The Sociology of Financial Markets

Karin Knorr Cetina and Alex Preda, (eds), Oxford University Press, 2004, 319 pages, £50.

Sociology meets financial markets in this collection of earnest essays. For some of the sociologists, the encounter is a bit like a visit to the zoo. They gaze with fascination at the strange animals that they find there, study their habits, and write down their impressions. For example, Jean-Pierre Hassoun tries to make sense of their displays of emotion (don’t sociologists display emotion too?). Yet these sociologists remain strictly on the safe side of the railings, and they communicate in their own private language, which they assume that their readers can understand.

Not all of the sociologists behave in this detached fashion, however. The more adventurous among them are willing to step into the cages and spend some time among the wild beasts. And they have produced some interesting papers. For example Donald Mackenzie (‘How a Superport-folio Emerges’) investigates the events leading up to the collapse of the hedge fund Long-Term Capital Management in 1998. It emphasises the importance of the very high reputations of LTCM and its managers before the collapse, and of the consequent widespread imitation of its position-taking by other fund managers. LTCM’s trades became crowded just because LTCM had made them, because many others followed. That meant that, when LTCM wanted to reverse them, market liquidity suddenly evaporated, because everyone else wanted to do the same thing.

Daniel Beunza and David Stark (‘Heterarchical Search’) discuss how trading rooms are organised, and explain that the mode of organisation is a rational solution to the problem of how to maximise the utility of the knowledge and experience of a diverse group of people. Richard Swedberg (‘Conflicts of Interest in the US Brokerage Industry’) explores the abuses committed by broker analysts during the dot com boom in the 1990s at the expense of retail investors. He claims that they can be explained by the development of close relationships, based on common interests, between corporate executives and broker analysts, in which the interests of small investors were set aside. And for those with an interest in governmental bureaucracies, there is an interesting account by Mitchel Y Abolafia (‘Interpretive Politics at the Federal Reserve’) of how Fed chairman Paul Volcker got his way in 1982 when he persuaded the Federal Open Market Committee to abandon monetary base control, which had been in operation since 1979, and revert to interest rate management.

One paper which I had expected to see in this volume is missing. In addition to their role in allocating savings to investment projects, financial markets have, when allowed to, provided a powerful means of social advancement for clever and single-minded people. With their ruthless focus on profit, they have no room for other criteria in handing out the prizes. Consequently, they have routinely undermined entrenched social hierarchies and redistributed wealth. Perhaps other sociologists have studied this phenomenon; if so, it’s a pity that their work wasn’t included in this book.

Bill Allen

Brevan Howard Asset Management