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Market Governance Is About People (And How They Think)

posted by Annelise Riles

Hello everyone and thank you so much to Bob and Adam for bringing me into this exciting conversation. This week I want to raise with you a few thoughts about the way forward on financial regulation that have come out of interviewing and observing regulators in their interactions with market participants over ten years. My research has been mainly in Japan but involves some US components as well.

Before I get started though, the wider theme this week is going to be how vitally important it is to get out in the market and among regulators and talk to people rather than to just assume we know what a rational person in this or that role might think or do. I am continually amazed at how little we know about what regulators think and do; how little they know about what market participants think and do; how little market participants know about each other; how little the journalists know about any of this. And yet there is a growing body of very serious and solid empirical qualitative research out there based on long term observation and deep knowledge of particular markets that we could be relying on to answer these questions. Some examples: Doug Holmes on central bankers, Vincent Lepinay and Hiro Miyazaki on derivatives traders, and my work, and the work of Credit Slips’ own Anna Gelpern on lawyers. We need to start basing out regulatory policies on the empirical facts--on what we know about how real people in the markets think and act--not on what we imagine they might do. 

The keywords here are “people” and “thinking”.  Somehow we seem to have forgotten that markets and their regulation are all about real people, in real relationships that carry certain expectations about what doing the right thing might be--with regulators, with their competitors in the industry and their former classmates, with their customers, with their spouses and children, with their bosses and secretaries, and on and on--and certain sets of intellectual and mechanical tools for making sense of the realities they confront and making choices about what to do about them. 

The disciplines of sociology and anthropology have a whole bunch of sophisticated tools for studying these things, and there is now a growing field out there called the anthropology of finance.  What anthropologists and sociologists know about market activity dovetails with behavioral economists’ insight that market behavior is not inherently rational or self-interested.  The next question is, what does shape market behavior? Anthropologists and sociologists study market culture, market institutions, and market thinking--everything from the kinds of technologies traders use to interpret the market to the relationships between regulators and market participants--to answer those questions. I discuss the insights of my own research and what anthropological approaches more generally have to offer in my book, Collateral Knowledge: Legal Reasoning in the Global Financial Markets, which will be out from the University of Chicago Press in March 2011.

If we really take in this simple fact about markets, all kinds of new opportunities to shape market activity come into view. So in the next few days I will throw out a few examples of how this perspective might contribute to current policy debates in the headlines. I look forward to your ideas and criticisms, and if any of you are attending the AALS meetings in San Francisco this week it would be great to talk in person too.


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"If we really take in this simple fact about markets, all kinds of new opportunities to shape market activity come into view."

That seems like a dangerously overconfident statement to me. As far as I can tell, the antecedent for "this simple fact" is the proposition that "market behavior is not inhrently rational or self interested." That statement being a negative one, I don't know that it supports much in the way of positive action. Second, it's a wide, vague generalization that does not logically support any specific programmatic action. Third, one could debate it quite a lot; it may be that its rationality is underestimated and the issue is whether the observer understands all the incentives and other factors that bear on the behavior. Fourth, it's a growing field but hardly a mature one and it would be more prudent to refrain from jumping to conclusions about actions based on anything so nascent. Last, I don't think the fields of anthropology and sociology are very scientific, in the way that hard sciences are (for example, there are major questions about replication and control settings in all social science experiments), and even within the fields there are meaningful methodological and similar debates about the degre of certainty and breadth of inference one can extract from any given project and that ought to make one quite cautious about basing any actions that affect a country of 308 million people on work done in these fields.

Is economics "scientific, in the way that hard sciences are"? The first part of your post seemed to believe that it was; the final sentence seems to assume the opposite.
If we give up on social science and acknowledge that natural science has little to say about financial services, we're left with a humanities approach. The humanities approach doesn't bother me--you learn a lot about financial services by reading Tom Wolfe. But is that all there is?

ES: I am all in favor of social sciences collecting data and performing analysis and trying to achieve a level of reliability akin to what one sees in hard sciences. My point was since the social sciences haven't reached that stage and aren't really close, it is dangerous to act on the premise that they have.

I re-read my comment and still don't see what you say about the first part of it so can't reply on that count.

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