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Symposium 2014

Addressing Financial Uncertainty

The Challenge

We live in an uncertain financial world, in the sense that we do often know neither the probabilities with which conceivable financial events will occur, nor all the possible events that could occur. Additionally, we do not even know whether our conceptional structures are appropriate for apprehending and evaluating financial events. Thus future financial outcomes are often not known in any calculable way. Nevertheless we must make financial decisions, since even no decision is a decision to maintain or existing financial strategy. Although the discipline of economics has thus far provided little guidance for decision-making under uncertainty, in practice financial market participants usually act in systematic ways.

What are the principles underlying their actions? How do they gain the convictions necessary to make their decisions? When are these convictions reasonable? What roles to economic models play in rationalizing reasonable or unreasonable convictions? Under what circumstances are systematic, conviction-based actions socially harmful? Can financial policies and institutions respond to this challenge?

Why is a rational approach to uncertainty so rare in practice? Under what circumstances does the recognition of uncertainty elicit anxiety and when does it elicit hope and creativity? What policies and institutions are desirable to avoid the former and encourage the latter?

More fundamentally, how can societies structure their polity to deal with uncertainty? Is Karl Popper’s vision of an “open society” that engages in open discourse based on “critical rationalism” an adequate foundation for responding to financial uncertainty? In other words, can communities of rational individuals arrive at justifiable financial policies and institutions through open discussion and debate? Or do the powers of persuasion, imbalances in market and political power, and strategic manipulation of information undermine the possibility of benign public problem-solving?

    Proposals

    Proposal
    Symposium 2014

    Unforeseen risk threatens us as the outcome of failed thinking. Two solutions are (1) drastically to alter the economics curriculum and (2) to monitor the relationship of two specific emotion groups circulating in public and private narratives.

    The theories we have about the world – especially those not properly known to us – have huge implications and consequences for action.  Whether through the lens of modern “active inference” t ...

    The theories we have about the world – especially those not properly known to us – have huge implications and consequences for action.  Whether through the lens of modern “active inference” theory (developing in neuroscience) or standard social science they determine our “definition of the situation” (Thomas 1921) - what we see and what we don’t. Academic theories are one source of how we see. But the leading academic theories that seek to advise policy (in economics and psychology) have so far made no real attempt to study and draw inferences from the world we live in. Rather they offer

    Business
    Proposal
    Symposium 2014

    Economic policy and psychological moods

    The problem: The financial crisis has demonstrated beyond doubt that we need to look at the financial markets and the economy in a completely new way. Rather than see them as the outcome of decisions ...

    The problem: The financial crisis has demonstrated beyond doubt that we need to look at the financial markets and the economy in a completely new way. Rather than see them as the outcome of decisions based on the rational self-interest of consumers and investors, we should see those decision-makers as people who are subject to psychological mood swings. Keynes, writing in the 1930s, coined the phrase ‘animal spirits’, a psychological concept which he regarded as the key driver of the booms and busts of the economic business cycle. Much more recently, Robert Shiller and Nobel Laureate George Akerlof argue in

    Polity, Academia, Business, Civil Society

    Background Paper

    Background Paper
    Symposium 2014

    Addressing Financial Uncertainty

    What is the DATA approach? What does DATA do? How has DATA been applied?

    What is the DATA approach? What does DATA do? How has DATA been applied?

    Polity, Academia, Business, Civil Society

    Virtual Library

    Virtual Library File
    Symposium 2014

    Minding the Markets: An Emotional Finance View of Financial Instability. London and New York: Palgrave Macmillan

    The 2008 financial crisis showed that human emotion has a critical impact on financial markets. Until now, economic theories have failed to take this into account. At the heart of the worst financial ...

    The 2008 financial crisis showed that human emotion has a critical impact on financial markets. Until now, economic theories have failed to take this into account. At the heart of the worst financial crisis in world history was a failure to organise markets in a way that adequately controls the very human emotion and behaviour which trading unleashes.

    The newly established discipline of 'emotional finance', pioneered by David Tuckett, draws on principles of psychoanalysis to enable financial markets to be understood in a completely new way.

    By recognising the crucial role played by unconscious needs and fears, the influence of groups and the nature of uncertainty in all investment activity, Minding The Markets provides a deeper understanding of the markets and timely ideas about how to incorporate that understanding into policies to make markets safer.

    Based on candid and in-depth interviews with over 50 fund managers internationally, this groundbreaking book not only presents a fresh academic theory, but also reveals the truth about what happens in the emotionally-charged real world of financial trading.

    Virtual Library File
    Symposium 2014

    Constructing Conviction through Action and Narrative: How Money Managers Manage Uncertainty and the Consequences for Financial Market Functioning.

      Financial assets are abstract entities. Their value depends on beliefs which are inherently social and,we argue, emotional. Recent events have revealed profound uncertainty at the heart of financ ...

     

    Financial assets are abstract entities. Their value depends on beliefs which are inherently social and,we argue, emotional. Recent events have revealed profound uncertainty at the heart of financial markets, the manifest existence of emotion and the way confidence is crucial to orderly market functioning. Using findings from two interview studies, supported by ethnographic observation, we elaborate on the irreducible cognitive and emotional conflicts which face actors engaged in financial markets and threaten their daily operations.We introduce the term conviction narrative to analyse how they manage these conflicts on a day-to-day basis, and with what collective consequences. Our thesis is that expertise and conviction in financial markets have constantly to be created and renewed through a combination of psychological and social action with the implication at the macro level that while financial markets can be orderly they are so in an intrinsically fragile way.

    Financial assets are abstract entities. Their value depends on beliefs which are inherently social and,we argue, emotional. Recent events have revealed profound uncertainty at the heart of financial markets, the manifest existence of emotion and the way confidence is crucial to orderly market functioning. Using findings from two interview studies, supported by ethnographic observation, we elaborate on the irreducible cognitive and emotional conflicts which face actors engaged in financial markets and threaten their daily operations.We introduce the term conviction narrative to analyse how they manage these conflicts on a day-to-day basis, and with what collective consequences. Our thesis is that expertise and conviction in financial markets have constantly to be created and renewed through a combination of psychological and social action with the implication at the macro level that while financial markets can be orderly they are so in an intrinsically fragile way.

     

    Socio-Economic Review. 1-26. doi:10.1093/ser/mwu020

    Virtual Library File
    Symposium 2014

    Uncertainty, Conflict and Divided States: Some Psychological Foundations for Macroprudential Policy

    In this paper I argue that because the decision-making context of financial markets is ontologically uncertain, it is advantageous to understand what happens within them using what I term conviction n ...

    In this paper I argue that because the decision-making context of financial markets is ontologically uncertain, it is advantageous to understand what happens within them using what I term conviction narrative theory. Evolution has provided economic agents with human social and sentient faculties, including emotional and narrative capacities. They make it possible to simulate and commit to action for futures that have not yet happened. Such abilities, which are particularly well-adapted to decision-making under uncertainty where the future is necessarily not calculable, might be expected to play a part whenever decisions are hard to reverse and/or have potentially serious consequences into the relatively distant future. That future must be imagined.

    This paper cam now be downloaded with commentary at: http://www.bankofengland.co.uk/research/Pages/conferences/programme2014.aspx