Sunday, 5 February 2017

What lies ahead for Istanbul as an international financial centre?

Levent, one of Istanbul's financial districts. By VikiPicture  [CC BY-SA 4.0 (], via Wikimedia Commons

I have recently published a short commentary on the phenomenon of international financial centres- public and private initiatives to promote  major global cities as hubs of financial trading and services. Having explained the background to the concept and how cities are ranked by international business consultants, I have then discussed Istanbul's very own initiative led by the AKP government since 2007.

The initiative's list of objectives is long and consists of  areas ranging from education through infrastructure to regulation. These objectives are comprehensive and commendable as they will expand and deepen Istanbul's sophisticated financial services to Turkey and its hinterland.  Yet, as I have  noted in my commentary,  one of the two most prolific activities  for the Istanbul finance centre initiative has so far been construction work in Atasehir - a densely built and congested area in Istanbul's Asian side. This several billion dollar building work aims  to relocate various state financial institutions from Ankara to Istanbul, and complement these office buildings  with a shopping mall, residential buildings and recreational areas. The ongoing building work  does not make much sense given the advances in telecommunication technologies and the fact that these state institutions do not seem to suffer from poor infrastructure or building stock. It can however be understood as part of the AKP policy of promoting economic growth via construction and infrastructure  activity, especially at a time when the Turkish economy has been stagnant compared to its growth potential as an emerging market.

Atasehir district, where the building work for Istanbul finance initiative takes place. By © Nevit Dilmen, CC BY-SA 3.0, 

Second most prolific activity seems to be promoting Islamic finance. Islamic financial services have made significant advances in recent decades and several cities such as Kuala Lumpur, London and Doha compete for a larger share in this fast growing sector. Islamic finance is not just for pious Muslims. It can be attractive to ethical investors and any other investor when it offers competitive financing options.

Istanbul's competitiveness in Islamic finance has a lot to improve as currently there are only few Islamic banks in Turkey and there is no regulatory authority that can check the Sharia compliance of any existing or future financial product or service. Reliance on an external authority such as one  in London or Egypt might be complicated and reduce Istanbul's competitiveness.  All in all, the focus on Islamic finance has the potential encourage many pious Turkish savers to shift to their savings - which they generally keep in instruments such as gold, foreign currency, and real estate-   to the Turkish financial system. It can also be attractive to regional and international investors. Nevertheless, the initiatives for Islamic finance in Turkey should not be designed as a substitute for the existing financial services and markets, which are premised on secular commercial and judicial principles. After all it is these services that have put Istanbul on the global map of financial centres. Narrowing their reach by promoting Islamic finance at their expense will not help Istanbul nor the Turkish economy.

Here is the link to the article in The Conversation - a great platform for academics to disseminate their research and opinions with journalistic flair . Articles are free to republish with attribution under CC licenses. Many thanks to  Annabel Bligh for her excellent editorial support 

Thursday, 13 October 2016

Studying financial markets: Methodologies, disciplinary boundaries or What it takes for a social scientist to get the Nobel?

As part of PhD programme at Edinburgh University Sociology, we the PhD students were encouraged to write working papers on our PhD topics. I wrote a piece on the methodological issues and boundaries in research on financial markets. This was then published in Edinburgh Working Papers. The paper was a very limited survey of the respective literatures of mainstream finance, behavioural finance, international political economy, economic sociology, and social studies of finance (SSF). The latter is simply the application of social science disciplines [not financial economics or behavioural finance!] to the study of financial markets and has its origins in the beginning of this century. Despite its narrow scope, I think the paper gave a good flavor to a general audience of how each discipline theorized and approached behaviours and outcomes in financial markets and what was distinctive about SSF as an umbrella approach- namely its focus on materiality (e.g., financial models, market structure)  in individual and collective financial behaviour. In writing the paper, it was also interesting to see how different disciplines, despite lack of any meaningful mutual awareness, shared similar starting assumptions such as rationality and lack of it!

Having looked back, I am not surprised to see that I as a student of sociology devoted a good part of the paper to economic sociology and SSF with a prophecy that SSF would come to occupy a bigger role in our understanding of financial behaviour. Almost a decade later,  I think that prophecy has materialized so to speak with numerous articles, manuscripts and edited books that are inspired by essential theories and concepts from the SSF's pioneering works (e.g., Callon, MacKenzie and Millo). This is not surprising as SSF's conceptual and theoretical corpus is not unfamiliar and undecipherable to researchers from different subject fields such as anthropology, sociology, and organisation studies. Compare that to mainstream and behavioural finance, which in their empirical manifestations are in a constant debate as to whether markets are efficient or not, using large price data and elegant mathematical modelling to detect (in)efficiencies within. The accessibility of SSF and its attention to the material world that surrounds our behaviour also motivate social scientists to explore how theoretical and material artefacts come to underpin and transform our behaviour not just in financial but also other business domains such as production and marketing.

