November 21, 2010
by Annelise Riles
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When is a silo mentality a problem in financial markets?

Yesterday at the American Anthropological Association’s annual meeting I went to hear Gillian Tett, a journalist for the Financial Times, talk about how her own training in anthropology (like me, she holds a doctorate from Cambridge) had shaped her reporting on the derivatives markets and the financial crisis.  Tett eloquently explained how anthropologists’ attention to the difference between what people say and what they do, and how the ethnographic method–of observing people intensively over the long run rather than simply relying on public statements or even one to one interviews–had helped her to see the importance of credit derivatives before other newspapers began reporting on them and to sniff out problems in the credit derivatives markets ahead of the crash.  Tett argued that anthropologists’ holistic perspective, and their interest in rituals, in social and institutional practices, in latent hierarchies and in all that gets glossed as “irrational” in economics had an invaluable contribution to make to our understanding of modern finance and to policy debates.

Tett’s own diagnosis of the financial crisis focuses on what she calls “silos”–the way different financial institutions, and different teams within each financial institution, prevented anyone from seeing the big picture.  Stuck in their own little tribe’s group thinking, each team could not see the wider effects of their activities, or the way their perspective was only one among many.  Tett says she sees herself engaged in “silo-busting”–breaking down those barrios with a more holistic approach.

Tett is surely right that a silo mentality pervades certain aspects of the financial markets.  This is one of the ways finance is really like the rest of the world–all of us fail to see the limits of our own ways of thinking.  This is certainly true in the social sciences.  Anthropologists for example are for the most part utterly convinced that their own world view is better than others, and that they are misunderstood and under-appreciated by everyone else.  Economists’ self-confidence about their own discipline’s assumptions is legendary.  Paul Krugman has created a stir by asking whether economists’ over-confidence in their models might not have caused them to miss the financial crisis.  Like Krugman, I think Tett’s diagnosis should cause academics too to ask some hard questions about why we did not do more to highlight and critique the problems in the financial markets prior to the crash.  For myself, for example, fieldwork in the derivatives markets had convinced me long before the crash that all was not well in these markets. My husband (also an ethnographer of finance) and I often joked way back around 2002 that our research had convinced us not to put a penny of our own money in these markets.  But our own disciplinary silo made us feel that it was impossible to counter the enthusiasm for financial models out there in the economics departments, the business schools, the law schools, the corridors of regulatory institutions.  There surely was some truth to our sense that no one wanted to hear that markets were not rational in the sense assumed by the firms’ and regulators’ models.  But maybe we should have tried a bit harder; it turns out many other people also had doubts and thought they too were alone. What might have happened if we had all found a way to link our skepticisms?  The silo mentality is not just about a lack of knowledge.  It is also about a lack of confidence in one’s ability to communicate with people outside the silo.  I don’t think this is anthropologists’ problem alone.  When I ask many of my research subjects why they don’t tell regulators the full story, have just shrugged, “they wouldn’t understand.”
With funding from the Tobin Project and the Clarke Program in East Asian Law and Culture, Tom Baker at Penn Law School and I have sponsored a string of workshops aimed at breaking down disciplinary barriers and getting the conversation about markets going between economists, sociologists and anthropologists.[1] It has been exciting to see how much interest there is on all sides. One of the positive outcomes of the crisis is a greater sense of curiosity about perspectives outside our own silos and a greater commitment to building new conversations.
Still, I wonder if it is always and everywhere a good idea to break down specialized ways of thinking and replace them with a holistic approach.  Take lawyers and back office staff inside the big banks.  As I have written about elsewhere, they lack the big picture: there are lots of things about finance they don’t understand and this sets them apart from traders.  But precisely because they don’t think like traders, they can also evaluate the activities of a trading room with some critical distance.  After all, if they were indoctrinated into the same assumptions as traders they probably would not catch the limitations in traders’ logic that can have disastrous risk management consequences.  So having lots of different groups that think differently from one another with a stake and a role in making decisions is also an important component of financial stability.  In practice, dealing with people who think differently can be a huge pain in the neck–traders don’t much like back office staff meddling in their affairs and vice versa.  Collaborating across differences in expertise is laborious, time consuming, and even wasteful of time and resources, and everyone complains about the other guys constantly.  Yet the requirement that different groups with different forms of expertise collaborate in making financial decisions is a kind of sociological fuse box, a way of slowing things down when they start to snowball out of control.  Sometimes waste and redundancy is a good thing.  The benefits of this fuse box would be lost if everyone had the full picture: traders with back office expertise can more easily circumvent regulatory checks; back office staff with too much training in finance begin to buy into the trader’s world view.
So maybe instead of silo busting, what we really need is more mandates that we collaborate, across our differences. This is true in the academy as much as in finance.

[1] The first Workshop on Behavioral and Institutional Research and Financial Services Regulatory Reform took place at Penn Law in the Fall of 2009. The second one took place in Washington, DC in June 2010. The third one will take place at the Cornell University Law School in April 2011.

