Philip Pilkington: Econometricians, Financial Markets and Uncertainty – An Anthropological View

Yves here. Readers responded positively to Pilkington’s anthropological take on the economics tribe, so we are continuing with his series. This post focuses on dodgy econometricians and economic forecasting.

By Philip Pilkington, a London-based economist and member of the Political Economy Research Group at Kingston University. Originally published at his website, Fixing the Economists

I recently read a paper by the anthropologist David Graeber entitled ‘The Sword, The Sponge, and the Paradox of Performativity: Some Observations on Fate, Luck, Financial Chicanery, and the Limits of Human Knowledge‘. Graeber sent it to me because we are hoping to write an article on the emergence of probability theory and its application in the financial markets.

The working title of our paper is ‘The Betrayal of Freedom and the Rise of the Future Machines’. The basic idea is to show that the predictive powers of social sciences — including economics and finance — were shown to be fairly vacuous in the 1960s from a variety of different directions. The response by the horrified professions was to bury the evidence and double down on probabilistic prediction. This coincided with the rise of finance and the whole thing produced the weird world of meaningless numbers and extreme instability that we face today.

Anyway, here I will provide a gloss on Graeber’s excellent paper as an accompaniment to my recent piece on the anthropology of the economics profession. It is not available online except behind a paywall but I urge readers to seek it out. It is one of the best psychological/anthropological descriptions of how and why people — from village elders to econometricians — try to use arcane and difficult methods to predict the future and dictate how people should organise themselves socially and economically. In order to discuss the paper I must first introduce to non-anthropologists two key terms.

The first is ‘mana‘. This is a difficult term to pin down as it has any different dimensions in many different cultures. But Graeber’s main angle of attack in the paper is that mana is a power that people believe they can gain control over to predict and influence the direction of future events.

The second is ‘performativity‘. Performativity is a sort of ‘thinking/doing makes it so phenomenon’. For example, the Queen of England is the Queen of England because everyone believes her to be the Queen of England. If everyone in the world stopped believing tomorrow that she was the Queen of England she would cease to be the Queen of England. Her social position is literally only real insofar as we believe it. Her royal actions and symbolism are thus a way to ‘perform’ this belief and reinforce it.

Now, onto the essay. Graeber thinks that many of the phenomena that anthropologists know as mana are actually very similar to concepts that we in the West employ such as fate, luck, chance and probability. Graeber notes that we as a society have been taught to think of events in terms of probabilities. But this is not present in non-Westernised cultures. He cites the following conversation he had with an educated Malagsy while he was in Madagascar doing fieldwork:

David: What do you think the chance is that a bus will come in the next
five minutes?
Zaka: Huh?
David: I was thinking of running up the hill to get some cigarettes. I figure
it’ll take maybe five minutes. What do you think the chance is that
a bus will come before I’m back?
Zaka: I don’t know. A bus might come.
David: But is it likely to?
Zaka: What do you mean?
David: You know, what’s the chance? Is there a very large chance it will
come? Or just a small chance?
Zaka: A chance can be big or small?
David: Well, is it more like 1 in 10? Or more like 50–50?
Zaka: How would I know? I don’t know when the bus is going to arrive. (p32)

It is clear that Zaka the Malagasy thinks David the American’s questions to be absolutely bizarre. It simply does not make any sense to him. Despite being educated he does not even think to ascribe to chance a numerical estimate. Graeber concludes:

Even when my Malagasy did become fluent, I never heard people employing language in the way that people would do so in America, for example, “I’d say 3 to 1 the cops won’t even notice that I’m parked here.” In fact, I discovered not only that such a way of thinking was unknown to most Malagasy, but also that, once explained, it seemed just as peculiar, exotic, and ultimately unfathomable as any of those classic anthropological concepts, such as mana, baraka, or s´akti, regularly employed in other parts of the world to put a name on the play of chance or to explain otherwise inexplicable conjunctures or events. Once I began to think about it, I realized that this puzzlement was a pretty reasonable response. Chance actually is a very peculiar concept. Zaka was right: the main thing is that we do not know when the bus is going to arrive. This is the only thing that we can say for certain. Anything could happen—the bus might break down, there might be a strike, an earthquake might hit the city. Of course, all these things are, from a statistical perspective, very unlikely, million-to-one chances, really. But it is that very application of numbers to the unknowable that struck my Malagasy interlocutors as bizarre—and not without reason. What a statistical perspective proposes is that we can make a precise quantification based on our lack of knowledge, that is, we can specify the precise degree to which we do not know what is going to happen. (pp32-33)

I am entirely in agreement with Graeber here. We can assume that the bus was not on a strict timetable because we are not dealing with an advanced and well-organised society. Thus giving the chance that the bus would arrive while Graeber went to get cigarettes a numerical estimate was a pretty mystical thing to do altogether. (I do find it amusing that Graeber said that the chances of a strike, the bus breaking down or the earthquake hitting were ‘a million-to-one’ though… it seems like even he finds it difficult to get away from his pre-conceived cultural way of thinking about such things!).

