, as a first step, we propose to study the relationship between paying attention and allocating attention.  Focusing attention and allocating attention are not so very different.  The objects across which one allocates attention are the ground against which the figure can be seen.  If we as researchers can know the other objects that an actor has in her field of view, then we know the viewpoint from which she  makes an assessment.

In assessing a focal situation, actors can make associations, analogies, and comparisons with the other situations that are present in their portfolio of attention. Specifically, a feature viewed as salient for evaluating one issue might be recognized as relevant for another. That is, the issues across which an actor allocates her attention will shape the properties that are selected as salient and worthy of consideration when assessing the focal situation.

We refer to this as the viewpoints effect. Our first proposition is that valuation is perspectival: One’s assessment of an issue is shaped by one’s viewpoint, given by one’s contingent portfolio of attention. We hypothesize, specifically, that two actors who assess a given situation vis-à-vis a similarly (differently) composed portfolio of other situations are more likely to autonomously converge (diverge) in their interpretations of the given situation.

Viewpoints are the first but not the only step in developing an observational network approach to valuation.  Building on the second relational property of attention in a two-mode observational network (i.e., links among the competitors who pay attention to the same market issues), we expect that market actors are more likely to come across the assessments of the competitors who focus their attention on the same issues.  When two competitors allocate their attention across more similar portfolios of problems, their views become prominently visible to each other. Associations made by one actor become noticeable to the other and vice-versa. Conversely, mutual exposure would be limited when two competitors are not in their respective fields of vision because they are allocating their attention to different market aspects.

Thus, our second proposition, referring to the views effect, is that valuation is doubly perspectival: actors’ valuations are not only shaped by their contingent viewpoints, given by their fleeting portfolios of attention, but also by the views of others, which themselves are shaped by their changing viewpoints.  We, therefore, further hypothesize that, the more (less) two actors have encountered the same third actors’ views on the other situations to which they have not been attentive jointly, the more their interpretations of a given situation will converge (diverge).

We test these propositions in the context of securities analysts, whom we might think about as professional observers.  In particular, we study the end of year earnings estimates that securities analysts make about the firms in their portfolio of coverage.

Whereas Daniel and I made our argument about reflexive modeling based on an ethnographic account of one merger arbitrage desk in one trading room (in fact, further limiting our account to what transpired on a single morning), Matteo and I conduct a statistical analysis of 10,933,662 pairs of analysts’ estimates on US publicly listed firms’ earning per shares.  Our findings support the idea that an actor’s position in an observational network – via viewpoint and selective exposure to others’ views – shapes valuation.

Our sociological account of valuation exploits two-mode networks as a method of analysis. Objects are located within a network structure of attention given by the actors who observe and evaluate them.  Meanwhile, actors are also located within a structure of attention given by the ties that connect them through the objects they observe and evaluate. Note the peculiar feature of this network. There are no direct ties among the agents.  They are not proximate because of some personal connection. Their location in the social space of attention – their proximity to or distance from each other – is a function of ties formed through objects.  In mapping these networks, we chart socio-cognitive networks.

In further research we will explore the community structure of such networks with an eye to investigating the how different types of structures contribute to dissonance or resonance.

* I once quoted Yogi Berra at a Harvard conference on pragmatism. The quotation was apt: “In theory there is no difference between theory and practice. In practice there is.”  I had used the quotation in arguing with a prominent German social theorist who then expressed some concern to a nearby participant that he was not familiar with this figure.  He became incensed when, during the coffee break, he learned that the “famous American philosopher” was a New York Yankees baseball player. I thought it was all in good fun; but he was not at all happy. If we had been in a bar instead of the foyer of a Harvard building, it might well have resulted in a shoving match. I made a point of keeping a smile on my face, but even then it was quite tense before a mutual friend stepped between us.  So, a note of caution about when, where, and how to quote American philosophers.

David Stark teaches in the Sociology Department at Columbia University.  Publications, papers, course materials, and presentations (including ‘silent lectures’) are available at  TheSenseofDissonance.com.

As part of our inter-network collaboration this entry is co-posted with Charisma.

CFP: Special Issue on “Virtual Money”

Dear Soc Financers,

Christian Olaf Christiansen asked me to pass along this call for papers for a special issue of the journal Distinktion: Scandinavian Journal of Social Theory on “Virtual Money.” A description is below.

