Peter Levin’s Rethinking Markets

May 17, 2007

Financial Fluency

Filed under: Daily — Peter @ 3:23 pm

Invited to speak for a group of alumnae on financial fluency and art prices, I was trying to think about some ideas on commensuration and categorization. Clealry not as helpful as the woman who talked about how much to set aside in liquid and marketable assets, but not unhelpful, I hope. The argument is that for any commodity, there will be some set of criteria that will allow comparisons across other commodities of the same type. The comparison measures are not at all exhaustive, but these are the criteria that allow for one piece of art to be measured against others, houses, etc., with the outcome being market prices in this case.

NYAS quantitative finance seminar

Filed under: Daily — Peter @ 3:09 pm

I was cajoled by Anthony Townsend to join the New York Academy of Sciences, and to meet him for a seminar on quantitative finance held there on May 16th. There were two speakers and a discussant, for a discussion about the relative value of behavioral finance and neo-classical finance. Terrance Odean took the former position, while Steve Ross took the latter.

(more…)

May 11, 2007

Banksy, value, art

Filed under: Daily — Peter @ 5:55 pm

Yeah, this is pretty amusing..
http://tinyurl.com/yry72m

May 8, 2007

Game-changing technology

Filed under: Daily — Peter @ 5:05 pm

A post at Orgtheory got me thinking about how to address the ‘new-new’ in organizations. As TF notes, the ‘question to answer ratio’ is rather high. I had some thoughts on when a technology goes from being a ’shallow’ change to being a ‘deep’ change.

(more…)

K-Marx Capital and Pollution

Filed under: Daily — Peter @ 1:32 pm

Ok, this is just a chance to see how tables might work for data. This comes from the EPA, our 1999 attempt to clean the air via markets:

May 5, 2007

EPA’s Title IV, 2007 results

Filed under: Daily — Peter @ 9:04 am

The results of the 2007 annual EPA auction are in, with the spot allowance for a ton of SO2 coming in at $433.25. Kudos to the Washington College Student Environmental Alliance, who paid a whopping $1120 for their 1 allowance! Costly way to take a ton out of the environment - common, but is it useful? quaint? symbolically important? Santee Cooper (under the name South Carolina Public Service Authority) bought 15,000 tons. And Morgan Stanley bought 50,000 tons, 40% of the total allowances available this year. They bought 50% of the available allowances last year too - they have obviously been moving into this field.

Other interesting results: there were only 14 winners, and only 17 total bidders - this is pretty small compared to previous years. The winners are really in four categories: 1) power producers; 2) energy traders; 3) environmental or educational groups; and 4) non-energy institutional traders (like Morgan Stanley).

Complete results are at the EPA website. While you’re there, take a look at the 1999 results, where Wendy Espeland and I bought a ton of sulfur dioxide. Wanna guess which one is our shell operation?

May 3, 2007

Quotes v. Trades

Filed under: Daily — Peter @ 10:44 am

One of the interesting things about the shift to electronic trading is the proliferation of quotes against the number of trades actually transacted. Futures Industry Magazine picked this up in summer 2006 in a Tech Talk article. Black-box trading, which is a catch-all phrase encompassing automated trading systems and other triggered trading systems, seems to be a big culprit here. A system of trading that depends on real-time management across markets, like most arbitrage systems require, actually creates a demand for real-time quotes that didn’t exist in the past. It’s the stock ticker run amok

At Eurex, the time it takes to get a quote response (the ‘processing time for order messages’) has been reduced from about 1/3 second in 1994 to 40 milliseconds in 2007. At the same time, the average number of quotes processed per day has gone from something like a million/day in 2000 to 145 million/day in 2006. As the article notes, “in 2000, Eurex had 1.2 quotes per contract. In 2004, 2.16. By 2005, this had risen to 7.88, and by 2006 it had climbed to 17.09 – eight times as many quotes per contract as in 2001.”

The relevant charts are here. A pdf of the entire article is here.