Think about this. If I have a coin that is fairly balanced I can give an objective probability estimate. The chance of the coin landing on either heads or tails is 0.5 or 50%. This number is not mystical. It is objective. But when Graeber asks what the chance of the bus turning up is or whether the cops will notice that he is parked illegally, these estimates are not objective. They are entirely mystical. They are, in fact, as Graeber rightly points out, the same sorts of magical thinking that many so-called primitive cultures use to try to grapple with the future.

The amusing thing, however, is that we actually employ people and give them social prestige to engage in these mana-like numerical concoctions. This is just like in supposedly more primitive societies where soothsayers and astrologers are given status as village elders and power to decide how the society should be organised. In our Western societies we hire economists and financial experts. Graeber writes:

Almost invariably, too, there are certain specialists who claim privileged, exclusive knowledge. In very hierarchical societies, elites will either try to monopolize such matters themselves (e.g., Azande princes maintain exclusive rights to officiate over the most important oracles) or attempt to forbid them as forms of impiety (both Catholic and Sunni authorities have been known to do this at one time or another). There is also a frequent, although not universal, tendency for these techniques to draw on forms of knowledge seen as foreign and exotic: the Arabic lunar calendar in Madagascar, Chinese numerology in Cuba, Babylonian zodiacs in China, and so on. (It is not the past, perhaps, but the future that really is a foreign country.)

From this perspective, it is quite easy to see that economic science has become, in contemporary North America above all, but in most of the industrialized world (or, perhaps better said, financialized world), exactly this sort of popular ‘technology of the future’. There are specialists who try to keep a monopoly on certain forms of arcane knowledge that allow them to predict what is to come, although in a way that, insofar as the situation becomes political, inevitably slips into performativity. At the same time, fluctuations in the financial markets, speculation on stocks, investments, and the machinations of commodities traders or central bankers, all these have become the stuff of everyday arguments over coffee or beer or around water coolers everywhere—just as they have become the veritable obsessions of certain cable watchers and denizens of Internet chat pages. There is also a tendency—quite typical of such popular technologies of the future as well—for idiosyncratic (‘crackpot’) theories to proliferate on the popular level. (pp39-40)

Graeber is absolutely correct here. This is where we come to the notion of ‘performativity’. If we examined the situation objectively we would quickly see that these people are mostly engaged in soothsaying but we do not. Why? Because the performance buttresses our hierarchical social and economic structures and lends them credibility and weight. We do not want to know the reality: namely, that our social structure is determined in line with political and social power. And thus we create fictions that ground it as being somehow ‘objective’.

The statistical estimations are mostly about performance in this regard. They are similar to a symbolic ceremony by the Queen of England. And in the financial markets this performance generates dynamics of its own. For example, when everybody is convinced that the markets will be calm they will get statistical read-outs saying that the markets will be calm precisely because they are acting as if the markets will be calm. But when they start to panic because something unseen happens, their statistical read-outs will suddenly change.

In truth their ‘future machines’ are just feeding back to them their own activity. It is like an animal looking in a mirror and thinking that another animal is staring back at them. In reality, it is just their own reflection. The whole situation would be hilarious but these dynamics are wreaking havoc on our societies. They are also trapping us as political actors because they give us a sense of fatalism about the future. They encourage us to think that the ‘experts’ have the whole thing figured out and that ‘politics’ should be structured in line with this. This is the true poison of modern economics and it is what makes modern economists such dangerous clowns. The unfortunate thing is that almost every single one of them, wrapped in their socially-sanctioned delusion of scientificity, have absolutely no idea what they are doing.

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  1. Oregoncharles

    So the 2-Party system is almost entirely performative: new parties “can’t win” because people BELIEVE they can’t win, and therefore won’t vote for them.
    Also called a self-fulfilling prophecy.
    The most interesting thing here is that anthropology has broken out of it’s “primitive” cage and is being used to analyse modern societies. About time.
    And I agree about modern economics, though this skips over the crucial fact that it’s really a political ideology, decorated with numbers. I actually think that basic market theory, really an application of feedback theory, is sound. But it went off the rails a long time ago.
    A piece on those trying to bring it back – I recommend Herman Daley – would be very welcome. Of course, in a sense this is a start on that.

