13th May 2014

Framing the place of observation networks in the recent sociology of finance

The last issue of Universidad de Chile’s social theory journal Revista Mad brings a special issue dedicated to discuss the impact of paying attention to ‘second order observation’ on social studies of finance. This issue is the third installment of an ongoing conversation. The first part was published on the Italian online journal of Sociology, Sociologica, where in that great format of theirs, they published the paper by Esposito later translated into Spanish by Mad, together with a series of responses, including David Stark’s contribution published also in the special issue in Chile. The second installment was a workshop carried out in 2013 at Copenhagen Business School, where Esposito and Stark presented their discussion and received the comments by Christian Frankel and José Ossandón that were later translated and published by Mad. The Chilean edition included also a closing note by Chilean system theorist Darío Rodríguez. Next June, this conversation will continue in a workshop organized by Celia Lury and David Stark at University of Warwick. As a way to introduce this discussion, I am copying into this post the unpublished (and unpolished!) English version of my notes trying to contextualize the place of observation networks in the recent sociology of finance.

This text does not aim to summarize the discussion held by Elena Esposito and David Stark on this issue. Its goal instead is to help readers who are not necessarily acquainted with recent developments in economic sociology by making the sub-disciplinary frame in which their discussion is located visible. A full introduction into the recent sociology of markets is also beyond the scope of this text (cf. McFall & Ossandón forthcoming). This brief piece is rather like an essay without a main body, consisting only of footnotes pointing at further literature and open speculative questions.

[Non-proofread draft. See also David Stark’s piece ‘Observing Observers Observing Observers’ previously published on Charisma]

Note 1: The new economic sociology and finance

In his extremely influential article ‘Economic action and social structure’, Mark Granovetter (1985) questioned the under-socialized starting point of previous approaches to markets. Instead of the basic situation assumed in neo-classical economics, where isolated suppliers and consumers meet each other motivated by their respective individual interest in selling and buying specific goods, the new economic sociology decided to start from a more realistic social assumption. Economic action is embedded in particular contexts of social relations and those relations, or social networks, should be the sociologists’ object of study (Swedberg & Granovetter 2001). Unlike the substantivist economic anthropology initiated by Karl Polanyi (1992), that distinguished between socially embedded and dis-embedded economic arrangements, Granovetter followed a de-differentiating strategy. That approach, however, could not say much about what makes markets unique. This issue was faced by Harrison White (1981, 2002).

In White’s view, what makes markets a particular social formation is not that their participants are socially embedded (this is rather what makes them like any other social situation), but that they are ‘decoupled’. As Weber (Gane 2013) and Simmel (2008) pointed out much earlier, markets are competitive social situations, and competition, White added, is a sophisticated socio-cultural process. In his particular conceptual language, markets are ‘interfaces’ (White 2008), social formations that emerge from economic agents trying to find their footing by comparing each other actions and goods. Economic agents deal with the inherent uncertainty of economic actions by indirectly observing what others in an equivalent position do. In markets, direct social links are replaced (or complemented) by comparisons with those with whom we share common point of references (for instance similar potential customers). And, as French ‘Economists of Conventions’ have consistently shown, comparability is not given but it is the outcome of costly processes, and can be found in many varieties (Faverau et al. 2002). There are markets where comparison is quantitative, like in copper, markets of unique goods where comparison is qualitative but a global scale, like in the art or fashion markets, and others more domestic, like in rural cheese, where comparison is local and on case to case basis (Karpik 2010, White 2005).

The ideas of the ‘new economic sociology’ have proved quite influential in studying financial markets. See for instance, Baker (1984) on the impact of the size of social networks on stock options volatility, Uzzi (1999) on embeddedness and interest rates in small business lending, Podolny (2001) on uncertainty, signaling, social capital and structural holes in venture capital, and Guseva and Rona-Tas (2001) on social relations and credit card lending in Russia. However, the more recent development of a cohesive sub-field of sociology of finance (Knorr-Cetina & Preda 2012) or ‘finance studies’ (as it is referred to when emphasizing its multidisciplinary character) has brought important methodological and conceptual innovations that depart from previous sociological understanding of markets.

