The structures of uncertainty: performativity and unpredictability in economic operations

Abstract

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.

Keywords:

• performativity
• second order observation
• uncertainty
• risk
• information
• derivatives

Notes

1. See Austin (1962) and Searle (1969), as well as a wealth of literature on speech acts and their various aspects, for instance, Grice (1975) and Cohen (1973) among others.

2. Following the definition of modal theory, according to which something is contingent if it is neither necessary nor impossible. It is there, but could just as easily not be or be different.

3. In a very empirical context, this is confirmed by Hull (1997, p. 507) (one of the most popular introductions to financial derivatives). It is difficult to test the validity of the models for pricing options and other derivatives (their ‘truth’) empirically because one judges the validity of the formulas and the efficiency of markets at the same time. If the formula does not work, this may be due to the inadequacy of the formula, the inefficiency of markets, or both. The same is true if the formula works.

4. According to Shackle (1972, p. 163), the problem of economics is that it still attributes a dual task to itself: to describe how things are and to show how they can be controlled. However, these two tasks are incompatible.

5. Systems theory speaks of ‘re-entry’, a notion which was introduced by George Spencer Brown (1972) in his calculus of forms.

6. Swan (2000, p. 17) defines derivative as ‘sales of a promise’.

7. The difficulty in accepting the reality of virtual entities (the reality of risk) is displayed by the centuries-old debate on the validity of contracts where no good is transferred, because the seller neither owns the good nor will he own it in the future. At the very least, intent to exchange the goods was required, i.e. a present engagement towards the uncertainty of the future – but this obviously did not work, and the ‘intent test’ was abandoned definitively in the 1980s: see Swan (2000, pp. 205ff.).

8. Shackle speaks of a ‘general pre-reconciliation’ (1988, pp. 9ff.) of choices by all actors in the (perfect) market.

9. The inevitable reference is Knight (1921), who distinguishes radical uncertainty from risk, i.e. from the lack of knowledge that can be controlled with the calculus of probability and information. Under the sociological label of the ‘risk society’ (Beck, 1986; Luhmann, 1991), the terminology is reversed (often causing confusion). Risk is the possibility of future damages that derive from the very conduct of the operators. This risk is radical and persistent, because the future remains open and things can always go wrong as a result also of what we did or did not do. As we shall see later, radical uncertainty always includes a moment of reflexivity. I cannot know how things will go because they also depend on what I do or do not do.

10. Strictly speaking, it makes no sense to speak of imperfect information, since perfection does not exist.

11. MacKenzie (2006, p. 184) observes that, during the crisis, purchases and sales are no longer informationless and actually affect prices – according to ‘information economics’ this always happens, though it is not always so evident.

12. At the origin there is Keynes’ famous ‘beauty contest’ (1973 [1936], ch. 12).

13. From an interview with Warren Buffett: ‘my purchases are dictated by a simple rule: be cautious when the others are greedy, greedy when the others are cautious’ (la Repubblica, 18 October 2008).

14. In this radicalized version, the notion of performativity overlaps with the controversial concept of autopoiesis from social systems theory (Luhmann, 1997, pp. 65ff.; Maturana & Varela, 1988). Autopoiesis indicates the condition in which the elements constituting a system are generated out of the network of these same elements: communications are generated by previous communications and are never imported directly from the environment. As the term (from the Greek ‘poiesis’, i.e. production) says, the system ‘produces’ itself and its reference to the environment. The environment can irritate or stimulate a system, but cannot intervene directly. This does not mean that the environment does not count, but that it is acknowledged by the system only in the manner and according to the forms that it is able to detect: as ‘hetero-reference’, i.e. as a reference (within the system) to what is outside it. Irritations and uncertainties are related to the operations of the system: they are a ‘self-generated indeterminacy’ that must be managed by the structures of the system (Luhmann, 1997, p. 67). The term ‘autology’ (mentioned in the first section of this paper) expresses the consequences of this condition: ‘the description realizes what it describes. It must then co-describe itself while realizing its description. It must understand its object as an object that describes itself’ (Luhmann, 1997, p. 16). In the discussion that follows, however, I prefer to retain the term ‘performativity’ – both in order to highlight the connections with a specific and challenging tendency of economic sociology and also to avoid overloading the discussion with the complex assumptions of social systems theory.