    1. ex-PFC Chuck

      So the 2-Party system is almost entirely performative: new parties “can’t win” because people BELIEVE they can’t win, and therefore won’t vote for them.

      Exactly! There are few better examples of this than the Minnesota gubernatorial election of 2002, a state in which alternative parties have had relative success at the state-wide level. The official name of the Democrats in the state, the Democratic Farmer-Labor Party (DFL), reflects the name the party that elected Floyd Olson as governor in the 1930s and the incumbent in 2002, Jesse Ventura (who had chosen not to run for reelection), had been elected under the banner of the Independence Party just four years before! (How and why Ventura got elected is a story for another time.)

      The three main candidates in 2002 were Republican Tim Pawlenty (state House party leader), DFL Roger Moe (state Senate party leader) and Independence Party Tim Penney (former Blue Dog Democrat who had previously been the Congressman from the rural and small town 1st District in the southern part of the state). Up until about ten days before the election the polls consistently showed a very tight, three-way race with the candidates bunched up in the low 30s when the undecideds were not included. Then both the Republicans and Democrats began aggressively running “Don’t waste your vote” commercials. Simultaneously further upheaval was caused by the death of Senator Paul Wellstone who was killed in a plane crash in the northern part of the state while campaigning for a third term. In those last ten days Penny’s share in the polls dropped like a rock, and the final percentages for the top three were Pawlenty 44%, Moe 37% and Penny 16%.

  2. Paul Jonker-Hoffren

    Dear Philip & Yves,
    The concept of performativity is also heavily used in sociology and economic sociology. The French sociologist Michel Callon has used this concept to study economics (“The Laws of the Markets, Blackwell,1998) and what he terms “Market Devices” (Blackwell, 2007) which contains a very interesting essay on the origins of index-based derivatives by Yuval Millo.
    His basic idea is that through the omnipresence of economics in politics, markets/businesses and even culture, economics has to some extent the effect that ‘we’ are trying to bend reality to fit the economic models – hence the attempts to dismantle the welfare state, crack down on unions, help banks etc. I think his work is much worth reading but I don’t know how known he is in America.

    1. susan the other

      Bending reality to fit economic models. I believe economix is a mental genetic manifestation of survival. Really. Why else would we conjure up and believe rationalizations that cause the very model to boom and crash. It is all rationalization in order to protect the idea of profit, or gain, or advantage, or whatever you want to call it. And it is all irrational. Because profit has to be taken from somewhere. All boats do not float. They only float when your models, like Greenspan’s, have an error in them. Or when they end before the third act.

  3. MyLessThanPrimeBeef

    A fairly balanced coin 50-50…not mystical, objective.

    Graeber – visitor

    Zaka – native.

    Presumably, when Graeber asks Zaka, he is thinking the native has taken the bus many times and knows roughly many often the bus is, early, late or on time.

    When he says, 1 in 10, or 50-50 while he smokes, he does not mean 10.000%, with 5 significant digits or 50.0000% (6 significant digits). No one use odds that way. He probably means around 10% in the case 1 in 10, and around 50%, in the case of 50-50.

    In the West, a native westerner would be able to say, or rather, guess the odds are closer to 1 in 10 or to 50-50, based on his/her past experience taking that bus. In fact, there are 3 rough choices – not likely, not sure, likely. And his/her answer to Graeber’s question would be 1 in 10 (if he/she rarely experienced early or on-time arrivals), 50-50 (if nothing particularly egregious stands out) or he/she might venture to guess it’s 9 in 10 in the last case (if the bus is scheduled to arrive in 5 minutes and not to deviate too often) , without at any time, implying anything approaching 5 o 6 significant digits in the odds, but rough guesses.

    It’s important to know the rough answers.

    I always tell people it’s better to know that 3.9 x 4.1 is roughly 16. Its’ way better than to carry the multiplication and misplace the decimal point to end up with the disaster answer of 159.9 or 1.599.

    If you are a native in any country and have taken the bus many times, it will come handy to know whether it will show up on time roughly 1 in 10, 50-50 or 9 out 10 times, based on what happened to you before.