Note 2: Mediated interaction and performativity in finance studies

Aligned with the research style of the social studies of science, where several of the leading figures of finance studies – such as Karin Knorr Cetina, Donald MacKenzie and Michel Callon – come from, sociology of finance has adopted a descriptive, ethnographic approach. Therefore, instead of mathematically inferring markets from existing statistics, as White has done, or looking for explanatory variables to test, as in most of the ‘new economic sociology’, much more attention has been paid to the ways in which economic agents actually interact and the instruments they use.

As Karin Knorr Cetina and Urs Bruegger (2002) showed in their influential work on currency exchange, finance market interaction is not face-to-face but face-to-screen. Traders do not only observe their comparable peers, for instance another trader from a different investment company, but their observation is technologically mediated. Information technologies- like the social networks studied by Podonly (2001) – are not only pipes through which pre-formed information flows but they are scopic devices that enable the development of highly reflexive markets (Knorr-Cetina 2003). But not only the interaction between market agents is mediated, the same can be said about the relation between financial actors and the peculiar goods they normally deal with. Financial agents are equipped with market devices (Callon et al. 2007) and these devices do not only help in making sense of sophisticated financial commodities but are also crucial in their valuation and enactment. Accordingly, a considerable amount of research has been carried out on the role played by devices in the practical organization of high frequency trading, stocks, derivatives, and collateralized debt obligations markets (Muniesa 2007, MacKenzie 2011, MacKenzie & Millo 2003, MacKenzie et al. 2012, Poon 2009).

The emphasis on market devices has had another important consequence which has led to discussions well beyond the rather specialized scope of the sociology of finance (cf. Ariztía 2012). Market devices, for instance the Black–Scholes model to price derivatives studied by MacKenzie (2006), are not only practitioners’ tools, but they are also the outcome of academic economic knowledge production. In this context, the terms of the relation between sociological and economic knowledge about markets have been rewritten. If economics becomes a very central element in the practical production of financial markets, it cannot only be challenged because of its relatively unrealistic assumptions. In Michel Callon’s words, economic knowledge is not descriptive but performative, or even more provocatively, ‘the economy is embedded in economics’ (Callon 1998, 2007). Accordingly, in the ‘new new sociology of markets’ (McFall & Ossandón forthcoming), economists and economics have moved from being the main epistemological counterpart of economic sociology to objects of research on their own that need to be followed.

Note 3: Observation networks

In her recent publications, Elena Esposito has shown her enthusiasm for the performativity thesis in financial markets (Esposito 2013). But, she has added, not very different claims can be found in early work by Keynes, with his analogy between finance and a beauty contest, and also in concepts such as ‘moral hazard’ and ‘adverse selection’, used in information economics to name situations where present knowledge transforms future markets. Furthermore, these notions, Esposito argues, refer to a more general phenomenon. Economics is one among other modes of observing – and thus performing- financial markets. Therefore, it may be time to search for a more abstract theory of ‘market circularity’ (cf. Neiburg 2008), that not only includes the techno-scientific descriptions turned market devices studied in the recent sociology of finance, but also the mutual observations theorized by White and the issues pointed out by those economists aware of the disruptive role of social expectations. Unsurprisingly, considering Esposito’s previous trajectory, she finds a solid starting point in concepts developed by social system theorist Niklas Luhmann (Esposito 2011).

In Luhmann’s theory, the economy is a self-referential system of communications (Luhmann 2013). Property right detaches trading from economic objects and money is based on promises of future payment. The economy is based on expectations and on expectations of expectations, and markets can be understood as recursive networks of observations. But it is not only that economic activity is continuously observed from multiple points of views (like the business press or economics), but the economic operation itself, notably through prices, is constituted by recursive networks of observations. All this is radicalized in finance where risk is not only a mode of observing economic activities but an object of trade on its own and where mechanisms such as credit ratings are not only used to evaluate existing goods but are re-introduced as milestones in further speculative dynamics (Esposito 2014).

