Thursday 13 October 2016

Studying financial markets: Methodologies, disciplinary boundaries or What it takes for a social scientist to get the Nobel?

As part of PhD programme at Edinburgh University Sociology, we the PhD students were encouraged to write working papers on our PhD topics. I wrote a piece on the methodological issues and boundaries in research on financial markets. This was then published in Edinburgh Working Papers. The paper was a very limited survey of the respective literatures of mainstream finance, behavioural finance, international political economy, economic sociology, and social studies of finance (SSF). The latter is simply the application of social science disciplines [not financial economics or behavioural finance!] to the study of financial markets and has its origins in the beginning of this century. Despite its narrow scope, I think the paper gave a good flavor to a general audience of how each discipline theorized and approached behaviours and outcomes in financial markets and what was distinctive about SSF as an umbrella approach- namely its focus on materiality (e.g., financial models, market structure)  in individual and collective financial behaviour. In writing the paper, it was also interesting to see how different disciplines, despite lack of any meaningful mutual awareness, shared similar starting assumptions such as rationality and lack of it!

Having looked back, I am not surprised to see that I as a student of sociology devoted a good part of the paper to economic sociology and SSF with a prophecy that SSF would come to occupy a bigger role in our understanding of financial behaviour. Almost a decade later,  I think that prophecy has materialized so to speak with numerous articles, manuscripts and edited books that are inspired by essential theories and concepts from the SSF's pioneering works (e.g., Callon, MacKenzie and Millo). This is not surprising as SSF's conceptual and theoretical corpus is not unfamiliar and undecipherable to researchers from different subject fields such as anthropology, sociology, and organisation studies. Compare that to mainstream and behavioural finance, which in their empirical manifestations are in a constant debate as to whether markets are efficient or not, using large price data and elegant mathematical modelling to detect (in)efficiencies within. The accessibility of SSF and its attention to the material world that surrounds our behaviour also motivate social scientists to explore how theoretical and material artefacts come to underpin and transform our behaviour not just in financial but also other business domains such as production and marketing.

The lack of an overarching theory such as efficient markets/random walks and prospect theory/ heuristics and biases can be seen as a weakness in economic sociology's and SSF's approaches to financial markets. Although performativity- the theory that economics as a science and its theoretical corpus can format real life markets with a good deal of institutional work-  has engendered a great deal of studies in economic and financial domains (see for example the latest book on performativity, and an earlier special issue on the concept), it is not the only theory that informs SSF's ongoing interest in financial domain. This is a perhaps a strength and a weakness for the future of SSF. On the one hand, being interdisciplinary in its theoretical and conceptual toolkit allows SSF to demonstrate how materiality of markets  is enmeshed with politics, culture and networks. In this vein, one can observe the proliferation of SSF originated  theories, concepts and puzzles within international political economy, anthropology, and accounting research and vice versa.  All these not only encourage interdisciplinarity among social science but also enrich our understanding of financial behaviour. On the other hand, the lack of an overarching falsifiable  theory that attempts to explain individuals and markets behaviour within SSF and economic sociology or any other social science field still underpins in my view  mainstream and behavioural finance's lack of interest in SSF and social science research. Overall, there is hardly any reference in mainstream and behavioural accounts on financial behavior to any pioneering and novel work from SSF and the social science disciplines it brings together. On the other hand, SSF researchers engage with mainstream and behavioural finance. Yet, this engagement mostly takes the form of theoretical/conceptual critique with few insightful  empirical  challenges.

Having thought all these, two questions come to my mind.

What would the mainstream and behavioural finance literature look like  if SSF researchers (antropologists, sociologists, organisational researchers) were retrained as mainstream or behavioural researchers on financial markets?

What would it take for a SSF researcher to get the Nobel prize in economics ?