    1. Paul Jonker-Hoffren

      In sociological theory, these are two quite diverse things. Reflexivity is at its simplest a term which connotes self-reflection and self-referral (i.e. of the actor/subject) while performativity is about the relationship between that actor and the social structure. This explication is too simple but it captures the essence.
      So you could say that if you’d have a reflexive economist (not sure these exist, maybe Yanis Varoufakis or Mark Blyth), then their behaviour would change regarding ‘the social structures’, i.e. what a market is, how it works, what is money etc. In other words, they start criticizing many of the economic policies and issues of ‘common knowledge’ that are taken for granted and seen as good.

    2. susan the other

      I was thinking about Soros too, Lambert. Reflexivity seems like a cryptic way of describing reaction. When you think about it reaction is what politix is all about. If this then that.

  4. MyLessThanPrimeBeef

    As for specialists who claim privileged knowledge, I always remind myself to know the person David Graeber, and not anthropologist David Graeber.

    “What do you do for living?”

    Too often, we ask that meeting a new person.

    I have said it before, creativity is about discovering yourself and not about paying for paintings to be hung on the wall. By that I mean, you have the potential to be what you want to be. You are the artist, the philosopher, the economist, the leader, the expert…. You are the specialist, and are not intimidated by logical fallacy of argument by authority. You are skeptical and you doubt every thing you come cross, trying your best to reason through. When it passes your test, you may tentatively embrace it….tentatively, because we never know.

  5. Johann Sebastian Schminson

    Reminds me of a lesson I learned in a psychology course, once (this was not pop-psychology, it was hard science — specifically, the measurement of the elctro/chemical/mechanical processes our senses employ to deliver messages to the brain, and how those signals become perception).

    Professor: “Mr. Schminson: Do you know where your car is parked right now?”

    Schminson: Why, yes — it’s parked in Student Lot ‘B’.

    Professor: And you know that, how?

    Schminson: Because that’s where I parked it.

    Professor: Might it not have been stolen or towed away?

    Schminson: Well, there is a chance of that.

    Professor: So, you don’t ‘know’ where your car is. You ‘believe’ you car is where you parked it.

    Schminson: Hmmmm . . .

    Professor: We believe many things, but we don’t know anything other than what our senses are informing us of, at any given moment, and even that ‘knowledge’ is suspect.

    Our points of reference are based, almost completely, on belief.

    1. h_rostam

      it is a great comment, i think david hume said something similar 200 years ago…

      personally i have always taken these kinds of percentages to be describing a “what would you do” scenario, and not actual knowledge, like with the example of the bus arriving, to me it means “if someone put a gun to your head and asked if the bus would be here in 5 min, what would you say? If you’re wrong you get shot.” its just a hypothetical game, a way of feeling better about your own decision.

      This kind of decision-making based on what others are doing, “at least im not the only one” seems to describe a lot of the conclusions that come from creating a mathematical model from something that you cant possibly have all the variables for.

  6. proximity1

    “The whole situation would be hilarious but these dynamics are wreaking havoc on our societies.”

    They’re both hilarious and havoc-wreaking. Still my favorite send-up of economic forecasting, see Dave Barry’s column, “Bury your investment portfolio,” from April 15, 2001. Barry, besides being wonderfully funny, also reveals something sociologically very interesting and important–whether he’s aware of it or not: such things are the modern “advanced” society’s equivalent in every sense both figurative and literal of primitive tribal ritual. I suspect that many people assume that we’ve long grown out of such stuff as primitive rituals but these are examples of our society’s major daily rituals and they are fully superstitious in character. Tribal witch-doctors—they got nuthin’ on us!

  7. cnchal

    The unfortunate thing is that almost every single one of them, wrapped in their socially-sanctioned delusion of scientificity, have absolutely no idea what they are doing.

    Everyone of them fuckups is still collecting a big fat paycheck. No offshoring or downsizing or austerity for them.

    Lets also remember the seat at the policy table, the head chair if you will, that these people with “absolutely no idea what they are doing” have.

    When earth’s inhabitants finally get cooked and poisoned, due to economic malpractice by self called professionals that “have absolutely no idea what they are doing.” these twits will go back to their models and say “we forgot the air conditioner, doh”.

  8. craazyman

    Well I bet professor G won’t be hiring that dude as a bus adviser.

    What you want is somebody who can say, with a haughty air of precision and erudition: “If bus arrival times are normally distribute with a mean of every 30 minutes and a standard deviation around the mean of 12 minutes, then there’s a 95% probability the bus will arrive within an interval of 5 minutes ago and 19 minutes from now. if you run you can probably get your cigarette and make the bus.”

    That sounds promising. So professor G trots up the hill, turns around after 100 yards just to reassure himself and sees the bus. Faaak!

