Financial markets might seem to be a subject matter appropriate only for economists, or perhaps also for behavioural finance specialists, who draw upon psychology to analyze matters such as investors alleged irrational biases. The proposed Fellowship, however, is intended to develop broader social-science, especially sociological, research on financial markets. Thus one research question to be addressed emerges from work in the social studies of science by Michel Callon and also the applicant. Has financial economics achieved its undoubted successes because it accurately described pre-existing realities? Or has it succeeded in part because it changed how markets were organized and how participants in them behaved? Has financial economics, in Callons terms, been performative? (A performative utterance is one that makes itself true, as when as absolute monarch designates someone an outlaw). A second area of work will be on the derivatives (eg options) exchanges that have emerged worldwide since the early 1970s. What accounts for international differences in the form they have taken and in their success? For example, are cultural matters important, for instance the contrast between Chicagos roughneck trading culture and the tradition of English gentlemanly capitalism? A third research question concerns possible instances in which finance theory has been counterperformative (ie in which its application may have undermined its empirical accuracy). The most prominent alleged such instance was the global stock market crash of 1987, which accordingly will be examined in detail. A fourth topic of research is arbitrage (trading that exploits price discrepancies), which is the key mechanism driving prices towards their theoretical values. Are there social aspects to arbitrage? For example, do arbitrageurs sometimes imitate each other, and, if so, with what consequences? A fifth research question is exploratory. Scandals such as Enron and WorldCom have shown that key market numbers such as corporate profits are not self-evident facts, but the outcome of complex processes of construction. To what extent can such processes of construction, the impact on them of the scandals and of regulatory and other changes, and similar matters be examined empirically? An important aspect of the Fellowship will be to encourage broader UK social-science on the financial markets. Several disciplines have much to contribute: for example, politics, with its emphasis on the governance of markets; anthropology, with its fine-grained ethnographic studies; human geography, with its emphasis on the continuing role of particular places in apparently globalized finance. A publicly-accessible database of existing UK work of this kind will be created, and leading scholars, newcomers, financial-market policy-makers and practitioners will be brought together in networking workshops
The overall aim of this Fellowship was to contribute to a broadening of the
disciplinary basis of research on finance. The Fellow conducted a programme of
research based primarily upon ideas and perspectives from the sociological study of science and technology, and the Fellowship also had a ‘capacity-building’ objective of helping to pull together the disparate work in the UK on financial markets in disciplines broader than economics and psychology. A further
objective was to draw work of this kind (which goes under the broad title of
‘social studies of finance’) to the attention of policy-makers and market practitioners.
A chief research goal was to investigate an issue that has become prominent in the social studies of science: the effect of a science on its objects of study. Our best, most systematic knowledge of financial markets comes from financial economics, but this field does not simply study markets ‘from the outside’. From the early 1970s onwards, market practitioners have made use of financial economics, for example to inform their trading strategies. The key early example is the use by practitioners of the theory of options: contracts or securities that give a right but not an obligation.
Hence the intriguing possibility that the ‘science’ of markets (financial
economics) has affected behaviour in those markets. This issue was explored in
most detail in relation to option theory, where three distinct historical phases were
1. Prior to the development of the canonical option model (the Black-Scholes-
Merton model) at the start of the 1970s, the fit between ‘theory’ and
empirical patterns of prices was only approximate.
2. During the 1970s and early 1980s the fit between theory and price patterns
improved considerably. This was in part because of the emergence of
organized options exchanges, but the research also found evidence that
traders’ use of the theory helped move prices towards the theory’s
3. After the 1987 stock market crash, the fit between the Black-Scholes-Merton model and patterns of prices again deteriorated. In crude summary, this was because the crash made evident risks that lay outside the ambit of the model.
There is also evidence (though no definitive proof) that the crash was
exacerbated by the widespread use of option theory in ‘portfolio insurance’,
which involves selling assets as prices fall.
In MacKenzie’s An Engine, not a Camera (MIT 2006) the case of option theory is elaborated into a fuller discussion of the development of modern financial
economics and its practical effect upon markets. A way of conceptualizing those effects is suggested, in which four cases are distinguished: a) where an aspect of economics is used in market practice; b) where its use has effects on market processes (e.g. on patterns of prices); c) where the effect is to make market processes ‘more like’ how they are posited as being by economics; and d) where the effect is to make market processes less like their portrayal by economics.
Other topics examined in the research included the factors influencing the
development of organised exchanges trading ‘derivatives’ such as options. Also investigated was arbitrage (trading that exploits price discrepancies; in a strict definition, arbitrage is trading that makes riskless profits with no net capital outlay). Here, the research highlighted both the ‘physical’ aspects of arbitrage (matters such as the speed of electronic dissemination of prices) and also its ‘social’ aspects (such as the effects upon arbitrage of social relations amongst traders and between traders and their managers). A final area of research was into how corporate financial reporting (in particular measures of corporate earnings) is conducted. A case-study of a UK mid-market company was completed, and an appropriate theoretical perspective for such research was identified and elaborated
Beyond these planned areas of research, three additional pilot studies were
conducted on: the development of carbon markets; the role of models in ‘credit derivatives’ (which are at the heart of the ‘credit crunch’ that began in summer 2007); and the sociology of trading (the role of social relations in forms of trading broader than arbitrage).
The broader goal of the Fellowship to encourage the development of social studies of finance more generally in the UK was pursued via two main avenues. First, the Fellowship website included, in addition to downloadable working papers, etc., profiles of the research community in social studies of finance in the UK and Ireland (see http://www.sociology.ed.ac.uk/finance/index.html). The initial trawl in April 2004 identified 22 members of this community; further trawls, and organic growth of the community, mean that the list now numbers over 50.
Second, four workshops were held, bringing together established academics in the field, students, early-career researchers, and market participants.
The Fellowship research has led to a single-authored book, an edited collection, a further single-authored book in press, seven refereed journal articles and four in the full Research Report). 40 presentations were given
by MacKenzie to audiences in the UK, US, France, Spain, Germany, Canada and Portugal, and included, for example, the 2007 Clarendon Lectures in Management Studies. Potential users of the research in the policy-making and market practitioner communities were reached via the third of the Fellowship workshops (oriented primarily to such users) and a talk to around 50 members of the Edinburgh business and policy-making communities. Two non-academic articles were written for outlets oriented at policy-makers and practitioners, and a further four essays for the London Review of Books brought the research to a wider public audience. Reporters from Reuters, Bloomberg and the Wall Street Journal have contacted MacKenzie about the research, and at one of the peaks of the ‘credit crunch’ crisis the Financial Times (15 August 2007, p. 9) drew upon An Engine not a Camera to suggest that the analysis of the relationship between models and markets put forward in the book helped to explain an important part of the crisis.