{"id":1631,"date":"2013-03-11T09:00:16","date_gmt":"2013-03-11T09:00:16","guid":{"rendered":"https:\/\/charisma.local\/charisma2023\/char1smaSSL\/?post_type=finance&p=1631"},"modified":"2013-10-02T16:47:00","modified_gmt":"2013-10-02T15:47:00","slug":"observing-observers-observing-observers","status":"publish","type":"finance","link":"https:\/\/www.journalofculturaleconomy.org\/charisma\/finance\/observing-observers-observing-observers","title":{"rendered":"Observing Observers Observing Observers"},"content":{"rendered":"

\"\"<\/a><\/p>\n

\u201cYou can observe a lot just by watching<\/em>.\u201d\u00a0\u00a0 Yogi Berra*<\/p>\n

This quote from one of my favorite American philosophers should be the motto of ethnographers.\u00a0 Watching, being there, in situ, with eyes and ears open, in an attitude of curiosity, not knowing (especially not knowing in advance) what you are looking for but prepared to recognize it \u2013 this is still one of the very best techniques for data collection.\u00a0 But, of course, ethnographers have no monopoly on observing others.<\/p>\n

Three recent papers observe observers observing others.\u00a0 The first, \u201cFrom Dissonance to Resonance<\/a>: Cognitive Interdependence in Quantitative Finance\u201d (Economy and Society<\/em>, 2012), by Daniel Beunza and myself, asks the question: How do traders deal with the fallibility of their models? In particular, how do they deal with the fact that, in identifying patterns in the markets, these same instruments can also blind the trader from seeing some things.\u00a0 As instruments of perception \u2013 and indeed, like the optic nerve itself which allows us to see but must also produce a blind spot \u2013 models that reveal also conceal.<\/p>\n

\"\"<\/a><\/p>\n

How does the trader avoid such cognitive lock in? The answer is that traders leverage the fact that other traders are observing from a different vantage point.\u00a0 The traders at the merger arbitrage desk we studied could not observe what is on their rivals\u2019 screens.\u00a0 But they can place on their screen an image of the \u201cspread plot\u201d which they skillfully use as a representation of the aggregate views of their rivals.\u00a0 When the spread plot moves in a direction different from one\u2019s own estimates, traders can ask, \u201cWhat am I missing?\u201d\u00a0 and make corrections in their models.\u00a0 Such \u201creflexive modeling\u201d can help an individual trader to avoid disaster. But it should come with a warning label: when the system lacks requisite diversity, the cognitive interdependence can create positive feedback that yields an arbitrage disaster \u2013 such as the $2.8 billion in losses to merger arbitrageurs (including the team we studied) in the GE-Honeywell deal.\u00a0 When the system lacks diversity of viewpoints, the same practices that do prove effective in mitigating individual cognitive lock in can lead to a collective lock in of enormous proportions.<\/p>\n

The second paper observing observers observing is \u201cThe Structures of Uncertainty<\/a>: Performativity and Unpredictability in Economic Operations\u201d\u00a0 (Economy & Society<\/em> 2013) by Elena Esposito who argues that, \u201cthe real purpose and function of the market\u2026 is to provide an arena for the mutual observation of observers.\u201d\u00a0 This is a paper that rewards careful reading.\u00a0 It is theoretically rich and dense. Yet, rare among such texts, it is very clearly written with some wonderful, strong sentences.\u00a0 The essay ranges fairly widely, bringing in ideas about time from her book (see The Future of Futures: The Time of Money in Financing and Society<\/em>, Edward Elgar, 2011), making a general argument about counter-performativity,\u00a0 and concluding with insights about the limits of probabilistic orientation.<\/p>\n

