Nassim Taleb pointed me to a note on his web site. Taleb says there, among other things, that: when writing history, we project our mental biases in a way to produce agency and increase the role of theory. The idea that academics, in general, are more theory-oriented than explanation-oriented is not new. Indeed, there is a wide spectrum of critical approaches towards theory, from, for example, Paul Fayeraband’s epistemological anarchism to evidence-based medicine.

However, Nassim’s approach becomes the most interesting when he refers to the area he knows best: option pricing. In a talk at the LSE earlier this year (at the Accounting department) Nassim claimed not only that the history of the Black-Scholes formula [shows] that mathematics is often there to “lecture birds how to fly”, but, more provocatively, that options’ traders hardly ever use the Black-Scholes-Merton model and that, in fact, the put-call parity is enough to trade options. Nassim’s claim is coming from his extensive experience as an options trader and I am sure that his observations are authentic and valid. The important question about BSM model, however, is no longer whether or not individual traders use it or not, because when entire price quotation systems are based on BSM, individual traders matter very little in this respect. The question then becomes: to what extent is BSM theory entrenched into financial market systems? The answer to this is fairly obvious: it is profoundly embedded into today’s markets.

Now, let us go back to Nassim’s claim that science in general, and economics in particular, are too theory-oriented. I agree with this claim whole-heartedly, and I think the BSM model case is a very good example for this tendency. However, the arenas where such theory-biases unfold and become effective are not the pages of economics journals (let alone those of philosophy of science), but trading floors, trading rooms and increasingly, trading and risk management algorithms. That is, economic theory is frequently inaccurate (BSM, for example), but is very affective. In other words, in markets, birds (and more so, bird growers) do read flying manuals.

Just returned from an inspiring academic event. The First Workshop on Imagining Business just took place last week in Oxford, at the Said School of Business. Visualization, especially as applied to finance, is a true passion of mine: it is a crucial component of contemporary markets (see my work on merger arbitrage), it offers lucrative business opportunities for innovation (see previous blog post), and it has been used to great effect by artists to re-imagine Wall Street (see my article here). Given all this, I attended the Oxford event with at least the same enthusiasm that my fellow Spaniards showed at the European soccer final. What, I asked myself, does existing research say about business visualization?

The organizers — Paolo Quattrone, François-Régis Puyou and Chris Mclean – were aware of the importance of the visual in organizations, and offered a perspective based on Science and Technology Studies. According to them:

Organizations are saturated with images, pictures, and signs that impact on many different aspects of everyday organizational life (…) Over the past decades, Science and Technology Studies have largely contributed to clarifying the importance of “representation in scientific practice” (Lynch & Woolgar, 1990). Through their focus on the process of re-presentation they highlighted how specific practices of making things visible … were central to ‘doing’ science. We wish to extend this to a study of business.

In other words, science is first and foremost about visualizations. What about its more practical, mundane and prevalent cousin — business? What to make of, “budgets and accounting tools, advertising literature, design specifications?” What do we think is the visual power of “public relations leaflets, standard operating procedures, schedules, reports, graphs, charts, organizational hierarchies [and] maps?” These were the questions that the presenters set out to answer. As a very refreshing novelty, the conference was accompanied by an art exhibition curated by Nina Wakeford, Lucy Kimbell and Alex Hodby.

The approaches to visualization were numerous and varied. I could not attend to all the presentations. But according to my own taxonomy, the presentations fell into four different groups: one set of papers explored how images (mostly photographs) are used for public relations and communication. A fascinating piece by Sue Hrasky explored the use of visual cues and images in corporate annual reports. Whereas researchers in accounting and management tend to decry the use of smiling people as not constituting “information,” Hrasky shows how images complement, reframe and expand the meaning conveyed by the text. On a similar note, Charles Cho, Jillian Phillips and Amy Hageman explore the significance of images in corporate social responsibility.