This is what I mean when I speak of electronic trading as being a kind of WYSIWYG market. One upshot of this is that increased dependencies on the narrowing gap between ‘reported quote’ and ‘actual market’ means that delays and glitches will become increasingly consequential.

April 27, 2007

A little meta

Filed under: Daily — Peter @ 9:28 pm

Where I am at the moment with this site: I’ve pretty much set up what I want it to look like, and what is going to go into it.

What’s left is to figure out how to add content with consistency, and what to do with the art site, which is set up differently. Oh yeah, and to add content.

April 5, 2007

“risk-free” versus very little risk

Filed under: Daily — Peter @ 10:34 pm

In reading Yuval Millo’s “Mechanics of Performativity”, I’m struck once again by the Black-Scholes notion of risk-free portfolios. There is a fundamental assumption, crossing a wide range of financial products (and, even as I’m venturing into the Art markets, economic reasoning there), about the relationship between risk and reward.

(more…)

February 14, 2007

‘independence’, markets vs. guesses

Filed under: Daily — Peter @ 3:04 pm

One problem with the assumption that crowds work is the independence assumption. Particularly with regard to markets, people don’t buy a stock as a guess as to what the stock is going to do, per se. That is, I don’t start by saying that IBM should be $50/share, and if it’s not then I’m going to buy/sell it. Instead, I’d guess that how it works is that I make a guess as to what other people are going to think that shares of IBM will be in the future. That is, it doesn’t matter what IBM should be at, if $35/share is what it is at. The assumption that markets trend to efficiency over the long run may or may not be true, but knowledge of that underlying ‘true’ or ‘natural’ or ‘fundamental’ price of IBM is unknowable.

If markets are a combination of what the thing is worth, and what others think the thing is worth, then independence will be impossible to come by. One way to test this - take the same future guess/prediction, and ask people to guess at the outset what the final number will be (so, what a movie would gross in its opening weekend, or how many innocentive challenges will be solved by June 1). Then take those same people and let them at an information market on the same prediction. Which should do better?

If the answer is the latter, why? New information becomes available, perhaps. Or perhaps there is information in other peoples’ guesses. That is, information precisely in the dependence of each member on others’ perceptions of that market.

times when crowds suck, first in a series

Filed under: Daily — Peter @ 1:47 pm

Just to keep a personal marker, and because I’m becoming more and more convinced that there is some serious sampling on the dependent variable in information market / crowd accumulation for the purposes of forecasting, of times when crowds v experts don’t sit well with crowds.

The full story/report is at Foreign Policy/Center for American Progress, but the point to highlight is the ‘public perception’ versus the expert community (page 6 of the report). How can we test to see if people are stupid or smart vis-a-vis the experts in this case?

January 23, 2007

information futures markets

Filed under: Daily — Peter @ 1:10 pm

I’m possibly getting involved with someone doing some research on information markets. This is just a sounding board.

The main piece against which I should start is the Wisdom of Crowds. Do we even know the criteria to judge how to make these markets? Does it matter that they work experimentally even though there is no theory of why or how they work behind them - or vice versa, if there is a demonstrable benefit to information markets, who cares what the theory says. If they tap into the energy of the universe, does it really matter so long as they do a good job?

Anyhow, to task. There are three main problems that aggregation is meant to solve: (1) cognitive problems, where there is a solution, absolute or optimal; (2) coordination problems, getting disparate actors on the same page; and (3) cooperation problems, getting people with opposed interests to act in concert. Surowiecki’s independent variables are independence, diversity, and decentralization.

Beyond that, the theoretical justification for prices as more valuable sources of information than experts, individuals, or planning boards, is Hayak, and the “Use of Knowledge in Society” more specifically. Hayak is writing against the impulse towards central planning of economies, as opposed to using the price mechanism of markets. He argues that bits of knowledge “of the particular circumstances of time and place” are spread across a wide group of people, spatially separated, without much interaction (521). Those with good specific knowledge act in the marketplace when there is, in his example, a shortage of tin or some other commodity. When the tin prices go up, say because of a shortage or a new use for it in some industrial process, it does not matter than only a few people know about it. The knowledge is spread across the whole economic system via the price of tin. As he notes, “in a system where the knowledge of the relevant facts is dispersed among many people, prices can act to coordinate the separate actions of different people” (526).