Conference announcement: Mediating Markets, Edinburgh March 2013

From Desne Masie:

MEDIATING MARKETS | Journalism | Public Relations | Impression Management | Narrative Practice

The role of the media in the stock market is currently a trending topic in academic research in the area of accounting and finance as well as other social sciences, especially in information infrastructures in the sociology of science and technology as well as the new economic sociology of financial markets. Mediating systems such as newspapers, online journalism, literary artefacts, press releases, speech acts and narrative reflexivity are a key legitimising force of financial markets and has been brought from within the heterodox fields of financial economics firmly into the mainstream literature.

The financial crisis and the rise of digital markets have led to the role of media being brought under scrutiny in the academic literature and financial research in particular. This conference explores the role of media, and the core mediating systems in financial markets: journalism, public relations, impression management and narrative practice — particularly with regard to their reifiying, performative and institutionalising function.

 

University of Edinburgh Business School 22 March 2013 for rsvp and info contact Desné Masie d.r.masie@sms.ed.ac.uk or Twitter: @DesneMasie

 

registration and information in the url below

http://www.business-school.ed.ac.uk/about/school-events?a=53149

  

And another conference by the same organizer:

 

AFRICA REDUX

This international conference looks at cutting-edge research, opinion and analysis from leading academics, economists, practitioners and journalists of Africa to provide a snapshot of the hottest issues on the continent today. Bringing together interdisciplinary approaches to refigure the debate in investment, politics and development Africa Redux asserts that the continent’s complexity demands a nuanced understanding of the factors that influence its economic climate. This has become especially urgent in light of the Africa Rising narrative, and the new financial geographies created by capital flows following the financial crisis, as well as instability in the Sahel and North Africa. 

 

University of Edinburgh Business School 21 March 2013 for rsvp and info contact Desné Masie africaredux2013@gmail.comor Twitter @AfricaRedux1

 

registration and information in the url below

 http://www.business-school.ed.ac.uk/about/school-events?a=53126

Workshop announcement: Interrogating Economics in the Public Sphere. Cambridge, April 2013

From Tomas Undarraga:

On the 18th and 19th of April 2013, the ECONPUBLIC project at the University of Cambridge will host a workshop on “Interrogating Economics in the Public Sphere”. The event will bring together historians, sociologists, and media analysts to review the outlying literatures on public economic knowledge. Our challenge is to elaborate on the research agenda that will explore the connections and overlaps between economic journalism, the public production of economic knowledge, and knowledge as communicative practice.

The workshop is organised around four panels and Donald Mackenzie will open the plenary with a talk entitled “Financial modelling as culture”. The panels will run as following:

1. The public understanding of economics: A recent media history
2. Social sciences and the media’s role in finance and financialization
3. The uses of publicity: the 364 economists’ letter of 1981
4. Economic journalism: practices in national contexts 

The second panel will discuss the media’s role in finance and financialization, aiming to explore the links between journalism, economics and the public sphere. The panellists include Aeron Davis, Karel Williams, Daniel Beunza and José Ossandón, which will discuss the media as a communicative space for financialization, the salaried intelligentsia and financialization in the UK, and Spain and financial communication with bond investors during the sovereign debt crisis, among others.  

More information about the workshop and the project as a whole, please see: http://www.econpublic.hps.cam.ac.uk/events/workshop-interrogating

The number of places available at the workshop is very limited. If you are interested in attending, please contact the project at: hpsecon@hermes.cam.ac.uk

Donald MacKenzie on financial algorithms and other matters

As even toddlers know by now, the NYSE is in the process of being acquired by the Intercontinental Exchange. The merger has been celebrated in the press as a sign of changing technology in trading (though the crucial role of the SEC in bringing about the algorithmic revolution to equities trading is almost always neglected by journalists).

