Ferraro and performativity: can economic sociologists cash in?

June 6, 2009

Over at Orgtheory, Fabrizio Ferraro has been posing a fascinating question. If we agree that economists perform economics, how about economic sociologists?

Our field has been studying markets for a few years now, and maybe we already know a things or two that could be “translated” in investment strategies. Zuckerman’s “illegitimacy discount” and “structural incoherence“, for instance, might be an interesting starting point to develop an investment strategy on volatility. Rao, Greve and Davis‘ work on security analysts’ coverage initiation and abandonment, and the literature on social influence among analysts, might help predict analysts’ behavior and stock reactions. Yuval Millo, Daniel Beunza and the Socializing Finance crowd must have discussed this problem, and I bet they will launch a “Performativity fund” one day: what would that fund look like?

In my own research on systemic risk and “arbitrage disasters”, I was amazed to see that one fund, Atticus, has actually developed a strategy to exploit the problems of reflexive modeling that David Stark and I identified. Aware that the reflexive use of models sometimes creates overconfidence, Atticus developed a strategy that bets against events precisely when everyone else is most confident in them. That way, when an arbitrage disaster takes places and arbitrageurs lose their shirt, Atticus wins big.

Atticus’ strategy was described as follows in the Financial Times:

One of Atticus Global’s most successful recent trades was its
contrarian position on General Electric’s proposed acquisition
of Honeywell. Most risk arbitrage managers followed their
usual strategy of going long the target, Honeywell, and short the
buyer, GE, assuming that the spread between the two would
close when the deal was finalised. However, Atticus Global
shorted Honeywell and bought GE, making a 10 per cent return
on its investment when the European Union blocked the deal due
to antitrust concerns. (*)

It is my sense that a conversation about the move from economic sociology to dollars is going to be inevitable. Should sociologists of finance move into finance? If so, what theories in the social studies of finance are most promising? And, more prosaically, what is a good name for a sociology hedge fund?

(*) Robert Clow, “Atticus Global finds its strategy paying off: ARBITRAGE FIRM NETS BIG RETURNS BY TRADING AGAINST OTHER FUNDS.” Financial Times, August 30th 2001, p. 25.

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