Peter Erdelyi, wrote a very nice and accurate summary of the public symposium about the edited volume Market Devices. Peter: many thanks for this!

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.

In the last few months an impressive variety of reactions, interpretations and buds of follow-up work regarding the notion of performativity of economics have been accumulating. It is impressive, (and satisfying personally) to see this intellectual trajectory evolving. At the same time, there are several points of misconception that seem to accompany almost every discussion I witnessed about performativity. A good example for this is a recent post in Org Theory, but this is only one example.

Let me touch two points briefly:

First, it is claimed that performativity analyses and criticises the validity and accuracy of economic theory with regard to market.

Well, one way to answer this is to say that the validity of economic theories is relevant, but it is only an intervening variable here. This is because performativity is focused on the way actors (individuals, organisational, hybrids) take into account economic theory. If actors incorporate into their decision-making an economic theory in such a way that changes the behaviour of the market or alters the way it develops, then we have performativity of that theory with regard to that market. So, the accuracy of the theory may play a role in the actors’ decision to use it, but that is not necessarily related to the emerging performativity.

Second one, and this is a very common claim, goes like this, in a generalised form: performativity only works for very specific/esoteric/exotic cases: strawberries, FCC auctions and such. What about production markets/labour markets/commodity spot markets?

The answer to this claim is two-fold, I should think. First, it is true that performativity was detected in specific markets, but this does not necessarily mean that it does not exist in other markets too. Note that performativity is devilishly hard to pinpoint empirically. One has to show causal connections between a theory and changes in the evolution of a market. The Black-Merton-Scholes model and the Chicago Board Options Exchange provided us with a ‘natural laboratory‘, as it were, because the beginning of options trading and the publication of the model took place virtually simultaneously. So, given that detecting and proving performativity is not simple, it is not surprising that it has been shown, so far, only in a handful of cases.

Second, (and this is the more important point), I believe that performativity of economics is only the tip of the iceberg. Expert bodies of knowledge affect the evolution and behaviour of markets continuously and profoundly. Areas like management accounting, risk management and information systems, to name but a few, ‘perform’ markets no less and very likely more than economic theories. It is true that, by and large, these fields do not claim to produce objective description of the markets, as neoclassical economics does. Yet, once incorporated into the institutional structure of markets, even ‘programmatic’ knowledge, such as accounting rules, become part of the taken-for-granted reality just like options pricing models do.

Today’s session at the Academy of Management prompted an interesting conversation with Laure Cabantous on technology and decision-making. The session, titled “Heuristics and Biases,” included three laboratory studies and my paper with David Stark, “Distributed Calculation: Mechanisms of Risk Arbitrage in a World of Uncertainty.”

The pairing of the papers was surprising but effective. Two of the pieces examined how humans make mistakes, use rules of thumb and experience biases when making assessments. My presentation argued the reverse. Individuals have limited cognitive resources, to be sure. But they are only too aware of this, and develop calculative technology to make up for their limitations. For instance, merger arbitrageurs have limited attention span, but they have developed a dashboard-type interface that they call “Trading Summary” and that allows them to see, at a glance, the status of all the trades they are involved in.

The third presentation, by Sanford deVoe and Jeff Pfeffer discussed an interesting bias. Thinking about one’s own hourly wage, the authors found, makes people less willing to volunteer time. The reason for this is priming, a result that is consistent with research that suggests that economics makes people selfish.

What to make of the session? As Laure Cabantous noted after the session, a more interesting session should have been titled Beyond Biases and Heuristics. Economic actors can experience biases, we know that… but they can address them with calculative devices (see our book on this). One interesting question is: what are the consequences of this move? What mediation, biases and effects do they have?

Perhaps we should think about one such session for next year’s Academy…

Market Devices

August 2, 2007

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Last week Michel Callon, Fabian Muniesa and Yuval Millo (yours truly) finished editing a volume, titled Market Devices, that is due out very soon by Blackwell (we don’t have a definite date yet, but the book can already be pre-ordered on Blackwell’s web site). Hence, this post is a bit of blatant self-promotion, but then again, the book is about sociology of markets and so it is relevant to what we’ve been discussing here since we started this blog.

The collection of papers in the volume is varied and it would be improper, really, to try and summarise them in a short post. However, at this point I can identify two key concepts that correspond directly with the papers.

First, the papers refer to the important, yet easily overlooked, role of technical devices in the construction of markets and their impact on market behaviour. Naturally, stating that something is a ‘device’ refers implicitly to the status of agency attributed that thing and to actors surrounding it. We discuss this issue – the problematic agency in contemporary markets – in the introduction briefly, but I believe that a more thorough look at what agency in markets is comes from the various empirical cases analysed in the chapters.