The merger also takes place more or less at the same time as two new articles by Donald MacKenzie (one of them coauthored with Juan Pablo Pardo-Guerra) have been made public. The paper on Island is particularly relevant, as it provides an analysis of the type of “insurgent capitalism” that has perhaps elevated ICE:

http://www.sps.ed.ac.uk/__data/assets/pdf_file/0003/97500/Island34.pdf

http://www.sps.ed.ac.uk/__data/assets/pdf_file/0006/93867/Merc11.pdf

More broadly, for an interesting interview of Donald MacKenzie (in English, but with a short written intro in Spanish) see the following link at “Estudios de la Economia,” a somewhat unclassifiable STS/ sociology blog led by Chilean academics Jose Ossandon:

http://estudiosdelaeconomia.wordpress.com/2012/12/15/the-risk-in-the-financial-system-can-often-develop-in-areas-that-people-think-of-dull-technical-and-boring-an-interview-with-donald-mackenzie/

Social Studies of Finance jobs

University of Leicester -School of Management

Lectureships and Readerships/Professorships 

The School of Management, University of Leicester is now recruiting in several areas, including the Social Studies of Finance.
Below are the links for the ads in jobs.ac.uk.
The text there may be giving the impression that we are looking only for applications for the professorships.
This is not the case: there are jobs at different levels.

http://www.jobs.ac.uk/job/AFR698/lecturer-in-management/

http://www.jobs.ac.uk/job/AFR717/professor-or-reader-of-management/

I am happy to receive informal enquiries from SSF and/or accounting candidates.

Very best regards,
Yuval Millo

–
Yuval Millo
Professor of Social Studies of Finance and Management accounting
School of Management, Ken Edwards Building
University of Leicester
University Road
Leicester, LE1 7RH
United Kingdom
Phone: +44 (0)116 229 7385
http://www2.le.ac.uk/departments/management/people/ymillo

Author’s Corner: The Small World of Corporate Governance by Bruce Kogut

“The Small Worlds of Corporate Governance” is the latest book edited by Bruce Kogut. The book showcases cross-country research on relationships among corporate directors, mapped using “small-world networks” (see here for a PDF of Chapter 8). The author’s goal was “to add a sociology of governance as an additional leg” (p. 8) to the corporate governance literature. The goal is amply met, with an impressive edited volume of 38 contributors.

Given my interest in corporate governance, Daniel Beunza invited me to interview Kogut for this blog — an “author’s corner” of sorts. Economists, sociologists and organizational theorists can expect controversy as well as sharpness in Kogut’s answers.

Is “The Small World of Corporate Governance” a first step for socializing corporate governance?

Yes, picking up on the ASR article that Gordon Walker and I wrote now some time ago, we make a very explicit case for what sociology brings to the exercise and practice of governance; for many people in this field, this needs to be demonstrated. It’s odd, the top of the pyramid, folks are very aware of their social networks, but somehow the transition from the networks of money and connections is lost in the mainstream accounts of who gets to buy and who gets to sit on boards.

What was your motivation for writing about “small words” in corporate governance? 

I wanted to do two things. Show how social science would do much better working under the principle of open science, sharing data, inviting folks to join, posting the data –you can get our data on our Columbia Bernstein Center web site.  And I also wanted to show how computational social science provides us with powerful tools and ideas, including comparative and world sociology. Some of these tools, i.e. algorithms, are posted, and they are also detailed in the book. I am pretty excited by dynamics and simulations and use data for simulations and I hope that others take notice, even if not per interested in governance. And also, I wanted to have a fun with a lot smart people, many who were early in their careers.

Given the extensive work complied in this book, what is the main message that, if at all, changes the way we think about corporate governance?  

The simple message is that society matters to governance and we can trace this social influence dynamically through the pattern of connections within elites. We show how governance outcomes differ depending on these social connections. There is a lot more to be done here, and many more kinds of ‘multiplex’ connections to be considered.  In our age of big data and algorithmic search, we are at the frontier of a revolution and we wanted to be in barricades, fighting this battle.

Should market regulators have read this book before the 2009 financial crisis?

 Well, probably we should all have been a bit smarter but every crisis teaches a different lesson. The Asian crisis gave rise to the teaching that liberalization of financial markets is a good thing. It can be a good thing in countries that need capital and the vendors of capital are a few banks. What our book says is to understand how structural patterns of ownership and power matter to a country. In the US, the book that still needs to be written in the vein of our study is how connections of politicians, regulators, and money have been, probably still are, too tightly held. I am glad to see that the office of systemic risk is part of the Dodd-Frank bill and is looking at loan exposures. I think we should migrate this study also to owners and boards.

