Peter Levin’s Rethinking Markets

December 31, 2007

Resolved

Filed under: Ramble — Peter @ 2:23 pm

For what it’s worth, one of my resolutions for 2008 is to be a nicer person. To those who I was a total jerk to over this past year, I guess I still own that. But I’m going to try to be more gracious in the coming year.

January Effect

Filed under: Markets, Prices — Peter @ 2:14 pm

One of the better anomalies is about to occur, the so-called January Effect in financial markets. Back in the day, stocks would jump in the first 3-4 days of January as the depressed prices from the end-of-year selloff would rebound. Of course, as people became savvy about it, the effect shifted a bit to December (the so-called Santa Claus rally), but still, it’s one of those funny plate tectonics where institutional effects (US tax law) meets individual psychology (optimistic January) meets collective social practice (being on vacation for the New Year holiday).

Happy January Effect.

December 28, 2007

Inter-disciplinary vs. Multi-disciplinary

Filed under: Ramble — Peter @ 9:04 am

This post riffs on a long-time discussion in my field of sociology, namely, How much should our disciplinary roots matter? It came up most recently as a side-light to a completely thoughtful, really interesting discussion of comments and research notes in journals. The issue of inter-disciplinarity is not new, or news, but I’d like to make my case for sociological chauvinism more explicitly. If crusade is about “the wild lack of critical thinking that many sociologists evince toward work that claims to show the triumph of some sociology-affirming narrative against some outsider (esp. ‘biological’, but also psychology or economic) alternative”, my crusade is about the deep self-doubt, bordering on self-disrepect, that sociologists seem to shoulder more than any other social science. I mean, at least psychology has enough self-centeredness to advocate for their own Presidential Council of Advisors. Sociology? Not so much.

There are two issues here, I think. The first is, do you know enough about the intersections of your discipline with others (and about the world) to make arguments about it? That is, I completely agree that there is a straw person’s argument that is easier to ‘take down’ than a real, nuanced one. But let me stick to sociology/economics, since it’s more my own expertise. In a recent interview with Eugene Fama, the Minneapolis Federal Reserve Bank noted:

More recently, and often in collaboration with Donald MacKenzie, Fama reexamined the capital asset pricing model, a classic model for determining fair cost for equity capital, and declared it an empirical failure unless two other factors, the performativity of markets and the underlying theoretical mechanisms of finance, are also included. This work, too, has transformed Wall Street.

Eugene Fama has discovered social studies of finance? Oh, wait. Let me try that again:

More recently, and often in collaboration with Dartmouth’s Kenneth French, Fama reexamined the capital asset pricing model, a classic model for determining fair cost for equity capital, and declared it an empirical failure unless two other factors, market capitalization and book value to market value, are also included, are also included. This work, too, has transformed Wall Street by providing academic support for “small-cap” and “value” funds.

I mean, seriously, I agree with Zuckerman that two wrongs don’t make a right, but really, we’re arguing that sociologists need to read and understand the nuanced arguments of finance and all of its heterogeneous variations? When the biggest debates in that field are whether and how to include market capitalization and book value?

The second argument goes something like saying that by incorporating other disciplines into sociology, we make sociology stronger. After all, the world is obviously no more empirically split into sociological, psychological, and biological than a meal is able to be disaggregated into its constituent ingredients (or chemicals, for that matter). The whole is different than the sum of its parts, and we’d be better off as a discipline if we took as our mission understanding the whole.

This is a compelling argument, and I see its merit. But I still disagree. And don’t make it seem like I mean that sociologists shouldn’t learn math, or history, or economics. I’m not a moron, and attributing that sentiment to me is not particularly gracious. That is, I’ll assume you’re not an idiot if you do the same for me. What I mean is that we understand the world better by engaging in multi-disciplinarity more than inter-disciplinarity. At the end of the day, sociologists and economists have different ideas on what is important and on how the world works. Sure we could use integrators. But the disciplines - unnaturally, historically contingent, yes yes - coalesce knowledge and advance understanding. This notion of multi-disciplinary comes from a brief experience at Northwestern with Wendy Griswold’s culture workshop. Her point there, which I would advocate here, was that the workshop works best not as inter-disciplinary, but as disciplinary. Everyone comes with their background not as baggage but as a baseline for multi-disciplinary interaction.

I believe strongly that discussion, scientific advancement, creativity, come in the passionate exercise of disciplinary knowledge. Why give the benefit of the doubt to biological explanations? Force them to be explicit. Why give the baseline assumption that markets express preferences a free pass? For that matter, be prepared to argue why society should be considered sui generis rather than as the sum of its individuals. You can be wrong here, and convinced by others. But why not start with sociology-affirming narratives?

I’m compelled by Zuckerman’s analyses of categories in the making of markets, and Podolny’s status orderings, and Fligstein’s markets as political arenas jockeying for resources. I think we have lots to offer. And I think the sociological case avoids some of the worst of economics’ historical ties to managing the economy, which makes sociology well-positioned to understand markets. We have multiple dependent variables (performance, survival as well as altruism [Healy], and markets themselves [Zelizer, MacKenzie and Millo], to name just a few), which is better than just one (performance). And we have a sweeping range of independent variables. Our mechanisms are clumsy, and our theories are not particularly grand nowadays. But I just don’t get the hand-wringing.