What is Hayak saying and not saying here. He hedges a bit about scientific knowledge, at one point sidestepping the question of whether scientific knowledge can be ‘priced.’ At the same time he suggests that entrusting authority to a body of experts shifts the problem of knowledge to the choice of experts but does not make that knowledge more efficient. So he seems for the most part to be arguing pretty close to his case, for a market mechanism against planned economies.

The question I have, then, is whether other kinds of information markets, as opposed to price mechanisms in commodity markets, is as much a ‘metaphor’ as an actual marketplace. For my money, this is the central theoretical problem to be answered.

(more…)

December 12, 2006

Engine, Camera

Filed under: Daily — Peter @ 7:27 pm

There are two ways to approach MacKenzie’s book. One is to play well with others, get in the spirit of the seminar, and tackle the thorny questions of performativity, the application of the social studies of science to finance, and the relationship between economics and sociology. The second way is to approach the problem in a slightly more Howard Becker-ish fashion, investigating the organization of derivatives trading. This second way, perhaps unfairly, sidesteps the theoretical problems raised in MacKenzie even as it gets us closer to what is really going on in the world. Positive versus normative, indeed. Let me take the first way first.

(more…)

June 13, 2005

brackishness and economic sociology

Filed under: Daily — Peter @ 5:19 pm

For my ’special fields’ paper as a graduate student, we had to write what was effectively an extended literature review - or rather an Annual Review of Sociology article. Mine was about ‘organizing accounts’ of economic activities. Clearly an idea worked out in combination with Berger and Luckmann’s The Social Construction of Reality and Mary Douglas’s How Institutions Think, I wanted to show that we need some sort of recovery efforts to get at economic institutions before they were stylized as ‘markets.’ Once there, they were transformed into a black box of effeciency, rationality, and self-evidence.

What this really meant, as I think about it a bit removed from it, was that I needed to be reading more economic historians.

(more…)

May 20, 2005

discretion in markets

Filed under: Daily — Peter @ 12:17 pm

Ok, this is going to come out shabbily:
There is a paper I’m working on, for which I’ve been really interested in discretion. If one of the places where sociology can and should contribute to discussions of markets is in the organizational and institutional constitution of price, another is in the creation of action around choice.

We actually have a paucity of vocabulary around choice in markets. There are the central motifs of price and quantity - the formalisms required to make price and quanitity (or liquidity as Carruthers and Stinchcombe would say) free-floating. These are actually quite astounding if you look at the history of futures markets, the work required to make contracts enforceable, stable, standardized. All this so that people could extract the ‘economic’ decision-making from the ’social’ environment (I’ll rant again that this is a theoretical rather than an empirical distinction).

There is also something that Anselm Strauss called ‘articulation work.’ This is the work that is required for cooperative action. Not just ‘institutions’ in the North sense of rules of the game, but ongoing, complex work of making sure that multiple actors can act both in solidarity and in competition. I like to think that this is what Abolafia was getting at in his book Making Markets - the opportunism and restraint that underlie many of the buy/sell decisions expressed by his traders. The contemporary expression of articulation work is in the wonderful work of Leigh Star, whose work on infrastructure, CSCW (computer-supported cooperative work), and categories, is well-grounded in Strauss and an undervalued application to technology.

What I have in mind is something like ‘flexible formalisms’. This is the ability to change the rules, make exceptions, put the formal structure aside, all in the interests of maintaining the smooth operation of work, in this case markets. The downside of this kind of work is nepotism, cronyism, ends-oriented political action (ahem, US Senate). But the upside of this kind of work is to make clear the kind of things that smooths work out.

