orgtheory.net

the need for reflexivity in modeling

Over at Socializing Finance, Columbia sociologists Daniel Beunza and David Stark comment on the future of sophisticated modeling in the finance industry. They note that some have blamed the current crisis, at least in part, on the “black box” financial models that caused investors to be overconfident in their projection of asset values. Others maintain that the models did not go far enough and that in the future we need better models to fully account for the risks in the market.

Does Wall Street need more models or less models? We see this as a false choice. The debate, in our view, needs to shift from the models themselves to the organization of modeling. We have identified a set of organizational procedures, which we call “reflexive modeling,” that lead to superior financial models.

The blog post is accompanied by a new paper in which Beunza and Stark study reflexive modeling in the context of an equity derivatives trading room.  For more on the organization of trading see Beunza’s and Stark’s 2004 paper about the “tools of the trade.”

Written by brayden king

February 2, 2009 at 11:01 pm

2 Responses

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  1. Yes, indeed. This is the point we make in our 2008 article [McKenna, B. & Rooney, D. (2008) Wise Leadership and the Capacity for Ontological Acuity. Management Communication Quarterly, 21 (4), 537-546]. More and more complex models in a complex world mostly miss the point. We need ontological acuity that questions the epistemic and ontological foundations of any model, however complex.

    Leaders need behavioral complexity (which “focuses on differences among individuals and on the interplay of a volatile, complex, and potentially ambiguous environment with human beings (as individuals or groups) who attempt to deal with that environment” (Satish, 1997, p. 2048).) and cognitive complexity (differentiation, or the “number of dimensions used by individuals to perceive environmental stimuli,” and integration, “the complexity of rules used by individuals in organizing the differentiated dimensions” (Wang & Chan, 1995, p. 35)). But this is not enough. Wise leaders need ontological acuity: the capacity to understand the categorical and epistemic foundations of knowledge systems and the context in which this foundation derives its meaning, or common sense. It is not just a cognitive phenomenon; it is a capacity, often intuitive and tacit, to understand discursive structures and organizational knowledge. Furthermore, beyond the epistemic and ontological, where is there any moral or ethical reflexivity in these models.

    Bernard McKenna University of Queensland, Australia

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    Bernard McKenna

    February 3, 2009 at 5:21 am

  2. Bernard — do not disagree with your comment.

    Your statement that “leaders need reflexivity” is obviously not false. But how useful is it? Like wisdom, good character and high moral standards, individual reflexivity is elusive, unpredictable and difficult to observe. Furthermore, given the complexity of today’s derivatives contracts, it’s just too much to ask a single individual.

    What I propose, instead, is reflexivity as an organizational property. This entails setting up a set of organization-wide policies such that everyone is reflexive, not just the leaders, and so that reflexiveness within the reach of normal bankers, not geniuses.

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    danielbeunza

    February 4, 2009 at 3:04 am


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