New Perspectives on Emotions in Finance

Jocelyn Pixley, Jocelyn Pixley

• Publisher: Routledge
• Year: 2012
• ISBN:
  9781136289309
• Edition: 1
• Topic: Commerce
• Subtopic: Commerce Général

The financial crisis that started in 2007 is a concern for the world. Some countries are in depression and governments are desperately trying to find solutions. In the absence of thorough debate on the emotions of money, bitter disputes, hatred and 'moralizing' can be misunderstood. New Perspectives on Emotions in Finance carefully considers emotions often left unacknowledged, in order to explain the socially useful versus de-civilising, destructive, nature of money. This book offers an understanding of money that includes the possible civilising sentiments.

This interdisciplinary volume examines what is seemingly an uncontrollable, fragile world of finance and explains the 'panics' of traders and 'immoral panics' in banking, 'confidence' of government and commercial decision makers, 'shame' or 'cynicism' of investors and asymmetries of 'impersonal trust' between finance corporations and their many publics. Money is shown to rely on this abstract trust or 'faith', but such motivations are in crisis with 'angry' conflicts over the 'power of disposition'. Restraining influences – on 'uncivilised emotions' and rule breaking – need democratic consensus, due to enduring national differences in economic 'sentiments' even in ostensibly similar countries. Promising ideas for global reform are assessed from these cautionary interpretations.

Instead of one 'correct' vision, sociologists in this book argue that corporations and global dependencies are driven by fears and normless sentiments which foster betrayal. This book is not about individuals, but habitus and market crudities. Human 'nature' or 'greed' cannot describe banks, which do not 'feel' because their motivations are not from personal psyches but organisational pressures, and are liable to switch under money's inevitable uncertainties. This more inclusive social science studies emotions as a crucial factor among others, to expand the informed public debate among policy makers, bankers, academics, students and the public.

Part I

Emotions and the present crisis

Reshaping the sociology of finance

1Magic thinking and panic buttons in the callous financial transaction chains

Helena Flam^*

Why even bother with the classics? Why not abandon the cult of ancestors? It is because still today they help us frame global interconnections and their implications. Emile Durkheim believed that the complex division of labour attaches individuals to each other, since it creates mutual dependence for the products of the other. He deplored that individuals tied together by a complex division of labour neither realize just how great is their interdependence nor develop corresponding forms of collective consciousness and feeling. Mutual respect, gratitude and love are called for, but do not materialize. Simmel stressed that monetary chains span the globe, bringing consumers of products in touch with salespersons and distant producers of their choice. He stressed that these chains do not translate into a shared awareness of mutual dependence. Fond of exploring ambivalence, Simmel argued that modern money, while giving release from semi-feudal obligations, constitutes individuals free to choose their engagements and circles of social affiliation to their liking. At the same time the impersonality of modern money inserts an isolation layer between individuals and groups, keeping them together and yet apart in their money-sustained indifference to each other.

In contrast to Simmel, Norbert Elias argued that money chains can connect and create interdependencies with a self-disciplining and other-regarding force, contributing its share to the general civilizing processes. Newton (2003) points out Elias erred in not recognizing that once the money chains become distant and de-personalized, the same money loses its civilizing impact, creating mutual indifference rather than empathy for others.

In the second part of this text, a similar argument will be made when investigating the circumstances that led to the financial crisis of 2007/2008. Only unlike Newton (2003) I will stress that it is not just the increasing length and attendant impersonality of the financial transaction chains that make for increasing indifference among the person-links in the chain. It is also, even perhaps most of all, the seeming financial independence of the credit providers and credit sellers from the credit buyers that generates mutual indifference. It is the existence of a huge number of rich national and transnational investors looking for lucrative opportunities that, especially during the boom phase, obscures the fact that the credit takers have to repay.

To focus on the capacity of the financial transaction chains to generate indifference, however, is to tell just half a story. The other half relies on a slightly modified Weberian approach to formal organizations (Flam 1990) to inspect personnel recruitment and work conditions in trading firms and investment banks based on well-known ethnographic and sociological studies. These studies suggest that possibly the absorption of traders and investment bankers in the task at hand prevents them from giving even one thought to what their trading and investments inflict upon others. As in the famous Milgram experiments, the traders and investment bankers are so concerned about doing their jobs right that they turn myopic. Overcoming uncertainty and a great sense of insecurity and vulnerability, while trying not to lose in an aggressive competition to others, they hardly pay attention to anything but numbers, each other and the assisting technology.

Other studies suggest another – compatible – explanation for both narrow focus and pain-inflicting crises. They argue that new traders and investment bankers massively recruited to an expanding financial sector from the 1980s on, were provided with hardly any training at all and rare supervision. They outnumbered the managers supposed to teach them the ropes to such an extent that, even where social mores, cultural codes and regulatory provisions existed, it was unlikely that these were taught. Arguably, these new traders and investment bankers had neither statistics nor social and cultural codes to fall back upon: no shield to protect their upward-mobility-starved ego in a competitive, aggressive finance world of the 1980s–2000s. Their egos were under attack also for other reasons: constant leaking layoffs and preventive firm-jumping were rampant. Firms in fact discouraged loyalties of any kind, encouraging duplicity instead. Also in larger mortgage banks the managers and employees alike were pressed to care for nothing but quick profits, throwing all caution aside. If they did not, and instead showed high levels of ‘discomfort’ about high risk loans or clients, they were silenced, demoted or fired.