The lack of an overarching theory such as efficient markets/random walks and prospect theory/ heuristics and biases can be seen as a weakness in economic sociology's and SSF's approaches to financial markets. Although performativity- the theory that economics as a science and its theoretical corpus can format real life markets with a good deal of institutional work-  has engendered a great deal of studies in economic and financial domains (see for example the latest book on performativity, and an earlier special issue on the concept), it is not the only theory that informs SSF's ongoing interest in financial domain. This is a perhaps a strength and a weakness for the future of SSF. On the one hand, being interdisciplinary in its theoretical and conceptual toolkit allows SSF to demonstrate how materiality of markets  is enmeshed with politics, culture and networks. In this vein, one can observe the proliferation of SSF originated  theories, concepts and puzzles within international political economy, anthropology, and accounting research and vice versa.  All these not only encourage interdisciplinarity among social science but also enrich our understanding of financial behaviour. On the other hand, the lack of an overarching falsifiable  theory that attempts to explain individuals and markets behaviour within SSF and economic sociology or any other social science field still underpins in my view  mainstream and behavioural finance's lack of interest in SSF and social science research. Overall, there is hardly any reference in mainstream and behavioural accounts on financial behavior to any pioneering and novel work from SSF and the social science disciplines it brings together. On the other hand, SSF researchers engage with mainstream and behavioural finance. Yet, this engagement mostly takes the form of theoretical/conceptual critique with few insightful  empirical  challenges.

Having thought all these, two questions come to my mind.

What would the mainstream and behavioural finance literature look like  if SSF researchers (antropologists, sociologists, organisational researchers) were retrained as mainstream or behavioural researchers on financial markets?

What would it take for a SSF researcher to get the Nobel prize in economics ?

Saturday, 23 May 2015

A new “foreigner” imagery in the Turkish financial markets?*

The recent years of the AKP rule have been marked by the increasingly polarizing voice of Recep Tayyip Erdogan, the current and first directly elected president of Turkey. In the face of opposition and criticism, Mr Erdogan tends to use rhetorical tropes that transform his critics into national and/or international conspirators against him and AKP.  A much more severe attack of this type happened in 2013 during the Gezi protests, which labelled all the protests as part of a “coup” against his government, orchestrated by national and international conspirators. As widely publicized, the Gezi protests started after a restitution project was initiated in Gezi Park- one of the few remaining green public spaces in Istanbul. Early protests by green activists quickly turned into nation-wide protests against the AKP rule, which were met with brutality by the state security apparatus. Unsurprisingly, there are a few ongoing court cases against the protestors, and various prison sentences have been given on the grounds of violating the code on protests and marches. A few members of a famous football fan group –namely, Carsi of Besiktas Gymnasium Club are still being tried for much more serious charges such as conspiring to overthrow the government.   

One interesting aspect of the AKP’s reaction to the Gezi protests was Mr Erdogan’s efforts to bring international financial actors into his discourse on the conspirators against AKP. As the early days of Gezi protests coincided with what is now called the Tapering Tantrum- namely, the initial flight of capital from emerging countries when the FED announced its intention to finalize its several trillion USD worth quantitative easing programme, the Turkish markets also suffered from this knee-jerk reaction of international investors. The significant losses in the Turkish equity and bond markets were also compounded by the protests and Mr Erdogan’s uncompromising reaction. Mr Erdogan not only dismissed the protests as the work of “riff raff” but also pointed squarely to a coalition of international conspirators and local accomplices, including what Mr Erdogan calls the “interest lobby”. The interest lobby basically refers to international fixed-income investors in Turkey who aim to earn higher returns on their exposure to the Turkish government’s debt. In Mr Erdogan’s view, this lobby is prone to destabilize Turkey by manipulating the Turkish markets and using their economic power for political ends.   Mr Erdogan’s discursive attack on international investors actually paved way to a very substantial investigation into international investors by the Turkish market regulators soon after the protests ended. As of 2015, there has been no official declaration as to whether such a lobby exists and what measures would be taken to deal with them. Though unofficial, the Turkish market regulators seem to have basically given up the investigation at the end of 2013 after finding no meaningful evidence of market manipulation by international investors during the Gezi protests. Despite the outcome, these investigations gave Turkish brokers and international investors a firm message that they were being watched for what they advise and do in the Turkish markets.   