Esposito has made a conceptual call for a sociology of markets that starts from recursive observations. But what could an empirical sociology of finance that introduces these remarks look like? Well, this is what David Stark does in his recent work with Mateo Prato (manuscript). This work carries on, but on a different scale, previous research carried out by Beunza and Stark (2008) on arbitrage and financial analysts. Instead of reconstructing the perspective of financial agents situated among multiple modes of valuing goods, Stark and Prato quantitatively reconstruct the analysts’ networks. But here network does not mean the social context in which analysts are located, but 2-mode heterogeneous networks consisting of analysts linked by their common objects of attention. In other words, unlike previous sociological work on financial analysts (Zuckerman 1999) that have stressed the impact of pre-existing categories in evaluations, Stark and Prato study how analysts’ evaluations of particular securities vary depending on the set of securities they are observing and the reflexive mutual observation loops with those evaluating a similar portfolio.

Three speculative questions

As Stark (2014) writes in his response to Esposito, they are starting up a conversation. But their ambition is high. They propose ‘observation’ as a bridge between three relatively distant approaches to financial markets in sociology. This multi-focal view cannot be but creative and, as such, also opens up new issues. Let me finish with three speculative questions.

The three different approaches to financial markets here connected correspond to three different modes of producing and valuing social scientific knowledge. Social network analysis is mostly a quantitative and explicative. Sociology of finance inspired by science and technology studies tends to be descriptive and conceptually flexible. And the weight in Social Systems theory tends to be placed on coherence and consistency in conceptual architecture. Esposito’s work is grounded in this latter tradition, while Stark and Prato’s respect the principles of the first approach. The question is whether the conversation initiated here expects to also combine these different sociological styles (see also: Farías & Ossandón 2011, White et al. 2011). Or, to use the language of Stark’s previous work (Vedres & Stark 2010), is this conversation a pacific structural hole or rather does it aim at being a disruptive ‘structural fold’ between different sociologies of finance?

In Luhmann’s terms (2000), to observe implies to distinguish, and a distinction is made between both a marked and an un-marked side. In the discussion reproduced here ‘observation’ corresponds to the marked side, which does not seem such a bad idea. Observation is abstract enough to connect the performativity thesis with recent economic thinking and can be used in a social network analysis. Also, and without much effort, it could be connected with Knorr Cetina’s scopic mechanisms and White’s interfaces. But what remains un-marked? Are there other notions that could do the same? What would be the consequences for the sociology of finance if instead of ‘observation’ the concept chosen was ‘mediation’ (in the sense of communication, brokerage, and translation present in all these approaches) or maybe ‘affect’ in the meaning given by Spinoza and of growing influence in recent cultural theory (McKim 2012)?

In (second order) System Theory not only A observes B and B observes A, but their recursive operation is condensed in new referential points that become stable objects in further observations (Luhmann 2000). This is what Varela calls ‘enaction’ and Von Foerster eigenvalues. Callon has used the word ‘performation’ (Muniesa & Callon 2009) and Serres (1982) ‘quasi objects and subjects’ to stress similar processes. In White’s theory, identities (individuals, firms, markets and so on) are not pre-existing but are formed in the search for control. Stark and Prato have followed a relational approach to valuation. However, is there space in their method for this kind of ontological recursivity? For instance: what happens when a particular set of securities are grouped into a new category, when some analysts start to be identified as a group, or when a particular credit rating becomes an unavoidable evaluation device? Of course, I understand that this can all be introduced as ‘control variables’, but the question is whether we could think about a social network approach that is not only heterogeneous and dynamic (cf. Vedres & Stark 2010) but also open to the formation of new kinds of entities.


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