Two examples, one from life and one from research.

(more…)

May 3, 2005

Commensuration, again, and Transvaluation

Filed under: Daily — Peter @ 8:51 am

Actually, I looked a bit at transvaluation, and it doesn’t seem to be quite the same thing. Or at least, as Inigo once said, it does not seem to mean what you think it means. As far as I can tell, transvaluation is more about the shifts from one value system to another (often in context of Nietzsche, seems to be applied often enough to the Chinese case).

What commensuration links to is a historical tradition dating further back, dare I say to Aristotle? Elizabeth Anderson’s work on value and ethics in economics gets at this, as does Porter’s look at the rise of quantification (what he calls ‘mechanical objectivity’). The idea is that once you can make things directly compare-able via an external metric (slightly different from, but related obviously to quantification), decisions become obvious. There need no longer be angst-y decisions about whether to take path A or path B - 4 is greater than 2, and that makes valuation transparent.

Transpose this onto the question of whether to drill for oil in Alaska or continue to buy oil from Saudi Arabia, and it becomes apparent (to sociologists at least) all the impossibly complicated factors that need to be taken into account. My favorite anecdote on this count is in Wendy Espeland’s The Struggle for Water. She recounts an economist trying to do a cost-benefit assessment of building a dam in Arizona - a commensurative feat if ever there was one. Part of this entailed figuring out how much to value river-tubing. There are standard techniques of forcing the social world into quantitative economic analyses, including (in this case) asking how much people would pay for the privilege of tubing if they had to. None of the poor intrepid economist’s models were robust or stable enough to account for this activity. And so, it was simply deleted from the equation.

The problem is, we have a serious deficiency, made worse by neoclassical models of economics, in evaluating qualitatively different objects, events, activities. This may be an organizational fact, part of a historical moment in the world. It may be a cognitive feature of being human. Beats me. But it has to be met head-on, I think, as part of the sociological project of re-evaluating both the relationship between the economic and the social (in the broadest sense) and the ways in which we allocate scarce resources (in the still-gigantic-but-less-broad sense).

March 23, 2005

Commensuration

Filed under: Daily — Peter @ 3:27 am

I had an interesting discussion this morning, with a colleague from across town. The topic was commensuration, a concept that we both have been interested in for some time (actually, our intellectual ‘pedigree’ is fairly similar, and I should say with some amount of grace that I’ve leaned on his insights more than he on mine).

Commensuration is the process by which qualitatively different objects are brought into tension via a common metric. For instance, how do we compare Barnard College, a women’s college in New York City, institutionally affiliated with but distinct from Columbia University, with Spelman College, a historically-Black women’s college, historically affiliated but distinct from Morehouse College in Atlanta? Do we just say that they are different? Well, maybe. But we can compare them along a number of lines: academic reputation, size, what students do when they graduate, region, etc.

When these comparison categories are ordinal, that is, they are meaningfully rank-able, this is what we mean by commensuration. Commensuration draws different qualities into tension and transforms them into quantitative difference. Region may make the schools comparable, but not commensurable; class size, percentage of PhD’s teaching courses, reputation, rank - these make the schools commensurable.

Why does this matter? Commensuration has potentially powerful effects, sometimes transformational ones. More on this later.

March 21, 2005

Discretion in Markets

Filed under: Daily — Peter @ 11:21 am

One of the contradictions of economic markets is that they rest on the notion that individual actors, acting in their own self-interest, come together to produce outcomes that are in the collective good. This effectively solves the political problem of social order - market exchange provides its own incentives for participants to distribute scarce resources, for instance, without resorting to violence or collective mob rule.

This is in the ideal sense, and my interest is not so much in showing how this hasn’t worked in lots of places (the thug-rule in Russia illustrated by Joseph Stiglitz in Globalization and its Discontents being one of my favorite examples of this). Instead, I want to argue that this imagery is actually theoretically wrong when it comes to understanding, at a fundamental level, what markets are.

(more…)