This argument is not unlike though obviously not identical to, arguments about the political center, with sociologists playing the role of self-doubting Democrats. The belief that if we only reached for conciliation and thoughtful understanding of each others’ positions, we’d have consensus and a great society. Partisanship is polarizing and makes those in the political center get the vapors, but it also reflects real debate and real discussion that is a more accurate description of what’s going on. Academically, inter-disciplinarity is a myth, and it marginalizes your discipline. We have genuine disagreements that are not going to be advanced by rushing to the intersection. Because I am highly suspicious that you’ll find any wisp of the sociological in the Theory of Everything.

December 17, 2007

Distemper

Filed under: Ramble — Peter @ 12:54 pm

I sometimes wonder what the role of blogs in academic life should be, as it seems to work really well for some people and not so much for others. In particular, I think the bleg should have some rules about it. At the obvious risk of picking a fight with a more senior colleague whom I don’t really know, who has tenure in my field, and who has clearly done the work over a much longer period of time than I have, I nevertheless point to this discussion of preferences versus tastes. The point at which the first comment was offered, responded to, and then left with no discussion, leaves me kind of sad. I have no doubt that this isn’t intentional maliciousness or anything close, but still it doesn’t strike me as particularly classy in the grand scheme of things.

Of course, this being Monday, I’m annoyed at myself for not getting enough done last week and now facing a daunting week ahead, so one might simply chalk this up to distemper.

December 9, 2007

ye. gods.

Filed under: Art — Peter @ 1:11 pm

Brian Wilson’s Lost Rap Recording. Via Unfogged.

December 6, 2007

How do you know what stuff to get?

Filed under: Culture, Markets — Peter @ 8:26 am

I’m always struck by the extent to which marketers have internalized the assumption that my preferences are stable, and static. Discussing next-generation mobile phone software in Technology Review, Kate Greene writes:

The software, called Magitti, uses a combination of cues–including the time of day, a person’s location, her past behaviors, and even her text messages–to infer her interests. It then shows a helpful list of suggestions, including concerts, movies, bookstores, and restaurants.

The idea is that as the software learns more about you, say, whether you like expensive food or fast food, and it’s 12:30pm, it will use GPS to suggest local fast food joints. The key for this is to predict future behavior based on past behavior.

For businesses, the future is all about personalization, effectively the capture and crystallization of a potential consumer’s preferences so as to sell them more stuff. In a large (retail and business-oriented) financial services firm I know of, the big innovation over the last couple years was personalization. There are quite a few organizations out there that engage in this kind of sell-by-stable-preference-assumption: Poindexter (now X+1), Epiphany, Revenue Science, Tacoda, DART (DoubleClick)

I want to unpack this notion of recommendations, since it is widely held to be the next generation of all sorts of business applications. And the idea of preferences is folded into assumptions about the micro-foundations of all kinds of markets as well. Assumptions about preferences are that they are relatively stable, determined a priori, and randomly distributed.

(more…)

December 4, 2007

How to price cultural stuff

Filed under: Art, Prices — Peter @ 12:17 pm

Tricky tricky Dr. Lena. In her discussion of the great Canadian post-Woodstock, train-tour extravaganza, she asks the question: how should we price cultural stuff?

There are two main ways, though we should frankly see both as conventions. The first is cost-plus, as she rightly points out. The ‘plus’ is something to fuss about, and how much to pay artists does just regress the problem back into costs. In other words, deciding an appropriate ‘cost’ for artists reproduces the problem. Artists may say, well, “pay me cost-plus, where cost is expenses to get out there, lodging, time-for-my-talent.” And then we say deciding an appropriate ‘cost’ for time-for-my-talent reproduces the problem. And so on.

Which leads to the second method, something like ‘what the market will bear.’ In practice, this means what people are willing to pay, combined with what you’re willing to accept. But - the world doesn’t come with supply-and-demand curves attached. Most markets are not totally variable-priced markets - markets where every price is individually negotiated. Capital markets are exception more than rule, and even when organizations do try to achieve this ideal, we think they kind of suck (I’ve long thought it would be fascinating to walk down the aisle of an airplane in flight surveying passengers about how much they paid, then making your results public. And by fascinating I mean riot-inducing.)

So, the interesting part is in how the theory of ‘what the market will bear’ meets the practice of ‘how much do we charge for this concert/album/art?’ And all of JL’s subsequent discussion is indeed the practical implementation of this second strategy.

Of course, this doesn’t answer her question, which is, what’s the appropriate comparable: 1) compare by artist?; 2) compare based on format?; or 3) compare based on venue? My real answer to that specific question is, I have no idea. It certainly appears that the concert organizers are pushing for ‘based on venue’, while some people recognize ‘based on artist’. I would say that the ‘based on format’ is harder, since the format is the unique part.

To get more general, let me hypothesize that comparables are more likely to be based on things that are, well, comparable. A CD of a totally unique band with a totally unique sound would be more likely to be priced based on ‘other CDs’. Outsider artists doing unique photography would be compared with other outsider artists (rather than other photographs). This is certainly an empirical question, but there’s my stake in the ground.

There is still a paper or book or something to be written about baselines, but this is not it. My nephew (who loves Mr. Krabs from Spongebob) will tell you that you need money to buy one of his toy cars from him, but the amount of money you need is incomprehensible. It’s all ‘coin money’ to him, regardless of whether it’s 3 dimes, two quarters, or 20 pennies - he has no baselines and so no means by which to compare.