Another line of presentations engaged with images from a semiotic perspective. Presenters offered their interpretation of the meaning of the images used by businesses. A interesting example from the finance industry was provided by Frandsen, Bunn and McGoun: the authors explore how the changing architecture of banks through the 20th C. –from the closed imagery of a safe to the alluring aesthetics of retail – has changed to fit evolving social views of money. As money changed from a “stock” that needs to be protected to a virtual flow that needs to be kept active, so has the architecture of banks adapted.

But my favorite piece was by Brigitte Biehl. She analyzed the cultural symbols at the trading floor of the Deustche Borse. The German stock market has recently upgraded its floor from a dark, low-tech space to an expensive and futuristic-looking market. The Borse also engages in publicity stunts a la Dick Grasso at the New York Stock Exchange: celebrating carnival on the floor, or inviting models in bikinis. All this performative drama gives rise to the obvious question: why such expenditure on the floor, just as electronic trading seems to be dominating the rest of world exchanges? Biehl has a cynical but interesting answer: because the investing public is ignorant of finance. Exchanges reduce the cognitive distance that retail investors experience vis-à-vis earnings, indexes, and other complications of the capital markets.

What to make of this argument? The problem with the “circus” approach to finance, of course, is that it sends a misleading signal. Even if they look serious and powerful on TV news, the clerks at the Borse are not actually responsible for the price movements. One of the attendees in the public offered an interesting solution: if the problem is the need to show people in the evening news, why not do it the way it’s done in London? Put a camera inside the trading rooms of the large investment banks, broadcast TV news from there.

Regardless of one’s view, Biehl needs to be congratulated for sparking a much-needed debate on this type of strategic semiotics of financial exchanges.

A third line of work engaged the imagining side of images: exploring how images can promote novel thinking on a certain issue. Here, the plenary presentation by Donald MacKenzie was one of the most talked about. MacKenzie asked, what would it take for a market to address current environmental problems? The existing European cap-and-trade system (so-called carbon trading) does not seem to be a success… but why? MacKenzie views cap-and-trade systems as a case of performativity: a practical instantiation of Ronald Coase’s theory of property rights. According to some, this performative move was too complex — an economist’s pet project, turned sour. MacKenzie’s presentation delved into accounting and regulatory details that have prevented vigorous trading in pollution permits, even suggesting some regulatory changes of his own. Fascinating work, and very different from the more distant historical perspective he took on Black-Scholes. As an SSF researcher, I can only salute this initiative and welcome the start of SSF research with real political impact (a topic of recent post by Yuval and Martha).

An enlightening “imagining” presentation was offered by Susan Scott and Wanda Orlikowski. Following a very broad review of the management literature on social media, the authors found that the choice of methodological tradition is very related to the way social media is imagined. Research that follows the strategy/ economics- inspired paradigm tends to view technology as a distinct entity, cut off from its users; whereas research in the ethnographic/ sociological tradition views technology in terms of community, with little focus on the unity of the phenomenon. I found this divide intriguing. The authors emphasized the need to overcome a dualistic image of social media, suggesting Pickering’s expression, “the mangle of practice.”

My own presentation engaged with images in a different manner – what I would call “calculative visualization.” In a nutshell, I talked about the spread plot (080623-distributed-calculation-at-imagining-business1). The spread plot allows merger arbitrageurs to calculate the “implicit probability” of merger completion: the probability that “the market” assigns to a successful completion of mergers that have been announced but remain to be solidified. It is special in that if you know how to use it (as professional hedge fund traders do) you can “see” the probabilities of merger between two companies. If you don’t – as is the case with retail investors – you are left guessing. Images like the spread plot, I argue, are responsible for part of the billions of profit made in these past decade by the hedge fund industry. And the more recent diffusion of these tools may well account for the limited returns experienced by these funds nowadays. (Two other examples of this were provided by presentations on SAP and the imaging system used by oil companies.)

To conclude — what did I learn about business visualization? That research in them falls on four very different types: corporate communications, semiotic analyses, re-imaginary approaches and calculative images. Perhaps predictably, I find this fourth type most persuasive. Beyond the natural allure of photographs, brochures or interfaces, I am particularly interested in visualizations that have color but also data, that let people imagine but also count, that inspire but are also practical. The capital markets are a terrific environment to explore these.