Second, the papers discuss, illuminate and sometimes problemitise the various dimensions implied in the notion of economising. Do markets make a society more ‘economic’ or are they merely the institutional expressions of pre-existing ideas and practices? Or maybe there are performative links between markets as institutions, market behaviour and more general notions of what it means ‘to be economic’? Again, these are questions that provided challenges to sociologists since the days of Weber and Polanyi. So, here again the papers canvass various testimonies about the processes behind the creation of markets and the formation of economic behaviours.

In previous posts (here and here) I put forward the concept of economic molecules: the idea that the basic decision-making unit in markets is not the single human actor and, but instead a cluster of people, machines and procedures. However, I was asked, is a molecule the right term here?

Saying that we should be thinking about economic molecules implies that mainstream economics assigns agency to individuals (the ‘atoms’). But is this really the case? It was commented to me that mainstream micro-economics’ basic building blocks are households and firms. Well (the argument may continue), these concepts (households and firms) are clusters, made up of individuals and procedures and so are ‘economic molecules’. What is the difference, then? The difference lies in what one does with the concepts. Economics uses the concepts of households and firms to apply a simple taxonomy to economies. That is, once a decision-making unit was defined as a household or a firm, the discussion about the nature of that unit is over. Different households may have different utility curves and different firms may have different production schedules, but they all belong to one of those mutually exclusive categories. In contrast, the notion of the economic molecule stresses that fact there is a large variety in the makeup of the clusters and thus there may be many types of animals in the economic jungle. For example, small hedge funds do not think and act like proprietary trading rooms (in fact, even within those trading room there are different ‘species’).

This still leaves open the issue of the physical metaphor. As Daniel mentions in a post, and as was commented to me elsewhere, referring to social actions in terms of physical interactions alludes to the early days of sociology, to the days of ‘social physics’. Do we really want to go back there? Also, atoms have long stopped being the most fundamental unit of matter. So, what is the point in referring, even implicitly, to atoms? These last points are important since relative intellectual positioning is important in the academic world. But, this still leaves us with the question that Daniel asks: we have an interesting, and a potentially useful concept, but how do we capture it?

Brayden King refers to the topic of market design in a post in Orgtheory. I completely agree with Brayden that the question of are (or to what extent) markets ‘designed’ or are they the outcome of ‘organic’, unintended growth is central to economic sociologists. After all, the question of how markets come about has been echoing in sociology since Polanyi.

Nevertheless, I think that juxtaposing ‘design’ and ‘organic growth’ as if they were counterparts in a zero-sum game is a bit misleading. Yes, there are many actors who would like to affect the structure of markets – financial regulators, accountants, trading firms, to name but a few – and given the opportunity these actors would be happy to design markets so that they would fit their needs optimally. Of course, such ambitions remain unfulfilled, and this is because markets are networks of heterogeneous actors. Regulators and traders, for example, do not necessarily hold similar, or even compatible, worldviews. Consequently, the different actors promote very different, sometimes conflicting agendas. So, the overall result in the market ecosystem is of organic growth. However, this does not mean that design attempts are diminished there. On the contrary, the overall effect is a result of constant interaction among actors, many of whom try as best as they can to design the market.

A similar situation can be found in markets whose evolution was affected by performativity. The fact that actors took into consideration economic theories and as a result those theories became an inherent part of the market does not mean that performativity equals design (of course, Brayden does not claim so). Nevertheless, reckoning the force of performativity can help us to shed more light on the tension between agents’ ambitions and actions (‘design’) and the outcome of those actions (the ‘organic growth’). When the market’s heterogeneous network includes actors who promote, or serve as conduits for expert knowledge (e.g. economists, management accountants, risk managers, computer systems designers) it is possible that other actors would adopt the knowledge and practice it, even when they do not agree with the underlying agenda of the actors presenting that knowledge. So, in such markets the interaction among the actors would be affected, (maybe even mediated) by those limited areas of acceptance in the midst of an otherwise competitive and conflict-ridden environment. Hence, performativity-affected markets may look more ‘designed’ than ‘organically grown’…

I see that the “molecules” saga is continuing… So here’s my small contribution to it: following Callon and Latour, I like the idea of a language that shifts from flesh-and-body individuals to people equipped with artifacts. And a new metaphor may facilitate that transition. Is “molecules” the best possible one? Well, one thing about molecules is that it keeps the reminiscence with physics… and its epistemological baggage.

And the baggage is heavy. Economists recast their social science as physics with the quantitative revolution in the 1920s… Econometric Society, Econometrica, Cowles Foundation, etc. Part of the idea was rhetorical: to claim for their discipline the existence of “fundamental laws” of markets that they would go on to discover with the use of models… This, of course, is an idea that the performativity agenda has challenged. Models don’t capture fundamental laws, but also create them. So one would think that molecules and performativity don’t go together.