This amounts to saying that from a joint Eliasian-Weberian perspective, the interdependence chains and the organizational setting were such as to encourage, even impose, uncivilized unregulated a-bureaucratic extremes interspersed with displays of civility. The stock market macho cultures and the aggressive CEOs presiding over the financial world pressed traders and investment bankers to their very physical limits – releasing their primitive instinct to go for the kill and to peak on success, while at the same time expecting that they will stay on their best behaviour towards bosses and playact honesty while engaging in duplicity with clients. At the same time, as the next chapter by Kyrtsis shows, traders and CEOs who are my focus, ignored or blamed bank ‘back office’ and cautious risk staff: rivalries became extreme inside many large banks.

A third – still compatible – explanation of why repeated crises, including the 2007–2008 crisis, have become more frequent, focuses on the investment strategies of traders and investment bankers. It exposes their ‘strategies’ as so much nonsense, ultimately guided by the ‘feel for the market’, rumours, statistical models or probabilities – all proven wrong, again and again. A fourth – also compatible – account has it that traders and investment bankers rely on a cacophony of the allegedly risk-reducing rules and practices, with different timing pressing their diverse panic buttons, inadvertently increasing the turbulence on, and the unpredictability of, the financial markets, making these more susceptible to crises.

The following text will first very briefly shed some light on the rise of the new financial business in the last three decades, to then turn to the general recruitment and work conditions of traders and investment bankers – mostly in the New York, Chicago and London areas. It will then discuss fairly typical decision-making strategies and panic rules employed by traders and investment bankers. All these would be of no consequence or concern had they not impacted on the American homeowner markets and fund owners. Backtracking a bit, the CEOs of the US financial world will be cast in their roles not as employers, but as neo-liberal de-regulators prying open domestic American homeownership markets and deploying new ‘exciting’ ‘products’ and ‘securitization’ methods in order to make exorbitant profits on the capital flows between global investors and American households – with the dire consequences of the financial crisis of 2007–2008.

Traders and investment bankers

In the late 1970s when the New York Stock Exchange (NYSE) dominated the stock market, a 20-million-share day was impressive. When the NASDAQ, a security market, started trading in 1971, it was the world´s first electronic market– it merely displayed prices on a computer bulletin board, later it allowed for trading online. By now daily trading on the NYSE and the NASDAQ involves billions of dollars. Many transactions have become computerized, while an entire range of services is provided online (Smith 1999: 3–4, 32).

An open-outcry market, although modified, is still in operation in Chicago. Technological investment made it possible for trading firms, investment banks and service providers to leave the immediate Wall Street area, even to set up their headquarters in Connecticut or New Jersey. The London Stock Exchange has also been completely computerized since 1986. It has seen physical dispersion of traders from the City to Mayfair and St James in London’s West End. The Palais de la Bourse in Paris now stands empty. It was abandoned in 1998 when the market became computerized (Hassoun 2006: 104, 118 fn 1). Among the oldest and greatest, the Tokyo Stock Exchange, computerized a year later, in 1999.

After the breakdown of the Soviet Empire and the rise of emerging economies, many new stock exchanges opened around the globe. The technology coupled with competition-encouraging re-regulation connected national markets to each other, lending them a global scope. Financial crises in Latin America, Asia and Russia revealed the speed at which capital can flee from country to country or region to region.

Since the 1980s some old financial firms were swallowed up or went bankrupt. New services such as discount trading firms or online service providers emerged. New giant investors appeared, such as, for example, insurance, pension and mutual funds, which look for financial products on which to make gain (Ho 2009: 286–287). The number of mutual funds went from a few hundred in the early 1980s to as many funds as stocks by the end of the 1990s.

The number of products offered on sale has also expanded dramatically, including not only stock, currencies, bonds and real estate issues but also the socalled derivatives, such as futures or options or new forms of arbitrage, such as hedge funds. Outstanding derivatives contracts are at any time worth four times as much as world GDP (Fenton-O’Creevy et al. 2007: 2, 11–15; MacKenzie and Millo 2003: 109). While in 1990 about 1,000 hedge funds managed $25 billion in assets, by 2008 8,000 hedge funds managed over $2,000 billion in assets.

As the lines between commercial banks, restricted to deposits and loans, and investment banks became blurred, most banks turned to an active pursuit and creation of new sources and novel forms of finance capital, in order to trade or mediate it or advise on it (Fenton-O´Creevy et al. 2007: 17–18). The old division of labour between the trader, broker, analyst, investor, etc. has become confused: a trader today may act simultaneously as an analyst and a broker or a financial or investment manager. He may trade in the clients’ and/or his own and/or his firm’s money. The number of clients who can afford to invest in the market and the access of these clients to information about the financial products has increased rapidly since the 1980s, diminishing the added value that a fulltime analyst or broker might offer.