In any case… whether one subscribes or not to my view, the overall message from the conference is clear: visualizations are key to contemporary business. Researchers need to engage with them. The organizers of this workshop need to be congratulated for putting together a novel, daring and successful event.

I’ve just returned from “A Turn to Ontology?” a provocative workshop at the Said School of Business in Oxford. It was organized by the resident Science and Technology Studies group: Steve Woolgar, Javier Lezaun, Daniel Neyland and others. This group is by itself interesting: they study things such as focus groups, advertising — the non-finance counterpart of social studies of finance. (Last year, two alumni of this group, Elena Simakova and Catelijne Coopmans put together an interesting workshop covered here.) Given all this, I attended the workshop in search for new clues to think about Wall Street.

The main contention of the workshop, according to the organizers, is that “the essence and existence of entities are best understood as the temporary upshot of interconnecting relations.” The most circulated example came from Daniel Nyland and Steve Woolgar:

Recent work on mundane terror shows how ordinary objects in eg airport settings become transformed into objects requiring various apparatuses of regulation, monitoring and control (…) ordinary objects acquire an insecure ontology. A water bottle is transformed into a potential object of terror. (…) For example, when Dan and Steve travelled from Heathrow recently, they started by getting security cleared (and having various liquids confiscated in the process). Steve then purchased a terror free bottle of water in the departures lounge. But they managed to misread the signs (in the chaos of terminal 1) when walking to the departure gate and found themselves again the wrong (“dirty”) side of another security check. At this point the terror free bottle was transformed into
an object of potential terror and promptly confiscated.

The ontology of a water bottle, the example suggests, is not simply determined by the properties of the water, but by the social arrangements at the airport. Is any of this relevant to finance? I am not yet sure. I have already stumbled upon ontological issues in my research; what I’d like to do is to discuss it here and let the reader judge.

The setting was my ethnography of arbitrage. After two years of fieldwork at the equity derivatives trading room of pseudonymous International Securities with David Stark, I eventually concluded that modern arbitrageurs sustain above-normal returns by challenging the ontology of normal securities. In effect, the arbitrageurs that I followed, whether in statistical arbitrage, options arbitrage or merger arbitrage, devoted themselves to breaking up and isolating the properties of stocks to their own advantage.

How? Consider, for example, merger arbitrage. By buying the target company and shorting the acquirer, arbitrageurs cancel out their exposure to those factors that are common to the two– typically, the industry. So, for instance, when HP made a bid for Compaq and the traders played the trade, they were both short and long on the computer industry, thereby cutting their net exposure to the computer industry. They limited their exposure to the only factor they devoted their research to, the completion of the merger.

To see ontological dimension to this, think of the exposure created by a stock as a pie. Its overall value is determined by different qualities: its liquidity, volatility, mean reversion in the price, sector, etc. Think of these qualities as portions of the pie. Whereas buying a stock – let’s say, IBM – entails exposure to all the factors that determine its price, arbitrage entails limiting one’s exposure to just one. What arbitrageurs do, in other words, is to break up a whole into its constitutive parts.

This challenge to ontology came apart this summer in August 2007. As a remarkable paper by Amir Khandani and Andy Lo has argued, this approach at breaking up the qualities of a stock was subject to disruption. As multi-strategy funds lost money on their subprime bets, they winded down their positions in other, more liquid bets such as merger arbitrage. This seemingly inexplicable fall in stock price then led to further margin calls and, in turn, additional losses — adding up to a staggering nine percent in one day.

Recombining wholes into parts is not unique to finance. We see the same in the new high-tech Spanish cuisine. Star Spanish chef Ferran Adria isolates the individual qualities of food – their tact, aroma, color and texture — and then reshuffles them in the form of liquid paella, puffy rice grains or foamy coffee. Like Adria, equity arbitrageurs selectively strip their exposure of their unwanted qualities, then reshuffle them to their advantage.

