Cracking the credit crisis: Is performativity a useful concept?

July 12, 2010

The past two weeks have seen another episode in the new “culture wars” within economic sociology. I’m referring of course to Zuckerman’s attack on performativity for obscurantism, ontological relativism and theoretical weakness. Over the years, attacks on performativity and actor-network theory have turned into a literature on its own (see this, this and that). Here at SocFinance we cannot keep up with such enthusiasm, but welcome the free publicity.

None of the critics, however, has engaged with the latest analysis coming from the performativity camp – MacKenzie’s brilliant work on the credit crisis. The outcome is paradoxical. While the anti-performativists attack the performativists for rejecting “empirical reality,” the leading performativist has been doing actual research in the very real world of the credit crisis. As Don Quijote said, “ladran, Sancho, luego cabalgamos” (They bark, Sancho, which means we are galloping.)

For a more integrative form of academic dialogue, consider the initiative of Bruce Kogut. Last fall he invited economists and sociologists to share their views in a symposium on the risks posed by quantitative finance. More to the point, he took the brave step of inviting MacKenzie to give the keynote speech. The outcome is summarized in a superb conference proceedings paper, and for those who are too busy to read the 73 pages of tight technical prose of the original MacKenzie manuscript, Kogut’s summary is an excellent place to start.

MacKenzie’s analysis is the story of how gaming took over mortgage finance. Mortgage finance took a turn to rocket science with the entry of derivatives traders in the decade of the 2000s. They brought with them the single-factor Gaussian Copula model, the key tool that would eventually be used by rating agencies. But this arrival did not translate into a happy intellectual marriage of experts in mortgages and experts in derivatives. Instead, it led to two what Mackenzie calls different “valuation cultures”: derivatives experts, and mortgage experts. The derivatives experts had the heavy mathematics and the hard data. The mortgage traders, on the other hand, kept to their qualitative methods, and were able to incorporate “soft” information that does not go into the models: whether the mortgage holder is going to retain his or her job, whether he or she has additional loans not on the mortgage documents, or whether the mortgage was obtained at bottom or the peak of the market.

The gap between the two valuation cultures created a profit opportunity. Because the raters only used hard data, issuers were thus able to hit a certain rating with mortgages that were, if the soft information was taken into account, essentially not worth it. Three economists, Rajan, Seru and Vig have recently offered evidence for this:

Using data on securitized subprime loans issued in the period 1997–2006, we demonstrate that as the degree of securitization increases, interest rates on new loans rely increasingly on hard information about borrowers. As a result, statistical default model fitted in a low securitization period breaks down in the high securitization period in a systematic manner: it underpredicts defaults for borrowers for whom soft information is more valuable (i.e., borrowers with low documentation, low FICO scores and high loan-to-value ratios)

Hence the counter-performativity. Introducing the copula model into the rating of derivatives made bad mortgage securities valuable. And this created an incentive for originators to create even more bad mortgages — after all, they could be packaged into securities and into derivatives that looked solid. As MacKenzie put it at the conference, “ABS CDOs [mortgage derivatives] changed ABS (mortgage securities], and ABS changed the mortgage market in ways that undermine the empirical validity of the models”. MacKenzie even provides the conditions for this form of counter performativity to take place. It takes, according to him, systemic (large-scale) adoption and the elimination of diversity.


14 Responses to “Cracking the credit crisis: Is performativity a useful concept?”

  1. joseossandon Says:

    A couple of weeks ago I attended to SASE (Conference in Philadelphia), where Mackenzie, as key speakers, also presented his crisis paper. After his talk, there was another panel on sociology and the financial crisis where Bruce Carruthers also talked about the crisis from a cognitive (or cultural) approach, mainly discussing the particularities of credit ratings. In the discussion in this panel there both Mackenzie and Carruthers’ papers were equally criticized by Max Planck’s professor Wolfgang Streeck, and later followed by others. The criticism was mainly whether sociologists of finance are so close to their object that are going native, and, furthermore forgetting the important social questions. It seems to me that finance studies are between two type of criticism (at least within social sciences), on the one hand, a positivist critic (like Zuckerman’s), and on the other a political economy type of criticism. A good question is what to do with them. In my opinion the worse scenario would be to start a never ending discussion about what is the best approach to finance (or worse, what is more scientific or more politically right). However, it is also very important to keep learning from other works developed with a wider frame or from more traditional styles of doing social science. I find myself very inspiring those research that rather than being ‘pure’ finance studies or anything else, are able to mix different type of resources in order to give a new answer to their research questions. Some of my favorites are: Mackenzie & Millo’s AJS paper (combining rich institutional data with more micro-sociology), Stark’s works mixing social networks and sociology of worth, and T. Mitchell’s stuff on economics (mixing performativity and Foucault).

  2. Pete Says:

    Do you really need to buy the whole ANT package in order to make use of counter-performativity? I know that ANT is where its intellectual roots are, but Mackenzie’s current packaging of it (formula is developed, formula is built into system, system ceases to function in accordance with formula) looks like the sort of testable proposition that social scientists of most stripes could incorporate.

  3. danielbeunza Says:

    Jose — I could not agree more with you. The sociologists of finance cannot spend their time and resources on addressing the critics. And I would say more. Streeck’s criticism came up today at a very interesting discussion at Bournemouth of this year’s SASE meeting, led by Will Davies. My view is exactly the opposite of Streecks — it is *only* by engaging with the content of what economic actors do that sociologists can provide a perspective on the outcome of their work.

    Pete — I agree with you, but with qualifications. This is not like someone at the butcher who wants the leg but not the breast of the chicken. No, you don’t have to take the whole animal home with you. But beware: the notion of performativity (or counter-per) carries with it strong theoretical assumptions about representations intervening in the object they seek to portray. One can certainly test it as a proposition –and in fact I would be delighted if you did– but your theorizing around the test would be ANT in its implications.