Over the past two decades a number of sociologists and ethnographers have studied traders, both those working directly on the stock exchange floor and those sitting in front of computers in their firms To the best of my knowledge they ignored the back office prophets of doom. Some researchers focused on proving to neoclassical economists who believe in monadic markets the importance of social and cultural factors for the very dynamics of these markets. They drew attention to the significance of market actors, organized in cliques, networks or solidary communities, and subject to their own and/or outside regulation (Abolafia 2001; Baker 1984). Others were interested in pinpointing the unification and instantiation of the body-mind-market that new computer technologies called for, while yet others argued that mathematical models and trading practices adjusted to each other in the process of constructing and sustaining the market, testifying to the very performativity of the market (Knorr Cetina and Bruegger 2002; MacKenzie et al. 2007; Preda 2007).

As fascinating as their findings are, one is struck by their myopic vision: traders watching the computer screens and/or each other, researchers watching the traders. Abolafia (2001),¹ MacKenzie (2003) and MacKenzie and Millo (2003) constitute notable exceptions as they seek to explain a few pre-2007 financial crises. Yet their focus remains on traders and their business. They never ask what consequences the crises had for citizens or countries affected by these financial crises. Even though myopic, earlier research helps us to provide one explanation for the financial crisis of 2008, and so many other crises, for it shows that most traders had a tunnel vision, blending out everything but their immediate trade.

What else can we find out from the older studies that helps to account for regular crises?

Profiling new traders and investment bankers

White, male, incompetent and insufficiently trained?

The 1980s rapid expansion of trading in bonds and futures, and less so in stocks, saw massive recruitment of novice traders – MBAs as well as ‘boys from Brooklyn’ – to open-cry markets in New York and Chicago (Abolafia 2001: 5, 14–15,18–19). From the 1980s in the USA most Wall Street investment bankers and bank traders were white males recruited from the social sciences or humanities at Harvard, Princeton and Wharton – with no degrees in finances or mathematics, although some graduates from Yale, Duke, MIT or Stanford and of the best business schools as well as a sprinkle of women and minorities were among the new recruits. In the UK nearly 90 per cent of traders came from Oxbridge, Harvard and Wharton (Smith 1999: 6; Ho 2009: 58–72; Fenton-O’Creevy et al.2007: 148, 151). In about 2000 some working-class men from East London and Essex, with relatively little education, joined this elite (Zaloom 2006: 75–80).

American traders in bonds, futures and stock used to receive six months to two years training and then ‘baptism by fire’ (Abolafia 2001: 30–32). In the 1980s, however, especially at the new, expanding derivative markets in options and futures, but also at the exploding US government bonds market, seniors could not possibly attend to the multitude of fresh recruits. These were brought in to deal with the increasing number of orders coming from new institutional and individual customers.

Almost every investment bank had a month-long training and a few days long luxurious orientation programme for all first-year college grads and first-year MBAs. Those selected upon graduation for positions as analysts from among philosophers, anthropologists or social scientists had to take a month-long financial training course intended for non-financial majors (Ho 2009: 74–80). They were taught financial calculations, quizzed, given homework and ranked. The most successful – usually white and male – were allocated to the best, ‘front desk’ positions, the rest were sent to much less paid and often despised ‘middle’ and ‘back’ desks. Among the most successful there were also some who did not know finance, but instead how to play golf and make an excellent impression.

A British study of 118 traders employed by four different firms and conducted in 1997–1998/2002 showed that those selected as traders (some of whom had an MBA) went through a whimsical selection procedure. They were started in the classroom and apprenticed, learning trade via observation and making decisions overseen by the mentor. This combined training took about six months, supervision up to two years. The authors of the same study argued that there is no typical corporate culture, no uniform mentoring standards or good, sensitive mentors who tell new traders when and how to invest. Only if fortunate, do new traders become systematically trained, supervised and cushioned. When they have indifferent, busy or insensitive mentors or managers, they are left unsupervised. They perhaps trade for the wrong reasons: out of boredom, overconfidence, anxiety or joy. The mentors in the same study stressed the role of intuition and/or the feel for the market as a decisive factor. Some beginners displayed it in three months, others never learnt. Their managers implied that training is of no consequence – what counts is the ‘feeling for’ or ‘knack for’ the market (FentonO’Creevy et al. 2007: 59, 165, 175–176; see also Abolafia 2001).

Similarly, in 2000 new recruits selected by a fairly small trading firm in London went through a two-week training that taught them basic terms, two trading strategies (scalping and spreading) and the emotional discipline, particularly necessary when incurring losses, required to pursue it (Zaloom 2006: 85,88, 91, 129–131). Neither financial experience nor understanding of financial instruments was required. Traders were not taught anything about the financial products they were trading. High education, decent math skills, ambition and willingness to take risk sufficed. In this firm traders were asked to write daily logs and three managers mon...