How does performativity happen? The case of risk management…
March 26, 2007
Tomorrow Tuesday, Yuval Millo will be giving a talk at Columbia about performativity in the context of risk management. The title is “Mechanics of Performativity: How financial risk management made itself irrelevant”. (the most recent version of the paper)
Here’s the abstract:
The paper analyses the development of organised markets for the trading of stock options and focuses on the role that risk management techniques played in the evolution of these markets. The paper’s main claim is that financial risk management turned into a boundary object in options markets – a set of instructions and practices that served as a common ground and as a basis for discussion and operation. Using empirical data collected from primary documents and interviews, the paper argues that the remarkable success of today’s financial risk management should be attributed largely to the communicative and organisational aspects of the procedures and not necessarily to their accuracy or validity. The historical narrative presented in the paper, spanning from the late 1960s to the early 1990s, reveals the social, political and organisational factors that underpinned the exponential success of a particular mathematical tool, the Black-Scholes options pricing model. The intertwined trends and events that accompanied the growth of options markets – the transformation of margin calculation, emergence of index-based contracts and the dominance of institutional investors in the markets – increased the dependency of the various market participants (traders, exchanges’ staff and regulators) on mathematical risk management. The strength of financial risk management as a boundary object was tested in the early 1990s, when it was adopted by the SEC, in spite of the fact that under extreme market conditions (October 1987) the system produced unreliable calculations.
The talk will take place on Tuesday March 27th at 4.00 pm at room 802 of the International Affairs Building, at Columbia. It is part of the Heterarchy Seminar, and sponsored by the Center on Organizational Innovation.