    The lesson is you shouldn’t smoke cigarettes. The model wasn”t wrong.

    How many people have to believe the Queen of England is the queen for her to be the queen. What if everybody believes but her? Are they delusional or is she? hahahaha

  9. David Petraitis

    Very good essay. I like having the anthropological basis of pseudo-science Econometrics brought up…
    Now I must hurry to see my Tarot card reader for his investment advice!

      1. steelhead23

        Frankly, With the DJIA and S&P500 roughly tripling since March 09, due in large measure to gifting by the Fed to the big players, pretty much all that dart had to do was hit the board. Hence, all the careful measurement of P/E, EPS, corporate balance sheets, forward orders, inventory, blah-de-blah, has been even more irrational than Lambert’s essay would suggest. It is entirely power politics, not shrewd economic models, that has driven the runup.

        I might meekly suggest that if power politics could be quelled, models could become more rational, but that is one hell of an if statement and certainly no prognostication of the future.

  10. Steve H.

    NATO allies in Europe have another set of people doing models, and that is the military. Their criteria of analysis uses different numbers (casualties, territory), and the efficacy of their model is directly tested in the short term. The bankers seem to think that anything and (almost) anyone can be bought. The military understands that morale is a multiplier operating at higher orders of magnitude.

    The sell-by date for the Ukrainian intervention was August 24. The march of the prisoners in Donetsk sent an unequivocable message to the military minds in Europe. With the writing on the wall, Der Spiegel published an article on the 22nd, effectively announcing that Europe is no longer able to keep a lid on the evidence for Flight MH17. If it is shown the Ukrainian military shot down the plane, the outrage of the Dutch provides a pivot point for Europe to turn east in alliance with military thinking.

    European nations must consider the possibility of artillery falling on their soil. The bankers models have not proved able to perform to their provided expectations (Russia says thank you to Nuland for spending $5 billion to give it Crimea). Ukraine can’t pay its external debts, Europe won’t lend it money to buy more shells, which leaves the U.S. to provide that support directly.

    Two more financial-strategic notes. 1) Chinese bond holdings. 2) As M. Hudson pointed out, the BRICS could make the jump to fiat currency, and the U.S. loses a huge advantage.

    I’m just guessin’ here, but there is a battle going on between the two dominant mind-sets in Europe, and the NATO alliance is a lot shakier than it appears. The Berlin Wall looked pretty strong the day before it came down.

    1. Steve H.

      And one banker has just been outflanked:

      IMF’s Lagarde put under investigation in French fraud case.

      To be clear, the point here is that one mind-set is necessarily realistic, while the other is “wrapped in their socially-sanctioned delusion of scientificity.”

      Repeating a quote by John Robb:
      “Grand strategy, according to Boyd, is a quest to isolate your enemy’s (a nation-state or a global terrorist network) thinking processes from connections to the external/reference environment. This process of isolation is essentially the imposition of insanity on a group. To wit: any organism that operates without reference to external stimuli (the real world), falls into a destructive cycle of false internal dialogues. These corrupt internal dialogues eventually cause dissolution and defeat.”

  11. impermanence

    “It is one of the best psychological/anthropological descriptions of how and why people — from village elders to econometricians — try to use arcane and difficult methods to predict the future and dictate how people should organise themselves socially and economically. In order to discuss the paper I must first introduce to non-anthropologists two key terms.”.

    No, not really. It’s simply another in the line of ten zillion ways people rationalize their seemingly inexhaustible craving to get something for nothing. This is the most creative [by far] of all human intellectual pursuits.

  12. susan the other

    My favorite Philip so far. Great essay. The Queen of England is the Wizard of Oz is the POTUS. Politics is like money, we all agree to it. Keep remembering the phrase George Schulz used: “Trust is the coin of the realm.” Indeed. And our realm has crashed and it won’t get up. Probability is, it appears, also political.

  13. impermanence

    If people would just take a step back and realize how vacuous all thinking is, then [perhaps], we could take a couple of baby-steps forward.

  14. TimOf England

    Also Philip, there is the time that the flipped coin stands there, defiantly, on its edge, it then needs the winds of change to tip it either way.

    On buses, even if the bus came, it might be full. I learned to “switch cultures” quite often (if only in Europe) working in Scandinavia & Iceland. I arrived outside an airport in 1999 and there was no bus when the “timetable” clearly stated that it left in five minutes. I asked… “The bus was full so it went, there will be another soon”, my “timetable” was irrelevant, but at least I got time to have a smoke and admire the weird clouds and wonder about them.

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