15. Callon writes that ‘[a]ny concrete economy is reflexive’, but then attributes to economics the ‘social organization of reflexivity’ (2005, p. 8), and, to the growing involvement of economics, the spectacular increase in the capacity for reflection, representation and action.

16. There has been a widespread scepticism towards a general theory of society for some time (Esposito, 2012). Pierre Bourdieu, for example, explicitly denies the possibility of such a theory (Bourdieu et al., 1968); actor-network theory intentionally retreats to interactions, and deals only with ‘situated’ relations among the members of a community (and the objects or quasi-objects involved), rejecting any reference to a wider theoretical dimension (Latour, 1987). This trend is understandable, especially given the reflexivity of the theory and the contingency of its objects. However, it comes at a cost: taking society as a reference it is possible to study the structural factors underlying these kinds of orientations – for example, the reasons why modern society must abandon the assumption of a necessary order and refer instead to contingency, i.e. to local and changing orders, which could be different and can change with time (Luhmann, 1992). The reference to society also allows for comparisons, for showing that similar mechanisms are at work in different fields of society – performativity in economics recalls the reference to public opinion in the political sphere, to the ‘news-making’ of mass media, to positive law, to formulas like ‘learning to learn’ in education, to the very use of ‘performances’ in art, and many others. One can then obtain stimuli and observe the differences. Referring to society as a whole, however, does not mean assuming a superior level or a higher logic: society itself is a system that changes with its operations and fails to guarantee any rationality.

17. This is the point at which the approach we are proposing differs from other theories which recognize and study performative phenomena – such as the latest versions of rational choice theory, which also take account of indeterminacy (i.e. of the cases where information is essentially incomplete because it concerns future states that depend on present decisions) (Elster, 2007, §11.7). The proposed solutions use a Bayesian model (Gintis, 2009, pp. 18ff.), according to which probabilities change over time as new information is acquired. In this way, however, one fails to consider the most important and problematic aspect of performative processes: over the course of time one not only knows more, but experience often leads to change in the very criteria by which one evaluates information, even that which was already considered. This changes the decision-making situation as a whole, in a radically unpredictable manner that does not preserve the ‘preference consistency’ on which these approaches are based (Esposito, 2007, pp. 57ff.).

18. Decisions are made under conditions of ‘bounded uncertainty’, facing an unknown but structured future, which we know to be bound by our choices: an open but non-random future (Shackle, 1990, pp. 13, 22, 28–48).

19. Mandelbrot was referring to the collapse of the financial market in October 1987, but the reasoning applies a fortiori to the recent crisis.

20. Economics talks of ‘wild randomness’ as a totally uncontrollable randomness. But this means that there should be a more ‘educated’ randomness, which behaves in a predictable way – a curious not random randomness, which reveals the blind spot of the model.

21. Mandelbrot (Mandelbrot and Hudson, 2004, ch. 9) speaks of dependency and pseudo-cycles.

22. And also shows very different consequences of performativity in different nations or sectors: the crisis, as we know, did not have the same scope or the same effects everywhere. There were cases in which other (often non-economic) factors have constrained or contrasted the circularity of the markets. To operate with these factors is typically the task of politics, which cannot determine or directly govern market trends, but can intervene with more or less effective actions of ‘disturbance’. The markets then react according to their forms, becoming once again open and unpredictable (because they often performatively anticipate political intervention: think of the great debate about banks being ‘too big to fail’, which relied on this condition). One cannot therefore guarantee the success of an economic policy, but this unpredictability can (and should) be considered in political action in order to plan a more complex and reflexive action for ‘steering’ (Esposito, 2011, pp. 188ff.).

23. Mandelbrot (Mandelbrot and Hudson, 2004, p. 239) describes the dependencies that arise in the absence of correlations and require models for studying risk based on more sophisticated techniques (in his case the mathematics of fractals). We could talk of a different relationship with information, where the information produced by data is different from the information contained in data.

24. This is the project of sociological systems theory, which departs from autology in order to reconstruct the structures of a society that contains its description inside itself (see Luhmann, 1997).