One of the strengths of the book is the use of “innovative methodologies” in social network analysis to map ties among board directors. Are research methods to be blamed or lauded in the popular association between corporate governance and the turmoil in the markets?

Not sure how to answer this question, but I have no doubt that there are not enough sociologists to cover every major question, so we have to start working smarter together. I was very happy to see a community of scholars develop, and it was remarkable how many joint papers were produced between members of the small world community, as we called ourselves, that were separate from the book. It was a great learning experience, for me too.

One believes that companies are globally connected and yet this book demonstrates that the world of corporate governance is “small” (e.g. low connectivity across countries) indeed. Is this a story of how a “small” group of directors controls a “large” part of our lives?

That’s not quite what we found. In fact, the world does not have the structural properties of a small world –and I think this is a problem.  There is no global law, no common rules on governance, and no deep social fabric.  Small worlds are often clubs, but these clubs can serve to monitor firms, keep an eye on corruption, respond in a crisis.  Internationally, who controls the large corporation? Who knows what Walmart is doing in Mexico and elsewhere and Walmart headquarters may truly not know. We need small worlds to provide this additional governance.

What are the implications of a “small world” for the spread of social innovation in governance practices, such as partnerships where the employees sit on the board of companies)?  

That experiment has been run and Europe is still fighting that battle, but it is surprising how many firms in America are also employee (and union owned) through ESOPs.  I don’t know if ownership ties matter a lot here, clearly law does, but there are also very interesting private equity companies who spread this type of ownership because the data show that these firms do relatively well.

One of the findings (by Martin Conyon and Andrew Shipilov) is that “governance models” – for example, the Anglo-Saxon – is indeed formed by multiple models. What are the implications for implementing international governance and accounting standards?

This was a mischievous chapter simply to say that you may think Anglo-Saxon countries consist of atomistic firms run by independent directors, but alas you are very mistaken. End of story.

What are the implications of a “small world” of corporate governance for corporate bankruptcy?  

Good question. Bankruptcy means that banks and lenders choose to refuse to lend more.  We have good evidence that those firms with closer bank ties had better access to capital during the crisis. However, once bankruptcy occurs, lenders own the firm (though labor and others may also have power) and their ability to coordinate a work out will depend upon their own ties and relationships.  We did not study this, but others have; it’s rather colourful research.

Social structures (e.g. families) and governance structures are argued to be mutually reinforcing. Although insightful, this view leaves us with little hope for social change in countries were social embeddedness plays a critical role. This idea strikes me specifically in the context of emerging economies (e.g. Brazil and China). Which direction are we heading to?   

We tried to wean a generation of scholars from the notion that family ownership is bad and also away from this notion of social embeddedness. The pure libertine will say, families and governments get out, but we have to ask relative to what. But quite frankly rather than enter this debate (other than to say the evidence is all over the map), we showed through a very simple simulation that family firms emerge out of social rules, such as who in the family inherits the firm or how many sons does a family have.  Again, we were stressing the pitch here’s how society matters to emergence of corporate governance. Once we understand these rules and macro outcomes, then we can start to think why an alternative might be good or bad.

Governance is described as a social asset shared among a club, how much can we change the composition of this club – for example, more females sitting on boards? 

Norway showed that a quota law can change the club dramatically and of course such clubs must be open to societal intervention. Quotas leave me very uncomfortable for I don’t understand why Norway thought that legislating outcomes, 40% females, was necessary or socially desirable. What about people who come from poor homes? Take this to an extreme and we will have to have a quota for white males to keep a few around. What we did using Belgian data on real directors was to give a mini-simulation how low quotas can generate considerable power to ‘women’ as a category. Since then in a paper that will come out soon in SMJ, we isolate more clearly the tipping point where a quota is just enough to get the ball rolling.  But I don’t mind saying, I am not real big on government intervention on setting quotas and this kind of thinking, as we analytically show, is confused.

Should society expect this club to promote social change? 

That question presumes that social change is desirable and I don’t fully disagree with the Edmund Burke tradition that conservation of the past is conservation of the future, and this club can in this sense be a conservative force with the capability to monitor and enforce better governance.  I don’t see firms as homogeneous, and thus I don’t see clubs necessarily pushing for change or conservation.  But since I have come to learn that much of social science pays so little respect to conservatism unless we are discussing governance of universities, that it might be healthy to say we can and should expect these clubs as much to be conservative as to be actors for social change.