These challenges to conventional financial ontology can also be found in fixed income. Indeed, it is arguably one reason for the current mortgage crisis. Securitization, or the aggregation of different mortgages into a single combined asset, creates a whole out of different parts. The operation first endows the mortgages with calculativeness – an average default rate, a mean return and a standard deviation. More recently, structured finance has also allowed bankers to transform bonds into different parts, or “tranches,” of different degrees of risk. (Incidentally, for outstanding treatment of the mortgage crisis, see the article by Donald MacKenzie.)

In this sense, securitization and structured finance is not so different from the secular movement towards processed food of the past century. Salami, sausages, spam, hamburgers and similar products make meat inexpensive by combining average and useless parts of an animal into acceptable food.

That this meddling with the ontology would entail unexpected challenges – and in the case of CDOs, financial catastrophe – is perhaps not that surprising. As we now know only too well, processed food opens up the danger for manipulation – for you don’t know what’s inside. The ontology workshop rightly reminded me to keep thinking about the ways in which resourceful traders turn apples into oranges, iron into gold — and mortgages into senior, “super-safe” tranches of a CDO.

On Friday, crude oil prices jumped in a new all-time high: the benchmark futures contract of light sweet crude was traded at US$139.54 in New York.

This new record was attributed to a comment by Iranian-born Israeli deputy prime minister, Shaul Mofaz, who said that: “If Iran continues its nuclear weapons program, we will attack it. Other options are disappearing. The sanctions are not effective. There will be no alternative but to attack Iran in order to stop the Iranian nuclear program.”

The news stories did mention that the context for this comments is the primaries in Kadima, PM Olmert’s party, where Mofaz is a contender and that it is likely that the comments were made for ‘domestic consumption’. The reaction to the statement shows that in today’s highly connected markets distinction between the local and the global cannot be made easily. Mofaz’s Israeli political bravado injected volatility to global oil markets. Such effect, in itself is dangerous enough, of course, but the other ‘leg’ of the reflexivity circle is potentially even riskier. In fact, this side of the phenomenon may feed a social loop that can place Iran and Israel on a sure collision course.

How so? Mofaz is now aware of the impact that his words have on markets. However, if anyone may think that this would serve as a lesson and that future comments would be less vehement, then they do not know the Israeli political discourse. Mofaz will now celebrate his influence on global oil markets and will use last week’s price rise as leverage for creating more political capital. Moreover, the reaction to this comment will motivate Mofaz and other Israeli politicians to outdo it and to have even more impact. So, as long as the scandal-ridden Olmert government is haemorrhaging support we should expect increasingly more flamboyant statements from Israeli politicians about Iran, more volatile markets and a steady progress to the brink of a (possibly, nuclear) war in the middle east.

The NYTimes reported yesterday on a kind of investment called ‘auction securities’ which were apparently dumped on individual clients by institutional investors in the second half of 2007. 

“Auction-rate securities, invented in the 1980s, are debt obligations whose interest rates are set at auctions every 7 to 35 days. The bonds typically have maturities of 30 years, but the preferred shares have no maturity date. ”

“The market worked relatively smoothly until mid-February this year, when the credit crisis made big brokerage firms reluctant to put up precious capital to keep the auctions going. Investors could no longer sell their securities — and cannot to this day.”

“Indeed, experts say that calling these securities auction-oriented is something of a misnomer because real auctions — during which buyers and sellers meet and an interest rate is set based upon their interest — weren’t taking place in recent years. Instead, the Wall Street firms in charge of the auctions smoothed the process by bidding with their own capital rather than rustling up thousands of buyers to meet up with sellers every week or so. ”

Because firms are receiving their fees regardless of whether the auctions succeed or fail, there is apparently no incentive for them to act to revive the market.  This means that investors, stranded by a managed bidding system, could have their principle tied up for an indefinite period of time…

For the full article see here.

From Bodies to Black-Scholes

A Two-day Workshop on Performativity and the Social Studies of Finance

Organized by Daniel Beunza (Columbia U.) and Yuval Millo (LSE)

Columbia Business School, New York, 28-29 April 2008

The Social Studies of Finance (SSF) is one of the fastest-growing and most intriguing new fields in the social sciences today. Born from the intersection of sociology of science, economic sociology, management and critical accounting, SSF offers a new vantage point for the analysis of financial markets and their dynamics.