Looking at the contemporary market cultures in Turkey, one can expect that Mr Erdogan’s rhetoric on the interest lobby would not struggle to find resonance especially among the Turkish retail investors. Since the deregulation of markets in the late 1980s, the gradually increasing presence of foreign investors in the Turkish markets has engendered culturally intriguing imageries and behaviours on the part of Turkish investors. These have included trading opportunism against the unsuspecting foreign investors in the form of fronting orders – buying before foreigners buy and then selling to them at profit. Another one is the “moustached foreigners”, which basically referred to Turkish investors setting up off-shore accounts to benefit from the tax exemptions given to the foreign investors in the 1990s. These off-shore funds were generally associated with notable Turkish investors who day-traded in the markets, influenced market outcomes, and amassed significant amount of financial assets, sometimes at the expense of Turkish and foreign investors.   

After the 2001 twin crisis in banking and economy, many of these notable investors lost their economic power in the Turkish markets. Some investors and finance professionals close to these investors lamented the lack of government support to this type of investors when they faced financial difficulties. For them, this demonstrated the successive Turkish governments’ unabated admiration for anything that was “Western”. One could see the point they tried to make as in the structural economic reform era that followed the 2001 crisis there had been a great flurry of international investor interest in the Turkish assets ranging from privatized state companies to Turkish bonds. In 2007, the share of the foreign investors in the Turkish equities rose over 70%, which was more than what it was in the mid-1990s. Moreover the automation and digitization of the Turkish markets also meant that access to market information became much easier than ever, including what the foreign investors were doing in the Turkish markets via their Turkish brokers. This again generated a few theories about the foreigners and their manipulation of the Turkish markets for their own economic gain.   

The peak point of national publicity for these theories happened when the Turkish Constitutional Court was to decide on a ban case against AKP in the summer of 2008. While many expected an AKP ban on the back of an ever powerful secular establishment that has been deeply suspicious of democratically elected governments with Islamist tendencies, this did not happen after a very close vote of 6 to 5 in favour of lighter penalties to AKP. Many Turkish investors cried out for investigation into a possible passing of insider information to the foreigners before the court decision. These calls did not lead to a separate and thorough investigation by the regulators. The regulators also sternly dismissed these insider information claims on the grounds that foreign investors invariably made financial decisions based on sound economic analysis, which demonstrated the Turkish economy’s strong growth prospects. On Mr Erdogan and AKP’s front, markets’ gyrations including international investors’ exposure to the Turkish markets had generally been a rhetorical trope to demonstrate how great AKP’s economic management was – when markets were rallying, and how the secular establishment was destabilizing the country and its economy – when markets were jittery about political uncertainty.   

So what has changed since the summer of 2008 that would explain not only Mr Erdogan’s new rhetoric about international investors but also the regulators’ changing stance against them? To begin with, the end of 2008 was marked by further and fresh criminal investigations into the various parts of the secular establishment, including high ranking members of the Turkish army. By the end of 2013, there were a few lengthy sentences handed over to the officers, journalists, academics and public figures that were charged with conspiracy to overthrow the government. In these years, the legislative and judicial changes on the back of successive election and constitutional referendum victories for AKP also consolidated Mr Erdogan’s control over different branches of the state, which he has frequently accused of creating a tutelage regime over the democratically elected Turkish governments.   

It is in this context of increasingly unrivalled and unchecked legislative and executive power of Mr Erdogan, one can better understand his discourse about everything and anything, ranging from what is wrong with abortion to why higher interest rates lead to higher inflation- contrary to what the economics science theorizes and generally finds sound evidence for. As Mr Erdogan is now the first elected president of the country- a position that has constitutionally limited powers, he does not make it secret that Turkey should have a presidential system Alaturca, which implies absolute control by Mr Erdogan over all branches of the state. This includes the Turkish Central Bank, which has enjoyed autonomy in its management of the inflation targeting monetary policy since 2001. For several years now, the Central Bank’s interest rate policy has attracted criticism by some AKP ministers and Mr Erdogan for being too high to sustain the Turkish economic growth – an area of achievement that many see as the key to AKP’s successive election victories. These criticisms have in recent months taken a much more sinister form in which the bank governor and his very few supporters in the cabinet were indirectly accused of “treason” by Mr Erdogan. The stalling economic growth rates- down to less than 3 % in 2014, coupled with the persistently high inflation must have been a worry to Mr Erdogan and AKP, who are soon facing another election challenge in June 2015. This election is very important for the Turkish president because if AKP reaches over 330 seats out of 550, they could take the country to a presidential system referendum in no time.   

