What Can The Native Tribes Of New Guinea Teach Us About Financial Markets?
Using an anthropological perspective and a broader social context we will begin to understand how bankers function.
Image from Pacific Island Books.
In his recent column, Aditya Chakrabortty observes that the current financial crisis should represent a crisis of legitimacy for the “narrow, straitened form of economics” that both helped to create the meltdown and failed to see it coming. But in contrast to previous crises, other voices have failed to make themselves heard, leaving the field free for the reassertion of neoliberal economic perspectives that were roundly discredited only five years ago.
To an extent this criticism of non-economists is justified. Fiddling while Babylon burns, much of anthropological debate remains dominated by such pressing concerns as the “relationship between cosmological deixism and perspectivism”, or whether “glaciers can listen”. Such examples might appear to be suggestive of a discipline revelling in its own irrelevance, but thankfully they do not tell the whole story.
Karen Ho‘s work on the culture of Wall Street has been widely picked up by the mainstream media in the US, while Gillian Tett has been hailed as “the most powerful woman in newspapers” on the back of being pretty much the only financial journalist to sound the alarm about the developing crisis. Tett consistently argues that it was her training as an anthropologist that helped her to spot the signs that were overlooked by her colleagues. And here on Comment is free, the anthropologist Joris Luyendijk explained how the City works from the perspective of those inside it.
These writers build upon a long tradition within anthropology that has challenged the over-simplified assumptions underpinning many economic models. Take for example, Bronislaw Malinowski’s analysis of the kula exchange of New Guinea, conducted nearly a century ago. Kula traders engaged on lengthy and dangerous canoe voyages in order to exchange shell necklaces and armbands. But far from seeking to maximise their gains, as conventional economic theory might predict, kula valuables were not accumulated. Instead a man only gained renown by passing them along the chain. Such behaviour might have appeared economically irrational, but made perfect sense in a context where a man’s power and renown was measured by the number of social relationships that he could maintain through exchange.
Malinowski’s conclusion was that one has to start from the wider sociocultural context within which people act in order to understand their actions. This remains important, not least because people often develop powerful attachments to particular cultural habits even if logic tells us that these patterns might not be the best way of proceeding in new situations.
Take for example the trend in the early 2000s towards the construction of collateralised debt obligations (CDOs) out of mortgage backed securities (MBSs) that was a major factor behind the crash of 2007. As both Tett and sociologist Donald Mackenzie observe, practitioners in these two fields had developed different methods to calculate their exposure to defaults. During the development of CDOs in fields such as corporate debt in the 1990s, its practitioners had become attached to highly complex mathematical models. By contrast, those involved in MBSs relied more upon specialist knowledge and research into particular areas of the market. The two groups had developed different cultural traditions regarding risk management. Yet when they came together, the numerical CDO model was applied in a context where it proved to be less appropriate.
Many factors might explain why this was the case: hubris, a culture of short-term thinking, and a fashion for faith in the magical power of markets were doubtless powerful factors. Even the relative power and influence of groups and factions within investment banks play a part in how such decisions are made. The point is that even in this age of automated trading by algorithms, the numbers that flash across computer screens are ultimately produced, received and acted upon by real people who operate within particular social networks and whose actions are more than the simple expression of abstract economic rationality.
The manner in which financial instruments such as CDOs and MBSs are traded differs wildly in many respects from that of the kula. But like kula necklaces, these financial instruments are cultural artifacts and their circulation and use can likewise only be fully understood if this is taken as our starting point.
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