  4. joseossandon Says:

    Daniel. Totally agree, ‘by engaging with the content of what economic actors do that sociologists can provide a perspective on the outcome of their work’. I’d just add that this ‘content’ may have a long history that might send the researcher far beyond (or behind) the traders room or any other specific site. Mackenzie’s paper is not just about the possibilities opened by the encounter of two different valuating cultures, but is also the story of specific statistical distributions, which themselves embody a whole history. Here to follow the actor needs both to be a good ethnographer and a good historian.

  5. yuvalmillo Says:

    Daniel, thanks for very nice post. I think that you do here a very good (and justified) PR to Donald’s paper, but I would urge people to make the effort and read the actual paper. Yes, with the conceptually complex and technical jargon. I urge people to do so for two reasons. First, because the strength of the argument lies in the richness of the analytical description. Put bluntly, if you want to gain better understanding of the processes through which the financial crisis came about then you really have to understand the nuts and bolts of the business. And, no: simply saying that ‘it’s all greed’ or that ‘the models are always wrong’ (or their more elaborate, but not less simplistic, academic equivalents) is not nearly good enough. The second reason is related to the first, but, given the continuous attacks on the social studies of finance, it is important to mention it: understanding the intricacies of the analyzed subject is a crucial part of the strand of sociology of science from which the social studies of finance. This intellectual landscape includes, for example, Leviathan and the Air-Pump (Steven Shapin and Simon Schaffer), Andrew Pickering’s work on particle physics, Harry Collins’ works on the detection of gravitational waves and Donald MacKenzie’s research on missile guiding systems. This is very partial list, of course, but the similarities between the pieces are obvious. All these works are empirical, they strive to understand the techno-scientific knowledge embedded in the machines/devices studied and, critically, they identify and analyze the reflections of the larger political, social and cultural circumstances where these technologies were developed. This last point should be made again, for the benefit of the ‘attackers’: social studies of finance does not analyze market devices in detail because it ‘went native’, but because by understanding the minute details of, say, how credit derivates are designed we can shed new light on the macro conditions of neo-liberalism and gain better understanding of the crush.

  6. Chris Jefferis Says:

    Thanks for the video link Daniel.

    The last minute of the video included a summary I found useful. Performativity is when the use of the model improves it’s fit with actual prices. Counter-performativity is when the use of the model reduces the fit with prices because the model is gamed or has unintended side effects.

    The magnetar trade (see is an example of gaming of the CDO model.

    Yuval – I think you have a point because the concept of performativity is descriptive rather than explanatory. Its necessary to include a description of all the processes that lead to the constitution of “performativity” or “counter-performativity”.

    Performativity is only explanatory if you buy into Callon’s assessment of economics, as a certain species of knowledge that seeks to realise itself in the world. But then the question is still how does it do this?

  7. yuvalmillo Says:

    Chris, Two things.

    First, what’s the difference, in this case, between ‘descriptive’ and ‘explanatory’? MacKenzie’s piece on the gaming of ratings and its impact on CDOs’ pricing aims to _explain_ a process that led to the crash of that market. Similarly, the story about the B-S-M model and options’ pricing also offers an explanation.

    Second, who is this ‘economics’ that ‘tries to realise itself in the world’? This is a common mistake that many make about performativity. The fact that economic theory is being ‘made accurate’ does not mean that the theory or ‘economics’ operated so that this aim is achieved. Instead, performativity is the result (which frequently unintended) of hybrid networks of actors who operate so as to promote a variety of agendas (scientific, political, commercial, etc.).

  8. danielbeunza Says:

    PR? We must have different concepts of what PR means.

  9. Yuval Says:

    PR = Public Relations, and a very justified act of PR, as more people need to know about this paper.

  10. danielbeunza Says:

    I disagree with your characterization of my blogpost. According to the Oxford Dictionary, public relations is “the professional maintenance of a favourable public image by a company or other organization or a famous person.” I am sure that is not what you mean by it.

  11. Yuval Says:

    OK, fair enough. I stand corrected. All I want to say is that it’s great that you flagged up Donald’s paper, because it deserves publicity.
    Now, what about the rest of my comment? 🙂

  12. Chris Jefferis Says:

    Yuval – on the issue of explanation/description, what I’m getting at is the question of whether there is an underlying relationship in the structure of how financial markets work that performativity captures. Obviously, you and Donald have shown that there can be a relationship between models and prices, but this is mainly explained by the history of the B-S-M as a social structure that has historically framed a number of the relationships i.e. trading, political, regulatory that constitute derivatives markets. I find it more useful to think in terms of the B-S-M as a social structure than to grapple with the term performativity, which I think seems to cover the same ground in an evocative but ultimately more convoluted way.

    Have a look at the article on Magnetar and the CDO collapse. I don’t think the concept of counter-performativity captures the problems illustrated there because the use of models doesn’t play a strong role in the ultimately destructive trade Magnetar put on.

    I’ll try and get back to you on the issue of economics and agency in the next few days.

  13. Yuval Says:

    Chris, thanks for this. I now I get your point and I want to sharpen the message. Performativity is not some primordial force that moves history. Performativity happens when certain conditions exist: an established arena for public experiments (such as the stock market), a methodology producing pin-pointed predictions (i.e. a number vs. the general predictions of, say, astrology) and reflexive actors. So, the history of B-S-M contained these conditions and, as a result, we see the emergence of performativity. This, just to reiterate the point, is what performativity adds to current theories: understanding the mechanisms of performativity would help us to analyse the success (or failure) of expert bodies of knowledge in organisational settings.

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