\"\"<\/a>Most relevant for my purposes here is Esposito\u2019s application of observation theory to the financial crisis. If you are not familiar with the concepts of first and second-order observations (from Luhmann but also from von Foerster\u2019s Observing Systems<\/em>), Esposito\u2019s essay will serve as a useful introduction.\u00a0 Like my paper with Beunza, Esposito is interested in the fallibility of models and the relationship of that to traders\u2019 observations of other traders.\u00a0 Any model would need to make assumptions about the actions of others.\u00a0 Things get really interesting, Esposito argues, when models become more sophisticated and begin to take into account that others are not simply acting but are acting on the basis of models (which themselves take into account that others are using models, each of which is probability based). As models become more sophisticated, more powerful, and better able to take into account model risk, prices become more volatile and the system as a whole less predictable.\u00a0 That is, the reliability<\/em> of models contributes to the unpredictability<\/em> of the system: “Under these conditions, every reliable forecast is destined to falsify itself, because the future reacts to the expectations imposed on it \u2013 where every additional reliable forecast contributes to an increased unpredictability of the future.”<\/p>\n

At the core of Esposito\u2019s paper is an interesting theory of financial markets:\u00a0 \u201cWhat is handled, in financial markets is uncertainty as such, resulting from a network of reciprocal observations of observers.\u201d\u00a0 The last in our trio of recent papers moves to studying empirically the effects of such social structures of observation on valuation.\u00a0 \u201cAttention Networks<\/a>: A Two-Mode Network View on Valuation,\u201d by Matteo Prato and myself, builds on the observational theory principle that valuation depends on the contingent viewpoint of the observer and on the views expressed by the observed. The observer\u2019s viewpoints and observed views are for us embedded in the evolving two-mode (agents-assets) network structures of attention that characterize financial markets.\u00a0 Our argument starts with a simple question: What does it mean to focus on a financial asset?<\/p>\n

One way to think about this is as a singular relationship of an actor to the asset.\u00a0 Another, quite popular way among sociologists, is to think about an actor examining an asset in relationship to an abstract category.\u00a0 We take a different view: Instead of positing that it is the \u201cstructure of classification<\/em> that guides valuation\u201d (Zuckerman 2004: 411), we argue that it is the structure of attention<\/em> that guides valuation. In place of arguing that valuation is embedded in socially constructed categories, we argue that it is shaped by networks of attention.<\/p>\n

\"\"<\/a>We define an attention network<\/em> as an evolving network created by multiple agents allocating their attention and expressing their judgments across multiple situations. Valuation, we argue, is shaped by an actor\u2019s location (or viewpoint) within such an attention network.\u00a0 That is, as a first step, we propose to study the relationship between paying attention and allocating attention.\u00a0 Focusing attention and allocating attention are not so very different.\u00a0 The objects across which one allocates attention are the ground against which the figure can be seen.\u00a0 If we as researchers can know the other objects that an actor has in her field of view, then we know the viewpoint from which she makes an assessment.<\/p>\n

In assessing a focal situation, actors can make associations, analogies, and comparisons with the other situations that are present in their portfolio of attention<\/em>. Specifically, a feature viewed as salient for evaluating one issue might be recognized as relevant for another. That is, the issues across which an actor allocates her attention will shape the properties that are selected as salient and worthy of consideration when assessing the focal situation.<\/p>\n

We refer to this as the viewpoints effect<\/em>. Our first proposition is that valuation is perspectival: One\u2019s assessment of an issue is shaped by one\u2019s viewpoint, given by one\u2019s contingent portfolio of attention. We hypothesize, specifically, that two actors who assess a given situation vis-\u00e0-vis a similarly (differently) composed portfolio of other situations are more likely to autonomously converge (diverge) in their interpretations of the given situation.<\/p>\n

Viewpoints are the first but not the only step in developing an observational network approach to valuation.\u00a0 Building on the second relational property of attention in a two-mode observational network (i.e., links among the competitors who pay attention to the same market issues), we expect that market actors are more likely to come across the assessments of the competitors who focus their attention on the same issues.\u00a0 When two competitors allocate their attention across more similar portfolios of problems, their views become prominently visible to each other. Associations made by one actor become noticeable to the other and vice-versa. Conversely, mutual exposure would be limited when two competitors are not in their respective fields of vision because they are allocating their attention to different market aspects.<\/p>\n

Thus, our second proposition, referring to the views effect<\/em>, is that valuation is doubly perspectival: actors\u2019 valuations are not only shaped by their contingent viewpoints, given by their fleeting portfolios of attention, but also by the views of others, which themselves are shaped by their changing viewpoints.\u00a0 We, therefore, further hypothesize that, the more (less) two actors have encountered the same third actors\u2019 views on the other situations to which they have not been attentive jointly, the more their interpretations of a given situation will converge (diverge).<\/p>\n