Can corporate governance practices shift from wrongdoing prevention to doing good? 

As many know, I am a CSR skeptic, though I see many good examples which don’t make me bilious. I see corporations doing good through a growing enlightenment of how what they do can be powerful forces for good in the world and also profitable. I am of course troubled by how much profit from providing goods and services to the poor is not defensible, but we should also respect that firms are powerful engines for the efficient delivering of services and these efforts employ people. Lowering the costs of providing finance to the poor, hiring people, and not being too greedy (the thorn in the heel of this argument) are worthy aims that boards need to move off the CSR agenda into the business for business agenda.

Recently, Michael Woodford was dismissed as CEO of Olympus Corp. after he whistled on a $1.7 billion accounting fraud at the top level of his own company. What is the role of individual’s values in the “small world” of corporate governance?

It’s hell to be a foreign CEO of a firm where the boys don’t like you.  And whatever his values, which appear to be admirable, he was not a player in the business networks of Japan.  Game over for Mike.

As for ethics in corporate governance, is “small” really beautiful? 

I don’t know. The Rajastani miniatures are beautiful, as is a large canvas of Reubens. Small in our sense does not mean small firms, it means that there are clubs that are not big relative to the size of the network and, here is the good news, these clubs are pretty well connected between clubs and to smaller players.  I kind of like this, it’s better that a Simon/Barabasi world of a few giants and then a lot of squid. Many people don’t like atomistic competition or markets made of small firms.  So as far as a structure goes, small worlds can be very aesthetically pleasing topologies – and I say this with full pride in the nerdiness of that observation.

Responsible finance, wind tunnel and radiotherapy. Notes from the conference “Market failures, market solutions” by the ICAEW Financial Services Faculty

If you thought responsible finance was just another word for responsible investment, here is an eye opener: many practitioners stress that it is just as much about good customer service. 

It was very intriguing to hear this as a key message at an Accounting conference, and not for example at a Bank Marketing event. The importance of customer service came up at the conference organized by the Institute for Chartered Accountants of England and Wales, a key professional accounting body, last month in London. The high-profile discussion on making finance responsible — from within the industry – featured talks around two panel discussions “Can responsible finance pay?” and “Have we forgotten the fundamentals of finance?” Link to the program here.

What prompted the event is the desire to restore trust in the financial sector after the crisis is. The ICAEW FS’s new paper framed the subsequent discussion, by providing a set
of expectations for finance and some examples: Prudential after the 1906 San Francisco earthquake; and more conventional “responsible investment” initiatives, such as the Finance Innovation Lab partly run by the ICAEW and the WWF, which develops environmentally friendly financial solutions. Leaders of “sustainable banks” such as Triodos were also speaking at the event.

Three things stood out to me at the conference:

- the diverse and intermingled notions of “responsible finance” that exist empirically

- the desire to “reintroduce judgment” into banking, and

- the widespread reference to “ethics” and even more so, to “culture”.

More about each below.

1) “Financial services is a service business. This is forgotten” emphasized Iain Coke, Head of the Financial Services (FS) Faculty of ICAEW in his opening address. Coke said everyone talks about financial products but finance is not about product manufacturing. Rather, the key to restoring trust and responsible providers was in maintaining long-term “sustainable” relationships with customers. 

In this vein, the conference identified a central aim of finance in making products that
customers understand, and making consumers understand the products.

The panelists talked at length about the virtues of having simple products (this is a frequent
preferred alternative in consumer protection debates worldwide). Others argued for products that may remain complex internally but deliver “what it says on the tin.” Jonathan Bloomer of Lucida presented a clear image: we need to get back to products that do what they need to do. He used the analogy of a small car with a concealed engine that the owner cannot access—its makers deemed it too complex for users. But the car does what the user expects it to do, which is to get from point A to point B. For Bloomer, the key issue is that the manufacturer understands the complexity behind the product, to make sure that the product does what it says it will do, in all circumstances. 

The discussion implicitly shifted between, and worked with, ideas about engineering the right properties of financial products (such as simple vs complex; reliable/knowable; transparent/opaque), or not touching the properties but communicating better information about them (such as more details; less details but clearer; delivered in an understandable or personal format).

