Performativity: will any theory do?

June 3, 2008

I was asked the question above, in different variations, many times during the workshop we did in NY in April. ‘what if, instead of Black-Scholes, the traders would have used some less-useful prediction mechanism (for example, astrology) would you then expect a performative effect to take place?’ or (the flip side of the previous question) ‘if Black-Scholes was not accurate to begin with and only became so as a result of traders using it, then why would anyone use a theoretical pricing model that was not producing accurate results?’

An answer, specific to the Black-Scholes case and how it became popular in spite of its inaccuracy during time of financial stress, can be found in this paper, that’s now making its way through a journal review process. However, the concept of performativity of expert knowledge in organisations alludes implicitly to a more general mechanism through which the process unfolds. As I did very briefly in the workshop and, as I now develop a paper version, I would like to offer here an initial set of theoretical definitions that describe the conditions necessary for performativity to take place.

To generalise performativity of predictive expertise, it is necessary to refer to reflexivity. Naturally, actors’ reflexivity is at the core of performativity: actors’ reactions to the ‘predictive content’ of a theory are the engine of performativity. What then, affects actors’ reactions to the theory?

First, given that actors are aware of the content of a theory, the actors’ ability to intervene in the field for which the prediction is made determines how effective would be the efforts to act in accordance with the theory. For example, we may have accurate theories about the rate at which the universe is expanding, but we are virtually helpless when it comes to intervening in this field. In this case, our reflexivity (after all, we are part of the universe) cannot be translated to intervention. In contrast, the public nature of financial markets makes them a field that is open to theory-driven intervention. In fact, such interventions – ‘taking positions in the market’ – are the lifeblood of the financial system.

Second, to serve as a basis for performativity, the connections between the field and the theory have to form a ‘well-designed’ public experiment. By ‘well-designed public experiment’ I mean that it is necessary for the predictive theory to provide items of information that could be confirmed or refuted unambiguously by items of information coming from the field. Again, the Black-Scholes pricing model and the early options exchange provided a nice public experiment. The model predicted a numerical item referring to a future market price and the market produced the actual price. In comparison, astrology can also be used a market-predictive methodology, but it is not likely to create to a good public experiment, as astrological predictions are very difficult to confirm or refute unambiguously.

Let us go back now to question about the predictive quality of the theory. That is, what would happen if the theory produces inaccurate predictions: is it possible that performativity would take place? Note that the two conditions above do not refer to an a priori validity of theories; they simply refer to the mechanisms through which performativity of such theories may evolve. Thus, ‘false’ theories can be performed; and that is because the second half of the mechanism described above, the public experiment, is exactly the process by which the validity of such theories is tested. Theories that produce predictions about the social, and especially ones that refer to intervention-prone areas in society, are not examined in isolated laboratories, but in public experiments.

However, a simple counter-argument can be presented here: maybe what we witness are the actions of the actors that simply activate a theory that had been correct? Such an argument, of course, does not take into account the full meaning of a predictive theory. Predictions that derive from theories do not provide arbitrary predictions of the future, but refer to a causal mechanism that stands at the basis of the predictions. So, when a theory does not incorporate the effect that its own prediction have on actors that can (and do) intervene in the predicted field, the predictive ability of that theory is reduced significantly. Of course, it is possible that such a ‘deaf’ theory would work, even for a considerable period of time, but when the actors (both human and non-human, as it were) would stop ‘supporting’ it, the theory would no longer produce accurate predictions. A good example, of course is, this is what happened (with some simplifications) to the Black-Scholes pricing model after the 1987 crash.

If we take this argument to its logical extreme then we could hypothesise situations whereby any theory could be performed, just as long as actors find its predictions useful and act in accordance with these predictions. However, the notion of usefulness underlying this argument is, in essence, a pragmatist one. That is, we know that the usefulness of a theory does not equate with its accuracy (the same way a public experiment is different from a classic laboratory experiment) and yes, we can hypothesise such a situation. But, it would be safe to assume that it is unlikely that actors would find theory that consistently produces grossly inaccurate predictions useful and thus, it is unlikely that such theory would be performative.

5 Responses to “Performativity: will any theory do?”

  1. danielbeunza Says:

    Congrats for bringing such profound discussion to the blog. It is interesting to note that reflexivity is not just a philosophical idea, but also the basis for successful trading strategies and political positions.

    Consider, for instance the latest book by Soros on reflexivity:

  2. Alison Kemper Says:

    Thanks for a thoughtful post. It’s just what I needed to add some rigour to a piece of work I am getting done this week.

    In Tyler Cowan’s blog, he posts a series called “Markets in Everything”. Perhaps there can be a sister series called “Omnipresent Performativity Effects”. 😉

  3. yuvalmillo Says:

    Great! As I told Philip, when citing it, refer to the presentation I gave at the workshop.

  4. Peter Levin Says:

    Interesting post, addressing a concern I think about all the time. But might I suggest that there are alternatives as well. You note that if the theory ‘fails’, or if it has no ‘public experiment’ available to it, there is no possibility that it will be performative – at least in the sense you mean.

    I was thinking about the cases where the theory remains, despite evidence to the contrary. My art specialists are as likely to speak of a price as ‘not yet achieving’ its market price, or that its market price is not yet in line with its cultural value, or something like that. In other words, out-of-line prices are explained not by a failure of theory (in this case, theory is that mess of valuation done by specialists), but by a failure or anomaly in the marketplace.

    A second case recalls to mind that someplace (I can’t seem to recall it now) I remember a study asking whether economists were judged based on their predictive abilities. This is interesting because of economics’ claim to at least aim for prediction. I recall, though, that prediction was less important than providing ‘interesting explanation’ or somesuch. I read this, again, as some kind of bending of the world to match what theorists do, rather than the reverse.

    I realize these are not exact counter-factuals, but I’m interested in your thinking about how wide a range of possibilities there might be. The idea that there is a reality out there, and that theories ‘work’ or ‘don’t work’ in explaining-then-shaping those realities, seems a bit constraining.

  5. […] Levin on the ‘Performativity: will any theory do?’ […]

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