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Inventing narratives

by Hans Dembowski

In brief

Paradeplatz is the centre of Zürich’s financial district.

Paradeplatz is the centre of Zürich’s financial district.

Given that financial markets have a huge impact on the world economy, the ethnographic research that Stefan Leins did in a Swiss bank is of great developmental rele­vance. He studied how financial analysts see the world and how they work.

Western scholars developed the methods of ethnographic research to study exotic cultures. In recent decades, however, these methods are increasingly applied to understand specific professional communities in western societies. Leins, a social anthropologist, joined the financial analysts’ team of a Zürich-based bank to do his research.

His recently published book “Stories of capitalism” shows that analysts’ work is highly subjective. They rely on a host of diverse sources of information, including academic studies, company reports, business media, share prices and other stock market information. However, there is no clear hierarchy of exactly what data are essential, and how they are to be interpreted.

According to Leins, analysts develop narratives about how they expect specific financial assets to perform. They then support that narrative with data that fits their hypotheses. In Leins’ words, “numbers do not tell stories, numbers are used to enrich previously constructed stories”. Selecting useful facts and figures from various sources is called “data mining”.

In several ways, moreover, the narratives financial analysts invent are opportunistic. The most important examples are probably:

  • Analysts 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, their narratives normally 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 therefore need narratives that promise good returns, not messages of doom.

These insights are not entirely new. Observers of financial markets basically know these things. It is one thing, how­ever, to expect a certain profession to tick in a particular way, and another thing to read an empirical account.

Leins points out that analysts’ work is legitimate. In his eyes, “the economy needs narratives because they make the unknowable future accessible”. The financial analysts do their best to predict the future and certainly hope that their narratives will work out well. The point is that this hope is more an issue of faith and intuition than of rigidly processed data according to some kind of stringent methodology.

The subjective nature of analysts’ work helps to explain why the financial crisis on Wall Street 10 years ago came as such a surprise. Many observers knew that problems were brewing up, but they also kept reassuring one another that the problems would somehow be controlled. The crisis shattered public trust in banks, but it did not change their business models.

Most social scientists understand perfectly well that markets are driven by human expectations. Economists, by contrast, tend to pretend that markets reveal something akin to the laws of nature. Leins shows that this is not so. Indeed, perhaps the greatest challenge financial analysts face is that data do not speak for themselves. How market participants read them varies, and anticipating how others interpret what is going on is just as important as understanding the underlying economic dynamics. If unreasonable expectations are causing a stock-market bubble, it may actually be smart to keep buying shares nonetheless. Selling them right before the bubble bursts will bring maximum profits. Rational investors will thus follow a collective trend even when knowing that the trend is irrational, hoping to get off at the right moment. Rational behavior can thus compound irrational trends.

Economists, who like to construct models based on the irrational assumption of human behavior being entirely rational, would do well to consider Leins’ work. His book shows that their discipline too is really a social science.

Leins, S., 2018: Stories of capitalism – Inside the role of financial analysts. Chicago: University Press.

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