This intensive two-day workshop is convened by Daniel Beunza from Columbia Business School and Yuval Millo from the London School of Economics. It is aimed at presenting the field to newcomers, and is directed at research students and early-career researchers in accounting, finance, management, political science and sociology.

To allow effective discussion, the group size is limited to 12 participants. The workshop’s fee is US$ 200. To apply for the workshop, please send by February 29th a CV and a one-page description of your research and how it relates to SSF to

For more details see:

I have long been surprised by the lack of novelty in financial visualization. Even as maps, video-games and operating systems become more and more adept at 3D, colors, layers and animation… the screens of Wall Street keep showing the exact same graphs as usual. Last week, in a panel on financial visualization, I learned the reasons for this lack of innovation. And I made an argument for the opposite.

Consider just how puzzling the existing status quo is with regards to visualization. Bloomberg, the market leader in analytics, offers the same 1980s-style aesthetics that it did two decades ago. Tickers, that ineffective relic of the pre-Internet era, continue to grace the screens of CNBC and the streets around Times Square. Yahoo and Google offer the same graph that retail investors have been using for years — a plain-vanilla price chart. Even Apple’s iPhone (supposedly, the epitome of the cool) has the same chart.

This is surprising, because existing visualizations do not support profitable trading strategies. Indeed, most systems are based on timely news and time series of stock prices and volume. And yet, we know from basic financial economics that both past prices and news are a bad predictor of future stock prices. As for the ticker… the animated display of selected stock prices is a low-bandwidth visualization born in the era of the telegraph. That’s right: 19th C. Nowadays, information can travel much faster, and one does not need to wait for “my stock” to come up on the ticker.

Why this un-innovativeness? That was the question I asked myself as I took the subway to downtown Mantattan. The panel was organized by the New York chapter of the Usability professionals (essentially: designers), joint with NYC Wireless. The presentations of the rest of the panelists — all three very smart, very sophisticated professionals — made very clear the difficult situation that designers suffer as soon as they start to work for a Wall Street firm.

One of the presenters, a brilliant and charismatic designer, was responsible for the Intranet at a major credit card company. According to her, 70% of Wall Street intranets are just numbers. Why? Other concerns prevail over graphic sophistication. First, in finance, heavy regulation forces different parts of the firms not to be able to see the same information. So firewalls are very important. Second: designers get little training. “How can you communicate with the bankers,” the presenter asked, “with only a 20-minute online tutorial on risk management?” Third, mistakes “cost millions.” And fourth, convenience is everything: “we had to completely redesign the system so that the bankers could read it on a pdf on their way home to Westchester.”

The second panelist, an acclaimed designer in his “previous life” and now head of visualization at a major Wall Street bank, abounded on these issues. The bank, he said, had more people working in IT than the entire employees of Adobe. But visualization has only arrived to two percent of software, and most of it to its intranet — the hidden part. How come? “Traders are very busy. They make an incredible amount of money, and their time is very valuable. They cannot commit to meet you at such-and-such time to discuss changes in the system.” The designer finally found a way to work with them, but even this is very telling: “I say to them, ‘I’ll come to your desk tomorrow at nine, and when you have a minute, tell me what we do.” In addition to this, traders are very practical and resist innovation. “If there is a yellow button on the left for the escape function, they need to see it in the next version of the software.”

In short, the picture of Wall Street designers that comes across is revealing. The designers in are smart, able, savvy. But they make up an distinct community of practice, one with lower status, limited financial knowledge and one that does not seem to fully communicate with the traders and bankers. In terms of innovation, they also seem to be paralyzed by the needs of their users. As as we know from Christensen’s “The Innovator’s Dilema,” users are a conservative group.

What, then, is the way ahead? I believe that innovation will happen. But it may not come from the internal design teams on Wall Street. Along with Christensen, I expect that it will come from some low-end entrant to the industry. (And it is interesting that there were people in the room from the entertainment industry.) My own presentation discussed some potential avenues for innovation, based on my curatorial work on art that is based on finance. Please see below a PDF document of the presentation.

