Comments on Market Devices – round three

September 7, 2008

Commenting on the previous Market Devices post, Peter made a crucial point; one that, actually, I got quite a few times in different shapes. The general form of this question is something along the lines of “doesn’t the application of sociology of scientific knowledge to markets turn them (or even, reduce them) into fields of knowledge creation and testing? Aren’t markets important for other reasons than for validating or refuting predictive models?”

Yes. To say that markets are important primarily because they are public experiments where models and theories are tested would be silly. Markets are much more than that and the various descriptions are known well: markets are arenas for the allocation of scarce resources; they symbolise and enact political ideologies; they are part and parcel of contemporary capitalism and so on.

But, and this is the point where SSF is is misunderstood: the SSF approach does not ‘transform’ markets into some sort of laboratory so that they would fit as a case for the sociology of science. Instead, SSF research suggests that (1) there is deep involvement of expert bodies of knowledge in market activities and (2) the involvement of that knowledge shapes markets and their behaviour. Hence, to understand markets we have to know how things such as models, theories and their technological applications operate. In this respect questions regarding validity of models (or the construction of their usefulness) are as important for the analysis of markets are factors such as pre-existing social affinities and ties (embeddedness) or how different types of auctions help to bring about different types of market behaviour (micro-structure economics).

10 Responses to “Comments on Market Devices – round three”

  1. Peter Says:

    Thanks for the clarification, and I see where you are coming from. I read your response a little as saying, if I were a cultural sociologist (or an organizational sociologist, or a demographer, or a social psychologist, etc) I would bring the tools and analytic categories of my subfield to bear on any new particular area of content I would come across. It is not surprising in this respect that SSF mobilizes soc of science arguments with regard to markets.

    And I am wholly on board with the notion that SSF does not reduce markets to experiments, but rather that to understand markets we have to understand how theories, models, and their tech applications operate (per your comment above).

    I guess I meant something a little different. SSF often does not use models, theories, and tech applications as a loose metaphor or corollary to scientists on the bench, but a much closer kind of analogy. I would suggest to someone like BK that it is kind of weird to think about theories of markets to be comparable to cold fusion theory. That SSF takes that comparison more seriously makes me feel like the hard science commitments is actually getting in the way of understanding the models, theories and tech applications associated with markets.

    btw, I hear that the LSE’s electronic trading system was down for much of the day – or maybe past close – and that they had somehow reverted to auction system (…See now, here SSF should have lots to say about the gap between the technological application and theories of markets, and their in-action counterparts.

  2. yuvalmillo Says:

    Yes. Peter. I agree completely. Of course, these things need to be developed further, and we constantly bump against how young this sub-field really. About the London Stock Exchange: I didn’t hear about it. I will check it out

  3. typewritten Says:

    That said, there’s nothing wrong with reducing markets to experiments just once in a while.

    (And perhaps experiments to markets too.)

  4. danielbeunza Says:

    Fascinating debate. I not only agree with, ahem, Typewritten, but would go beyond. Markets are only profitable, interesting and active when there is an experiment going on. As Zuckerman (2004) documents in his best but most dramatically overlooked known paper, trading volume and volatility peak in situations of uncertainty. That is, when investors don’t know what to make of the existing situation. A similar message comes from the small but growing economics literature on “differences of opinion,” including the work of Hong, Stein and Yu (2007) in the Journal of Finance.

    As for the LSE… wow! Yuval, this could be a goldmine.

  5. yuvalmillo Says:

    Very interesting comments! There is going to round four…

  6. Peter Says:

    Daniel, there was an article in New Scientist (19 July 2008, p28, entitled “Crazy Money”), discussing the effects of news and where it came from on vol – doesn’t contradict Zuckerman, but adds texture. I put the chart up from it in a post on a slightly different topic (I swear I’m not link-trolling, you can go directly to the New Scientist if you like instead 🙂 ).

    Per the LSE, there was always the argument at CME that one of the main criticisms of electronic trading was that when the power went out ATS’s got screwed while floor traders can simply pull out their pencils. Obviously more complicated than that in a world where decisions sans continual feeds of electronic data can’t be made, but still. The catastrophe argument was beaten out by the counter-argument that electronic trading builds in such redundancy that ‘power failure’ becomes unthinkable. Equally problematic as you well know, but it seemed to win the day.

    I don’t know that I disagree at all with your advice on experiments, typewritten (and I saw you decided, having not conquered in a year the world of public discourse, to discontinue your blog). The commitment to science analogies is just a bit puzzling to someone who comes to the same issues and questions from a different tradition (ie cultural institutional, work).

  7. Zsuzsanna Says:

    I believe there is a student of MacKenzie’s who is studying the London Stock Exchange’s trading system. His name is Juan-Pablo Pardo-Guerra. What I remember about his work is that the technology is an import from another big exchange, and there are interesting problems of “adaptation”.

  8. danielbeunza Says:

    Thanks for the info. I’m going straight to your blog to take a look… link-trolling is like insider trading… lubricates the system and aligns incentives.

    As for the CME debate, is that published anywhere? I’d love to cite it.

  9. Peter Says:

    Daniel – I don’t know that the CME debate is published anyplace, as it falls pretty well into the category of things I believe to be true but would have a hard time proving with systematic evidence. In the late 19990s when they started implementing the side-by-side terminals (itself a fascinating story), people would do stuff like throw pencils at them, and I recall lots of jokes about grocery clerks who couldn’t add without an electronic cash register. And when I brought it up to my ATS informants, they had long technical answers to the effect that after the global nuclear blasts it’ll just be the cockroaches and the electronic exchanges left.

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