Selected Research on Finance

Ratings and rankings are criticized for being simplistic, obscurantist,  inaccurate, and subjective, yet they are becoming an increasingly  influential social form. We elaborate the criticisms of ratings and  rankings in various fields but go on to argue that analysis should shift  its target. The problem that ratings deal with is not observation of an  independent world. Instead, the challenge they face is the circularity  of second-order observation in which observations must take into account  the observations of others. To this purpose they function well enough  not because they mirror how things are but because they offer a highly  visible reference point to which others are attentive and thereby  provide an orientation to navigate uncertainty. The concluding section  places the problem of ratings and rankings in a broader historical  perspective, contrasting the ranked society to the society of rankings.  Responding to uncertainty, ratings and rankings perpetuates rather than  eliminates anxiety. 

Esposito, E. and Stark, D. (2019). What’s Observed in a Rating? Rankings as Orientation in the Face of Uncertainty. Theory, Culture & Society, 36(4): 3-26. https://doi.org/10.1177/0263276419826276

The chapter analyses the way in which structured finance manages and  controls the openness of the future as a source of profit. Financial  modelling relies on a specific form of fiction, based on the careful  construction of a present image of the future and its  uncertainty—expressed by the evaluation of implied volatility. The  problem with this approach is that it fails to take account of the  reflexive way in which the fictitious future it constructs affects the  (not-yet-existing) future reality. This chapter highlights the dual  nature of the future as intersection and combination of both the present  future and the future present. It concludes that structured-financed  models—despite their attempt to control risk by making calculations in  the present about the future and about current market expectations of  the future—may, in times of turbulence, increase the indeterminacy and  unpredictability of future reality.  

Esposito, E. (2018). Predicted Uncertainty: Volatility Calculus and the Indeterminacy of the Future. in Jens Beckert and Richard Bronk (Eds.) Uncertain Futures. Imaginaries, Narratives, and Calculation in the Economy, pp. 219-235. Oxford: Oxford University Press.

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Can observers observe the economy from outside? Recent developments in economic sociology tend to blur the classic distinction and combination of economy and society and to move to a condition in which the observer (each observer) is inside the society he describes. The behavior of financial actors can be analyzed combining two concepts with a long tradition and many implications: beauty contest and moral hazard - and can then be translated into the terms and the tradition of observation theory. Keynes' beauty contest can be interpreted as a systematic recognition of second-order observation: financial operators observe primarily other observers and what they observe. This observation produces particular circularities - first of all the insoluble problem of moral hazard, which reproduces in the field of finance Merton's famous model of self-defeating/self-fulfilling prophecies. If finance is second-order observation, however, its movements cannot be explained by reference to the world, but rather to observation and its structures: the reality reference of finance is increasingly provided by ratings, which offer information not on how the world is, but on what the others observe. The spread of ratings in recent decades and the doubts about their reliability are related in the article to the generalized move of modern society to second-order observation, that produces specific problems and specific puzzles, but also structures and constraints.  

Esposito, E., (2013). Economic Circularities and Second-Order Observation: The Reality of Ratings. Sociologica. doi: 10.2383/74851.

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The paper reflects on the presuppositions and consequences of the  concept of performativity (understood as the involvement of the observer  in the objects and projects he/she describes). The paper proposes a  broader notion of performativity, one that not only concerns theory but  is also extended to the entire economy, which observes itself in all of  its operations. This conception has the advantage of being connected  with critical approaches inside economics, which highlight the central  role of uncertainty and surprise. It can explain how and why  performativity turns into counter-performativity and how financial  operators exploit uncertainty when orienting their behaviour, expecting  and using the unpredictability of the future. 

Esposito, E. (2013). The structures of uncertainty. Performativity and unpredictability in economic operations. Economy & Society (42): 102-129.  https://doi.org/10.1080/03085147.2012.687908