Today’s announcement of the Nobel Prize in Economics is interesting news for the social studies of finance. The award given to Leonid Hurwicz, Eric Maskin and Roger Myerson celebrates a line of work, so-called “mechanism design”, that is closely related to the calculative artifacts examined by the sociology and anthropology of finance.

As Peter Boettke writes in the Wall Street Journal, the notion of “mechanism design” explores the problem of when will market calculation work or not work:

Mechanism design theory was established to try to address the main challenge posed by Ludwig von Mises and F.A. Hayek. It all starts with Mr. Hurwicz’s response to Hayek’s famous paper, “The Use of Knowledge in Society.” In the 1930s and ’40s, Hayek was embroiled in the “socialist calculation debate.” (…) Hayek’s argument, a refinement of Mises, basically stated that the economic problem society faced was not how to allocate given resources, but rather how to mobilize and utilize the knowledge dispersed throughout the economy. (…) Leonid Hurwicz, in his classic papers “On the Concept and Possibility of Informational Decentralization” (1969), “On Informationally Decentralized Systems” (1972), and “The Design of Mechanisms for Resource Allocation” (1973), embraced Hayek’s challenge.

Obviously, the laureates’ work is not sociology, and neither does it relate to any tangible or material “mechanism.” In effect, the prize winners differ from the contemporary interest in Knightian uncertainty in the laureates’ emphasis on dispersed information (rather than the more sociological diverse interpretations).

But as much as the two problems are different, their solution — knowledge sharing, communication, debate, social interaction — is similar. For that reason, it is possible to think of the socio-technical artifacts analyzed in SSF (the strawberry market, black-scholes, the spread plot) as “mechanism design”. Conversely, the work of one of the, Roger Myerson, was directly applied to auction design… a topic that has been the subject of a famous controversy in SSF between, on the one hand Callon, Muniesa and (separately) Guala; and, on the other, Mirowski and Nik-Khah. (See the recent book Do Economists Make Markets?)

All in all, not quite a Nobel endorsement of SSF, but encouragement to the study of the social and material black box of market calculation.

The NY Times is asking whether NY is still the ‘capital of capital’ mentioning that, among other things, the largest mutual funds are not based in the city, the biggest securities trading floor is no longer that of the NYSE (see here about the demise of open outcry trading and here more discussion about it):

[I]n today’s burgeoning and increasingly integrated global financial markets — a vast, neural spaghetti of wires, Web sites and trading platforms — the N.Y.S.E. is clearly no longer the epicenter. Nor is New York. The largest mutual-fund complexes are in Valley Forge, Pa., Los Angeles and Boston, while trading and money management are spreading globally. Since the end of the cold war, vast pools of capital have been forming overseas, in the Swiss bank accounts of Russian oligarchs, in the Shanghai vaults of Chinese manufacturing magnates and in the coffers of funds controlled by governments in Singapore, Russia, Dubai, Qatar and Saudi Arabia that may amount to some $2.5 trillion, according to Stephen Jen, a Morgan Stanley economist.

However, as financial markets become more distributed, we should re-evaluate the connections between geographical location and capital.

One potential direction that is hinted in the NY Times story is the preferred location for IPOs (initial public offering). The article refers to the fact that nine out the ten largest out-of-country IPOs (IPOs done outside the country where the company is incorporated) in the last year were held outside the US. IPOs, of course, are the fundamental building blocks of financial markets as through them new stocks enter the market. Knowing that NY is the traditional location for IPOs, we can pretty much equate US with NY. The meaning of this figure is that NY does not attract to the same degree it used to the types of people and institutions that perform IPOs. Instead, the story tells us, new urban ‘financial-attraction’ centres are rising (at least as far as IPOs go). Hong Kong seems to be one of New York’s major rivals, as are some European cities.    