The question then is… what other metaphor best captures the notion of markets made up by calculative ensembles?

A few weeks ago I mentioned in a post the concept of Economic Molecule. This notion argues that in contrast with mainstream economics, which employs an atomistic view that sees the individual as its basic unit of analysis, it would be beneficial if economic sociology would use a different unit of analysis. That unit of analysis, the single Economic Molecule, is the cluster of people, machines and procedures that together make up the most basic meaningful node in markets: these molecules, and not the ‘naked’ individuals, make decisions and bring about changes in the structure and nature of markets.

Peter Levin wrote a reaction to this notion:

You suggested in your earlier post that the argument made by the performativity crowd puts front-and-center a new conception of the economic actor. The ANT emphasis on calculative agencies implies a subject whose very subjectivity intersects with the tools at her disposal. I guess I think about Doctor Octopus from Spiderman 2 (or Spiderman himself, for that matter). The prosthetics don’t need to be self-aware to be, in an important sociological sense, a part of you. (I mean, Heather Mills McCartney has a prosthetic leg, on which she danced well into the running of Dancing with the Stars. When we think about her, her prosthetic leg is actually a part of her – we can argue about ‘real’ or ‘fake’, internal or external, but in a sociological sense Ms. Mills encompasses the natural and artificial).

This is a differences of degree rather than kind, goes the argument, from say, your eyeglasses, or a telephone. Nothing new here, an over-generalization of Latour and Callon, among others. But applied to traders, it becomes interesting.

We could study black-box trading systems, or electronic trading more broadly, as a similar ‘molecule’ (3 atoms of human brain, 1 atom of finance theory, 2 atoms of hardware/software). What was once just ‘cognition’ becomes immediately and irrevocably contextualized. You literally can’t make sense of a rational economic trader without his finance theory, his screens, charts, formulae, software, colleagues, telephones. I myself would want to disentangle the theories, the technology, the networks, but nevertheless, we could learn quite a bit more from starting at this point and seeing how variability in context/tools/theories change how we ‘do’ markets.

But there is a second avenue of research here. My own impulse is to take on how and why these particular atoms glom into these particular molecules to begin with – the constellation of priors that give rise to what we think of as the economic actor. I guess I incline towards doing physics rather than chemistry (please excuse the reproduction of this distinction, I mean it without its usual hierarchy and status claims). Hence my interest in information, gender, discretion. I want to know not so much the effects of the molecules on markets, but the circumstances and conditions of the atoms-to-molecules transformations.

I’m not sure how new this is, frankly. I think it sounds a lot like H. Becker’s attempts to shift form artist as individual genius to artist as focal node in art worlds. And I also think there is something too expansive about the ‘molecule’ notion – I mean, why stop at finance theory and software as prostheses? It quickly becomes everything, from the high-tech wireless handhelds traders use to trade, to learning mathematics in grade school. Which is fine, but then at some point it gives less rather than more empirical traction on markets and economic sociology.

But this is an important line of reasoning nevertheless.

David Martin has organized a very remarkable panel titled “Ways of Performing Finance” at the 2007 annual meeting of the Society for the Social Studies of Science. The session will take place on saturday October 13th.

The papers are the following:

“Distributed Calculation: Artifacts for Deliberation in the Capital Markets,” by Daniel Beunza and David Stark (Columbia Business School / Center on Organizational Innovation)

“Making Corporate Social Responsibility Calculable and Legitimate on Financial Markets: The Social Construction of Socially Responsible Investment in France” Jean-Pascal Gond (Nottingham U)

“Governing global banking organizations: On the significance of organizational knowledge in regulatory practices” Matthias Kussin (U Bielefeld)

“Mutual Legitimization Process of ‘Market’ and ‘Theory’: the example of Volatility Forecasting” David Martin (U Toulouse-France)

“Making stock pricing methods performative: the everyday logics of interaction of professionals in contemporary finance.”
Horacio Ortiz (Ecole des Hautes Etudes en Sciences Sociales)

“Moral Behavior in Stock Markets is Shaped by Mandates and Market Structure” Aaron Pitluck (Illinois State U)

“How to be Fair in Finance? Knowledging Actuarial” Ine Van Hoyweghen (U Maastricht)

“Fairness in the Insurance and Reinsurance Business” Jacques-Olivier Charron (CNAM/LIPSO)

“What’s the market wage? How compensation surveys give form to the financial labor market” Olivier Godechot (Centre Maurice Halbwachs-CNRS/ENS/CEE)

“Comparative study of credit scoring in the USA and France” Martha Poon (UC-San Diego / CSI-Ecole des Mines de Paris)

The gathering is remarkable, I believe, for the diversity of its participants. It comes to show the strength of the performativity agenda, especially in the European intellectual space.