making markets in our own image


Rob Norton has a nice article on innovations in modern finance. Registration is required for the website, but it’s worth traversing for the content of the article.

It took a revolution in the field of finance to produce the theories and techniques that make possible today’s more sophisticated markets. This revolution started in the 1950s inside the heads of a few dozen economists, mathematicians, statisticians, and physicists working at universities and consulting firms. Modern quantitative finance came of age between the 1970s and 1990s, but is only reaching full maturity now. With the exception of the computer and the Internet, no modern development has affected business more powerfully.

Despite the fact that finance scholars and financial economists routinely describe their innovations in these terms, organizational and management scholars are much less sympathetic to the idea that finance drastically changed business strategy. Rarely, do we see the implications of the capital asset pricing model discussed in our literature.

In economic sociology, however, there is a different trend. One of the hottest areas of the subfield, I think, is the sociology of financial markets. People like Donald Mackenzie and Michel Callon expanded this field in recent years. Rather than searching for underlying patterns of behavior that might explain variation in stock price volatility or some other financial measure, as the network analysts had done for years, (e.g. Wayne Baker) the new economic sociology of financial markets takes the tools of financial economics as their independent variable to explain the evolution of markets. Like the finance scholars themselves, the sociologists of finance adamantly believe that the new financial innovations have drastically changed market behavior. The concept they use, performativity, describes the transformation of behavior by the tools created to solve practical problems. Economists create theories and analytical tools, like the CAP model, and these in turn shape the way traders, brokers, CFOs, and other financial specialists behave in the marketplace. In a very real way, the tools change the terrain of the market to fit the conditions that were theorized.

Donald Mackenzie has a new book on the subject, which I have not yet read but that is currently in my reading pile. Here is a review of the book by the widely-read David Warsh.

Written by brayden king

September 30, 2006 at 4:29 pm

2 Responses

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  1. That’s a darn good question – where is the CAPM model in management theory & economic sociology? I know people like to talk about the rise of the economics profession these days, but I’m glad that someone’s really thought about how CAPM (and other specific outputs of the econ profession) shapes markets. But I wonder if MacKenzie is making the “strong” economic sociology arguent that the economic growth is created by the model, or the weaker claim that CAPM merely helps coordinate action in the financial market and point out previously unseen profit opportunities?


    Fabio Rojas

    October 1, 2006 at 4:48 am

  2. Bonus question for the b-school kids: let’s assume that finance economists are right – CAPM and other analytic techniques explain some substantial amount of economic growth. Does that contradict in any way resource based value theory? Are financial actors using CAPM as a rent capturing device? Or, could you make the argument that CAPM and its ilk simply allow firms to more efficiently process inputs and outputs?

    PhD oral exam question: If you find this question ambigous or poorly posed, could you reformulate it so it does make sense and then find an answer?


    Fabio Rojas

    October 1, 2006 at 5:03 am

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