Why we may need a new financial economic theory

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Jan 21, 2014
from 05:30 PM to 06:30 PM


Ken Edwards Building, Lecture Theatre 1

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0116 252 2320

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Professor Yuval Millo

School of Management

Lecture Summary

Recent research in sociology, management and in the evolving area of Social Studies of Finance presents a number of challenges to financial economic theory. This talk will address three of these challenges and will suggest that given these challenges, we should reconsider the validity of some of the assumptions that underpin our theories of how financial markets behave and expand our research horizons into new areas of inquiry.

First, we need an economic theory that takes into account the effect of economic models on the economy. Using as a lens my research with Donald MacKenzie on the history of the Black-Scholes-Merton option pricing model, I will explore how the pricing model affected the behaviour of options exchanges and how this effect was ingrained into the technology and regulation of the markets.

Second, we need an economic theory that considers in detail the organisational environments in which decision-making takes place. Using my research on decision-making by hedge fund managers (with Jan Simon, Neil Kellard and Ofer Engel), I show investment decisions are affected by the prevailing institutional logics in which the managers are positioned and are performed using social networks. We use the Porsche-Volkswagen short squeeze to illustrate the impact of this analysis on decision-making.

Third, we need an economic theory that accounts for the techno-materiality of financial markets. Focusing on recent developments in the area of high-frequency trading, a recent research I conducted with Daniel Beunza, Donald MacKenzie and Juan-Pablo Pardo-Guerra shows that factors that have little to do with supply and demand, such as topology of order routing networks, temperatures of the communication cables and sheer physical distance affect market behaviour.

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