John Griffith-Jones, Chairman-designate of the UK’s new Financial Conduct Authority said that transparency about the “wind tunnel test” of products by providers is especially important. In fact, the idea to label financial products briefly came up, likened to food labels.

A further dimension was added to the debate by Griffith-Jones, who emphasized less the
generic reliability of products and more their personal suitability to a given client: finance must be delivering the right products to the right people. Customers should only be offered products that are good for them. His analogy with medicine: radiotherapy is not good for everyone but may help someone with specific types of cancer. (See my very brief comparison between the UK’s distinctive personalized approach and planned US consumer financial protection policy.)

Some of the panelists therefore saw transparency as the pretext for responsibility, so that
under transparent circumstances, both financial providers and consumers should be held
responsible for their decisions (such as in an example of interest-only mortgages). There was less debate about what this transparency of financial products and services entails, how to ensure it, and what it means to understand a financial product, either by makers or users.

However, the LSE’s Paul Woolley cautioned against the knowability of finance and
pointed to the inherent uncertainty in financial products/services: finance is a different sort of product, and you do not find out whether the financial provider was good until you have
already retained their services. (Basically explaining what economists call “expert” goods
and “experiential” goods.) Based on this observation, he argued that the Principal-Agent
problem is the correct model for financial markets instead of the Efficient Markets Hypothesis, since investors rarely invest directly into these markets but rather through an intermediary such as a bank, broker or even the exchanges. Since the interests of Principal and Agent are not aligned by default, this gives rise to exploitation by Agent.

Woolley came close to arguing performativity when he explained that he is writing the Agency problem into asset pricing theory and this should matter to practitioners. He pointed out that the rulebooks of financial markets were written based on asset pricing theory, so in essence, to change the markets we need to change theory first.

Finally, the soon-to-be Deputy Chief Executive of the new Prudential Regulation Authority, Bank of England Executive Director Andrew Bailey pointed out that we miss a broader “political economy” debate: how does the financial industry fits into the bigger picture? He brought the case of endowment policy mis-selling in the UK several decades ago. This has to be placed as part of the shift from a higher inflation regime to a lower inflation regime. That, in turn, should be related to a societal shift in relation to inflation. We do not talk about it, Bailey said, referring presumably to public discussion, regulation and the financial services industry.

2) In terms of financial decision-making, reintroducing judgment and local power
was mentioned both for lending and for regulation.

First, large UK banks are reconsidering the role of the bank manager in lending, as CEOs
question the virtues of their centralized credit decision-making functions. Kevin Burrowes of PwC said banks are asking if they should get away from “faceless credit” and give more power back to the bank manager, who is sitting in the middle of the community, and can be part of its prosperity. Others added that relationship managers should get proper training whereas turnover is high.

Not only that, Burrowes said that banks become increasingly involved: since large UK banks find they cannot lend to small businesses based on credit criteria, they increasingly decide to provide equity and essentially become venture capitalist banks.

Second, Bank of Engalnd’s Andrew Bailey said the financial regulator’s plan is to
reintroduce “judgment” in assessing capital adequacy, instead of a risk-weighted calculation which he suggested is too mechanical. IN the same spirit, he added that Accounting as a profession “needs to remember assurance and opinion in audit”. 

While the discussions often did not specify investment banking or commercial/retail banking, Bailey stressed that he sees a big difference because commercial banking is defined by a fiduciary duty to customers, while investment banking is about dealing with counterparties. Therefore they should be treated separately.

3) Finally, the two major concepts of the day were “ethics” and “culture”, running through all of the topics. The panelists grappled with the difficulty of pinning down responsible organizational culture and how to engender it. The “tone at the top” (board) and a permeating ethical culture were often mentioned as solutions. Alternatively, Iain Coke highlighted “integrity” and “competence” as the central features of a financial sector that people can trust again. But these come from various practices, including redesign of performance measurement and incentive structures, as well as relying more on professionalism. In short, the participants often decomposed culture into practical incentives.

For some, ethics came as a necessary substitute for regulation-by-knowledge, because we will never understand the details of what the industry is doing, as UK Member of Parliament David Mowat said, who acts as Parliamentary Private Secretary to the new Financial Secretary to the Treasury. 