November 15, 2010
by Annelise Riles
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Upcoming presentations

This week, I will present and discuss some of the findings of my upcoming book Collateral Knowledge: Legal Reasoning in the Global Financial Markets at two separate events.

First at 4:30pm on Monday, November 15, at the Colloquium Series of the Department of Science and Technology Studies at Cornell University:

Title: “Collateral Knowledge: Legal Reasoning in the Global Financial Markets
When: Monday, November 15, 4:30pm
Where: 374 Rockfeller Hall, Cornell University, Ithaca, NY

And on Friday at the Annual Meeting of the American Anthropological Association (New Orleans, LA), in a session entitled “Uncertain Paradigms: Ethnography and Theory“:

Title: “Collateral Knowledge”
When: Friday, November 19, 2:45pm (Session begins at 1:45pm)
Where: Sheraton New Orleans, New Orleans, LA

November 1, 2010
by Annelise Riles
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Building a Culture of Good Decision-making in Markets

Back OfficeDoes good financial regulation only happen in legislatures, regulators’ offices, and at international meetings of central bankers? What about what goes on between lawyers and their clients, between back office clerks and front office traders? Inside computer systems? What about the mountains of documentation, the procedures surrounding confirmations and disputes? What about all the people, and their tools, that make up a market?

One way to think about this is to ask, what are we trying to achieve, when we talk about creating more stable, efficient, fair financial markets? The answer is that we are trying to change the way things are actually done inside the market. Done by real people, in real situations.

At any moment, thousands of people around the world—from managing directors to administrative assistants and everyone in between—are making decisions, making choices, taking actions—file this document, call Leslie or Hiroshi about this deal, interpret this contract clause this way, buy this company, call the PR firm to see if they could put an ad in the newspaper about this political issue, have lunch with this regulator, and on and on. And those millions of actions, those decisions, are all we mean by markets. When we say we want more stable markets, we really mean that we want to shift people’s ordinary actions.

So all this regulation is just an effort to change real people’s actions, every day, sometimes in big ways, but often in small ways. The next time a middle level staffer at a ratings agency has a gut feeling that the rating of a bank does not fully reflect the bank’s exposure, we hope they will take the time to ask a few more questions, and then pass those questions on to superiors who will do the same. The next time a lawyer for a hedge fund is asked to find a technical legal interpretation of cross-borders securities laws that will limit their client’s fiduciary duties to their own investment clients, we hope they will take the time to ask whether such an interpretation really conforms with the spirit of the law, and to push their client on whether such an interpretation is really in the client’s own long term best interest. The next time a dispute between counter-parties to a swap transaction develops, we hope that the people working inside each of those hedge funds, companies, or banks think work out a negotiated solution rather than deploying “the nuclear option” with domino effects throughout the market.

What do these steps look like, to someone in the thick of things? They can require a little bit of courage—a choice to make just a little bit of trouble for a transaction by asking for more information or raising an issue with a superior. They can require a little bit of extra effort—a choice to take a little more time to go check the facts on a problem when you would rather head out early on a Friday afternoon. They can require a little bit of vision and creativity—to find a win-win solution to a conflict or to see one’s own personal interests, and the institution’s interests, in a longer term perspective. They can require some tools, like workable informal dispute resolution protocols developed by industry associations.

Now in fact, good decisions like these happen all the time. They even happened right in the midst of the last financial crisis. Things could have been far worse than they were in 2008 had not many thousands of people taken reasonable steps to bring whatever stability they could to their little corner of the market. And it could happen a lot more.

What bothers me about much of the talk about financial regulation is that it proceeds as if markets participants were rats in a scientific experiment, motivated only by simple desire for immediate gratification or fear of pain: We will either beat you over the head with penalties if you don’t comply with our securities laws or offer you cash incentives if you do comply (think, the new obscenely large incentives for whistleblowers to now make money on informing the government about the shady practices they made money engaging in before). In fact my ten years of research in the derivatives markets has convinced me beyond a shadow of a doubt that this view of market participants as selfish, brutish and stupid is not an accurate picture. There are many kinds of people working in many capacities in the market, with many different, complicated motivations. But all the people I know, money is only one such motivation. Others include respect from peers, a sense of intellectual challenge and fun, and yes, the satisfaction that one has built something good and done the right thing. If I were to ask many of my informants in the markets why they did the right thing in this or that case, I doubt the first thing that would come to mind would be “because a regulator said I should.”

So what does this all mean? It means that government regulation is one important route to changing markets by changing the actions people take in markets, but it is not the only route. We need much more conversation about what happens, in those key situations, when a person at a critical (but ordinary) juncture in the market chooses Path A or Path B. What are the pressures? What are the options? What influences those choices? What resources do employees need to make the best choices—more time? more knowledge? More support from peer groups? And yes (but not only), financial incentives and fear of penalties? We need to start building a culture of good decision-making.

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