So, what are the conditions that attract IPOs to a particular urban centre? The immediate conceptual candidates are human capital (experienced underwriters, for example), institutions, liquid capital and, inevitably, a social network that binds these ingredients together effectively. All of this may sound fairly basic to a sociologist, but in spite of the fact that there is considerable research about urban financial centres, to best of my knowledge the crucial element of IPOs has not been studied empirically from a sociological perspective. Having said that, a paper by Richard Florida analyses the demographic conditions that induce creativity among urban populations and thus may help to conceptualise the question of where IPOs are likely to take place. It can be that one of the reasons for this relative lack of academic attention is the fact that to understand what makes IPOs happen, one needs to witness the inner mechanisms of the process and these are not easily accessible, as this classic ethnography-like Fortune magazine story about Microsoft’s IPO shows.


A recent post in the Test Society blog (whose main writer is a personal friend) discusses the publication, by Palgrave of a set of lectures by French philosopher Michel Foucault. While reading this fascinating text, with its broad historical scope and its boundary-spanning insights, I gradually noticed a thread of analytical narrative that bears an interesting insight for modern risk management. This point, which appears repeatedly in the texts (and is, as far as I know and understand, one of the fundamental building blocks in Foucault’s thought) is the process by which the individual was re-configured vis-à-vis society, or societal structures. According to Foucault, that re-configuration began taking place, in Europe, at the end of the Middle Ages; it was established and institutionalised in the following centuries and reached its peak (at least in pure conceptual terms) in the eighteenth century, with the crystallised idea of Enlightenment. In that process of reconfiguration, the individual, in its interaction with societal institutions, is turned from being a ‘subject’ to (what can be called) a ‘calculable-relational object’. That is, the individual, after the transformation, can no longer be regarded simply as a detachable part of the society, a subject that can be easily singled out, isolated and manipulated. Instead, the individual came so to be seen as integral, irreducible part of a larger phenomenon, a broader category or a temporal intra-societal structure. Hence, the new conceptual and practical unit of reference swallowed the individual into a set of binding contacts and obligation outside of which she could not exist (e.g. physically, religiously) or at least could not be detected as a meaningful entity by the society. Furthermore, the existence of the larger societal phenomenon is dependent on the establishment of various calculative agencies and practices, such as the collection of statistics, the assessment of probabilities and the creation of numerical bases for policy.

Foucault uses a set of examples through which he explains the construction of the modern concept of the plague:

Take the exclusion of lepers in the Middle Ages, until the end of the Middle Ages. …[E]xclusion essentially took place through a juridical combination of laws and regulations, as well as a set of religious rituals, which anyway brought about a division, and a binary type of division, between those who were lepers and those who were not. A second example is that of the plague. The plague regulations […] involve literally imposing a partitioning grid on the regions and town struck by plague, with regulations indicating when people can go out, how, at what times, what they must do at home, what type of food they must have, prohibiting certain types of contact, requiring them to present themselves to inspectors, and to open their homes to inspectors. We can say that this is a disciplinary type of system. The third example, is smallpox or inoculation practices from the eighteenth century. The fundamental problem will not be the imposition of discipline so much as the problem of knowing how many people are infected with smallpox, at what age, with what effects, with what mortality rate, lesions or after-effects, the risks of inoculation, the probability of an individual dying or being infected by smallpox despite inoculation, and the statistical effects on the population in general. In short, it will no longer be the problem of exclusion, as with leprosy, or of quarantine, as with the plague, but of epidemics and the medical campaigns that try to halt epidemic or endemic phenomena.

This short example (and the text is rich in such micro-analyses) shows the construction of modern risk. To act institutionally about risk, it needs to be described and analysed in systematic tools. So, for example, individuals have to be removed from the concrete events of the plague or a financial crash only to be returned to them as figures in the numerical version of occurrences. Indeed, it is vital that the specific actors are anonymized and that the events are generalised and classified as a ‘case of…’ Without such institutionalised procedures, the conceptual tools that brought about modern risk management could not have developed. That is, the ability to perform historical VaR calculations, for example, is rooted in the historical transformation that Foucault analyses where idiosyncratic individuals disappeared and calculable plagues were constructed.