On the matter of regulation-by-knowledge, Mowat also asked, how do we manage global risk and global entities? In his closing address, the Conservative politician ho is involved in the new financial services bill, reiterated that the City depends on being the center of finance in Europe, but the UK is trying to regulate nationally what is a global financial system, where company risk management means that the UK is treated as just one part of a far-reaching corporate portfolio. He added that Eurozone financial regulation currently bypasses the UK, yet it obviously has great effects on UK-global banks. 

What can we take away from all this as sociologists/anthropologists of finance? There are many many points here and I want to start off with these three:

- A customer-oriented definition of responsible finance: what does this mean in the grand scheme of financial reform? Are mainstream banks trying to solve a new problem with an old tool? How does this discourse relate to the socially-environmentally responsible investment movement?   

- There was a relative lack of discussion of systemic properties in finance. Culture of organizations or the profession, and personal ethics were the main frame of discussion, and some speakers acknowledged that failures will be inevitable, so the key is how to respond to that, and that is where customers came in. 

- The reported initiative in the banking industry to turn to personal “judgment”, culture and ethics, as solutions to the problems of what we may call a technical expert system. I wonder how some of these ideas will take shape and if they will change mainstream banking. For example, how would banks bring back the bank manager and dismantle centralized credit decision-making systems, which seem to be so cemented into the financial infrastructure?

One clear conclusion is that practitioners and regulators are becoming attentive to “social” factors such as ethics, culture, or judgment as key to banking reform. But these are very difficult and complex concepts in social science; no wonder that their practical use (“how to have a better banking culture”) remains hard to envision. Financial practice is really entering the realm of sociology and anthropology here. A public discussion might be in order.

Research fellowship – Oxford – Models and resource stewardship

Research Fellow – Use of Models and Predictions in Resource Stewardship 

School of Anthropology, Institute of Science, Innovation and Society, Oxford 

Grade 7: £29,249 – £35,938 p.a. 

 The Institute for Science, Innovation and Society (InSIS) wishes to appoint a social scientist to a Research Fellowship in Use of models and predictions in resource stewardship for a fixed term of three years. The position is based at InSIS, School of Anthropology, Banbury Road, Oxford.

 The Oxford Martin Programme on Resource Stewardship is an initiative of the Oxford Martin School focused on freshwater, land, atmosphere and biodiversity as vital resources subject to both cumulative and systemic pressures arising from human activities. The programme involves researchers from several University of Oxford departments.

 The post holder will work in close collaboration with a social anthropologist and an earth systems scientist to identify factors that shape use and non-use of climate and weather information among flood disaster managers. Full details can be found in the job description below.

 You will need to have a Postgraduate qualifications in a relevant social science discipline, most likely anthropology STS, sociology, human geography, social psychology or political science. Experience designing, organising and executing qualitative/ethnographic fieldwork is essential along with the ability and willingness to work as part of an interdisciplinary team, an outstanding research record appropriate to the present stage of your career, with evidence of potential for producing distinguished research, and excellent organisational and time-management skills.

 The closing date for applications is 12.00 noon 16 November 2012.

 For information and to apply click here >

Esther Vicente

Institute Manager

Institute for Science, Innovation and Society (InSIS)

University of Oxford

64 Banbury Road

Oxford

OX2 6PN

ESRC Seminar Series: Financial Modelling Post-2008: Where Next? Seminar 1

Date: 28-29 November 2012

Seminar details

This is the first seminar in a four seminar series. The series will involve leading experts presenting papers on two key themes which are absolutely central in financial modelling: distributional assumptions and efficiency. The conference series will tie these two key themes to the events of the 2008 financial crisis. It will attempt to shed light on how financial modelling can possibly be re-interpreted in light of the 2008 crisis.

This particular seminar deals with the legal/historical origins of the 2008 crisis and is organised by Professor Molyneux (co-investigator), Bangor University.

Amongst the confirmed key note speakers are:

• Professor Rousseau, Vanderbilt University, USA
• Professor. Deakin, Cambridge University
• Professor Steven Ongena, Tilburg University, the Netherlands
• Professor Ian Tonks, University of Bath
• Dr Rhiannon Sowerbutts, Bank of England.

More details