Transcript Devices for Dissonance: Reflexive Modeling and Systemic Risk Daniel Beunza & David Stark Dissonance Dissonance fosters discovery by prompting reflexivity.

Devices for Dissonance:
Reflexive Modeling and
Systemic Risk
Daniel Beunza
& David Stark
Dissonance
Dissonance fosters discovery
by prompting reflexivity.
Dissonance
Dissonance fosters discovery
by prompting reflexivity.
Disagreement about what is valuable
makes it possible to discover new resources
of value.
How do traders deal with the fallibility
of their models?
In the literature, disasters are traced
to the behavior of traders, depicted
as
1) reckless
In the literature, disasters are traced
to the behavior of traders, depicted
as
1)reckless
and as
2) overly cautious (“herding”)
Processes that provoke doubt
can lead to overconfidence
Reflexivity about Models
This is a pipe organ in largest hall of Moscow House of Music.
Posted by Irina at 20:55
Labels: instuments, theatre
[a declarative speech act]
This is a pipe organ in largest hall of Moscow House of Music.
Posted by Irina at 20:55
Labels: instuments, theatre
“I apologize.”
“I apologize.”
[a performative speech act]
Performativity in economic sociology:
Financial models are not representations.
They are interventions that format, shape,
perform markets. Their use brings new
economic objects (markets) into being.
Models are market making.
“This is the way that people get
from point A to point B.”
A model is performative when
its use increases its predictive
capabilities.
This is a pipe organ.
A financial
model is not a
representation;
A financial
model is not a
representation;
it is an
intervention.
The arbitrage traders we studied
do the same.
The trading room is populated with
devices for doubt.
Traders do not simply use models and
devices that perform the market. They
also create and use devices for reflexivity.
This reflexivity is not exterior to (or above)
the structures of socially distributed
calculation but is an integral part of it.
Arbitrage is a (reflexively) skilled performance.
And this reflexivity is not of the individual
but is social and material.
Epistemic challenges of
using models in arbitrage
Methodological constraint: a single morning at a
single desk in an abritrage trading room.
Calculation in merger arbitrage involves
the dissonance between two sets of probability
estimates:
1) probability estimates derived at the desk
using proprietary models, databases, and
instrumentation.
2) “implied probablity” – the aggregate
probability estimates of the trader’s rivals
a given trading desk
makes probability
estimates based on
models, proprietary
databases, and
instrumentation
V= (1-)PNS +PS
The trader’s models and
instrumentation are
powerful scopes for viewing
the markets.
But scopes that reveal can
also conceal. If you take
your model for granted, you
can lose your shirt.
To avoid cognitive lock-in,
the traders turn to sociotechnical networks outside
the trading room.
relation between the
trader and his rivals
The spread plot in merger arbitrage
The spread plot is a representation
of an economic object that does
not have a price and is otherwise
not observable, co-produced by
the positioning of actors who use it
to confront their interpretations and
re-evaluate their positions.
Decoding the spread plot
$
Acquirer
Target
time
“Backing out” implied probability
The spread plot instantiates the
diversity of dispersed anonymous actors.
dissonance
Reflexive modeling
Dissonance disrupts.
It prompts reflexivity.
Each of the (materially mediated) relations
provokes reflexivity about the other.
?
re-search
Reflexive modeling
Differs from ‘herding’
Here, dissonance prompts re-search
Reflexivity is not self-awareness or
conceptual transcendence.
So as not to be captive of an epistemic trap,
traders use devices for dissonance.
?
?
?
WARNING
The same devices for doubt
can also be
devices for overconfidence,
leading to arbitrage disasters.
WARNING
The strength of reflexive modeling is
based on the fact that it leverages the
cognitive independence among dispersed
and anonymous actors.
The strength of reflexive modeling is
based on the fact that it leverages the
cognitive independence among dispersed
and anonymous actors.
But this same process suggests the
possibilities of cognitive interdependence
among the rival traders in the professional
arbitrage community.
Just as reflexive modeling can typically be a
source of correction, so this same cognitive
interdependence among traders can, in rare
but dramatic instances, lead to the
amplification of error.