The methods of ethnographic research were developed by western scholars to study exotic cultures. They serve to discover how people see the world they live in, what norms they apply and what roles they play and expect others to play. Relying on those methods, social anthropologists have made valuable contributions to development studies.
In recent decades, however, the ethnographic methods have been increasingly applied to study specific knowledge communities in western societies. The approach is particularly interesting when the communities concerned are highly secretive. The greatest challenge is to get access to such communities. Stefan Leins, a Swiss scholar, managed to get the permission to study financial analysts who work for a major Zürich-based bank. His book “Stories of capitalism” was published this year by Chicago University press.
According to economic theory, market decisions are based on rational calculations. Investors are supposed to process all available information, diligently assess risks and potential benefits, and then make choices that they expect to deliver maximum returns. A bank’s financial analysts are meant to excel in the first two categories and then give advice to both individual investors and their bank’s wealth managers.
To do his research, Leins joined the team of financial analysts at the bank he studied. The management and his colleagues knew that he was researching their culture. He got profound insights, but – as is typical of ethnographic research – he conceals which institution he worked and does not name the people he observed.
One thing he leaves no doubt about it is that an analyst’s work is subjective. This profession relies on a host of diverse sources of information, including academic studies, company reports, business media, share prices and other stock market information. They have hierarchies concerning what sources are most reliable or particularly interesting, but there is ultimately no clear hierarchy of exactly what data are essential and how they are to be interpreted.
According to Leins, the analysts he worked with do not assess a given set of information that they deem to be crucial. What they do, is to develop a narrative about how they expect specific financial assets to perform. They then support that narrative with the data that fits their hypothesis, leaving out data that does not do so. In Leins’ words, “numbers do not tell stories, numbers are used to enrich previously constructed stories”. Finding relevant facts and figures in various information sources is called “data mining”.
I used to work as a business journalist. What Leins describes looks a lot like how journalists work. I think a big difference is that the financial analysts have more time to focus on a single story and obviously draw on more sources to develop their narrative. What they have in common is that neither journalists nor financial analysts provide the kind of diagnosis that medical doctors do when dealing with standard ailments. Predicting how shares of a private-sector company will perform in a multilayered and ever-changing economy is more complex than treating a broken bone or appendicitis, for example.
Leins points out that analysts’ work is legitimate. In his eyes, “the economy needs narratives because they make the unknowable future accessible”. The author leaves no doubt that financial analysts do their best to predict the future, hoping that their narratives will work out well. The point is that this hope is more an issue of faith and intuition than of rigid data analysis by applying standard methods.
In several ways, moreover, the bets financial analysts make are opportunistic. The most important examples are probably:
- They tend to shy away from deviating too far away from what they perceive as the consensus opinion. This attitude gives them considerable protection. If the advice they give later turns out to be wrong, they can always say that everybody got it wrong.
- Moreover, the narratives financial analysts develop have to fit the worldview and expectations of the people who receive their advice. After all, the analyst's job is to convince these people.
- Ultimately, financial analysts serve as animators who stimulate others to invest. They need narratives that promise good returns, whereas messages of doom are worthless.
The insights are not new. Observers of financial markets basically know these things. Leins confirms them based on his personal experience. It is one thing to suspect that a certain profession ticks in a particular way, and another thing to read an empirical account.
The kind of professionally motivated and inevitable opportunism is an important reason for the financial crisis that started on Wall Street 10 years ago coming as such a surprise. Many observers knew that problems were brewing up, but they also kept reassuring one another that the problems could somehow be controlled. It is interesting to note that the crisis shattered public trust in banks, but did little to change their business models.
Leins has written one more study that shows that financial markets are not driven by anything like the laws of nature, but by human expectations. One of the great challenges financial analysts face is that market data do not speak for themselves. Analysts must not only take into account what is happening on capital markets, but also consider how other market participants will interpret those trends. Anticipating others’ interpretation is at least as important as determining what the underlying economic truth is. Even if an excessive stock-market bubble is building up, it may be sensible to keep buying shares, provided that one manages to sell them right before the bubble bursts. To follow an irrational collective trend may thus be rational for an individual investor.
Leins’ book allows us to take a look at what is going on inside a bank. Economists, who like to construct models based on the irrational assumption of human behavior being entirely rational, would do well to consider Leins’ work. Their discipline is a social science. Many of them think it is more precise than other social sciences, but it is not, as I have argued before.
Leins, S., 2018: Stories of capitalism – Inside the role of financial analysts. Chicago: University Press.