We test these propositions in the context of securities analysts, whom we might think about as professional observers.\u00a0 In particular, we study the end of year earnings estimates that securities analysts make about the firms in their portfolio of coverage.<\/p>\n

Whereas Daniel and I made our argument about reflexive modeling based on an ethnographic account of one merger arbitrage desk in one trading room (in fact, further limiting our account to what transpired on a single morning), Matteo and I conduct a statistical analysis of 10,933,662 pairs of analysts\u2019 estimates on US publicly listed firms\u2019 earning per shares.\u00a0 Our findings support the idea that an actor\u2019s position in an observational network \u2013 via viewpoint and selective exposure to others\u2019 views \u2013 shapes valuation.<\/p>\n

Our sociological account of valuation exploits two-mode networks as a method of analysis. Objects are located within a network structure of attention given by the actors who observe and evaluate them.\u00a0 Meanwhile, actors are also located within a structure of attention given by the ties that connect them through the objects they observe and evaluate. Note the peculiar feature of this network. There are no direct ties among the agents.\u00a0 They are not proximate because of some personal connection. Their location in the social space of attention \u2013 their proximity to or distance from each other \u2013 is a function of ties formed through objects. \u00a0In mapping these networks, we chart socio-cognitive networks.<\/p>\n

In further research we will explore the community structure of such networks with an eye to investigating how different types of structures contribute to dissonance or resonance.<\/p>\n

\"\"<\/a><\/p>\n

* I once quoted Yogi Berra at a Harvard conference on pragmatism. The quotation was apt: \u201cIn theory there is no difference between theory and practice. In practice there is.\u201d\u00a0 I had used the quotation in arguing with a prominent German social theorist who then expressed some concern to a nearby participant that he was not familiar with this figure.\u00a0 He became incensed when, during the coffee break, he learned that the \u201cfamous American philosopher\u201d was a New York Yankees baseball player. I thought it was all in good fun; but he was not at all happy. If we had been in a bar instead of the foyer of a Harvard building, it might well have resulted in a shoving match. I made a point of keeping a smile on my face, but even then it was quite tense before a mutual friend stepped between us.\u00a0 So, a note of caution about when, where, and how to quote American philosophers.<\/p>\n

David Stark teaches in the Sociology Department at Columbia University.\u00a0 Publications, papers, course materials, and presentations (including \u2018silent lectures\u2019) are available at\u00a0 thesenseofdissonance.com<\/a>.<\/em><\/p>\n

Acknowledgements<\/strong><\/p>\n

As part of our inter-network collaboration this entry is co-posted with socializing finance<\/a>. Trading floor image courtesy Daniel Beunza.<\/p>\n","protected":false},"excerpt":{"rendered":"

David Stark introduces three recent papers that observe observers observing others, including exploring how processes of valuation are shaped by an actor’s location in ‘attention networks’ Read More<\/a><\/p>","protected":false},"author":94,"featured_media":1661,"menu_order":0,"comment_status":"open","ping_status":"open","template":"","meta":{"_acf_changed":false,"footnotes":""},"categories":[1,7],"tags":[576,577,575,579,29,578,413,580],"class_list":["post-1631","finance","type-finance","status-publish","has-post-thumbnail","hentry","category-all","category-writing","tag-attention-networks","tag-daniel-beunza","tag-david-stark","tag-elena-esposito","tag-finance","tag-traders","tag-valuation","tag-yogi-berra"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/finance\/1631","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/finance"}],"about":[{"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/types\/finance"}],"author":[{"embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/users\/94"}],"replies":[{"embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/comments?post=1631"}],"version-history":[{"count":10,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/finance\/1631\/revisions"}],"predecessor-version":[{"id":1657,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/finance\/1631\/revisions\/1657"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/media\/1661"}],"wp:attachment":[{"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/media?parent=1631"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/categories?post=1631"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.journalofculturaleconomy.org\/charisma\/wp-json\/wp\/v2\/tags?post=1631"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}