On the financial markets front, in a context of slowing economic growth, high inflation and relatively low interest rates, the Turkish assets have become comparatively less attractive to international investors. One consequence of this has been the slowdown in the capital flows to Turkey, which have been essential to balance Turkey’s persistent current account deficit. Despite this slow-down, there has been no significant issue for the Turkish government to raise capital and service its outstanding debt, which enjoys one of the lowest debt-to-GDP ratios in Europe. Difficulties in raising capital are mainly expected for private borrowers, including banks which are exposed to the growing issue of consumer debt in Turkey. Interestingly, Turkey has been enjoying a peculiarity in these circumstances – namely, the net omissions and errors in its balance of payments statistics. This item in the national accounts refers to inflows and outflows of capital that cannot be recorded. Recently, Turkey has received billions of dollars of inflows as such, which cannot be traced back to specific transactions such as exports and foreign direct investment. In the meantime, Mr Erdogan does not seem to relent in his discursive attacks on the interest lobby and their local accomplices in his frequent and widely broadcasted speeches to various audiences. On the other hand, these discursive attacks seem not to resonate with Turkish retail investors and their brokers as much as they would do in the pre-2008 period. When asked, many are of the view that the spectre that helps Turkey balance its books regularly finds its way into the Turkish financial markets and keeps them buoyant despite the lacklustre economic performance. Another view about this spectre is that its colour is green, which refers to beliefs about its origins in the Middle East among Mr Erdogan’s close allies.  

It seems that the Turkish market cultures are changing in terms of the perceptions about the foreign investor figure on the back of Mr Erdogan’s increasing discursive interventions in the Turkish economy and markets. The Western investor imagery of always being up to mischief in the markets and getting away with it thanks to the Turk’s admiration of anything Western seems to be gradually substituted with a spectral Middle Eastern figure that is in the Turkish markets not just for economic gains but also political reasons. This new figure is poised to dominate market chatter in Istanbul’s dealing rooms in the years to come.

*Appeared first in May 2015 on ReflectionsTurkey, a platform of Op-Ed commentaries on Turkish Affairs

Wednesday, 19 February 2014

The invisible hand in Gezi Park protests? *

In his decade long rule of the country, Mr Erdogan has presided over decreasing inflation and increasing economic growth rates. One of the positive effects of these have been the decreasing interest rates by which Turkey is able to borrow in international markets. Concomitantly, Turkey has reversed its debtor relationship with the IMF and is now planning to increase its contribution to the IMF. These improvements have been recognized by upgrades on Turkey's credit rating, the last of which happened shortly before the Gezi Park protests and reinforced Turkey's investment grade status.

Gezi Park near Taksim Square. By Yinyerale [CC BY-SA 3.0 (], via Wikimedia Commons
The Gezi Park protests started small but turned into country-wide protests after the brutal police crackdown on protester campers in Gezi Park. As protests have widened to Ankara and other cities, the PM has called protesters “chapulcu” [riff raff]. However, the protesters have shown resilience against the excessive use of tear gas, water cannons and rubber bullets. Many commentators have seen this resilience as the manifestation of pent-up anger against Mr Erdogan's increasingly dictating and polarizing voice on different matters such as abortion rules, regulation of alcohol consumption, refusal to grant place of worship status to Cemevi- Alewites' place of worship, and rebuilding Topcu Barracks as a mall at the expense of Gezi Park, one of the few remaining greenery in urban Istanbul. 

Taksim Military Barracks — in Istanbul. Demolished in 1939 (Public Domain,

The PM's rhetoric, which for many is combative and condescending, has not helped. As one commentator put it, this is a protest movement among urbanites to restore their dignity in the face of PM's actions and words. 

Protesters at Taksim Square. By Fleshstorm (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons

It is in these circumstances, the PM has led the discursive counter attack on the protesters by calling them mere tools in the hands of “the interest lobby”. In Mr Erdogan's narrow usage of the phrase, the interest lobby simply refers to a group of national and international actors who strive to increase the fee on the loans given to Turkey. This phrase is not a new tool in Mr Erdogan's rhetorical arsenal. Mr Erdogan and his close circles, which include rising columnists and media tycoons, have repeatedly argued that Mr Erdogan's political and economic success has been at the expense of this lobby.

Riot Police clearing the square 15 June 2013 By Mstyslav Chernov (Self-photographed, [CC BY-SA 3.0 (], via Wikimedia Commons

Although finance capital is expected to seek higher returns, risk is the reverse side of the coin. Simply put, the interest rate by which a country borrows in international markets is determined by a plethora of risk factors such as local inflation rate, global economic prospects influencing the circulation of finance capital, and debtor country's growth prospects and political stability signalling its ability to pay back loans. One cannot rule out foul play in international markets as recent LIBOR fixing scandal has demonstrated. Nevertheless, such scandals and the underpinning opportunistic behaviour cannot explain everything in the markets.

So what has happened in the Turkish markets during the Gezi protests? The stock market went down by more than 10 per cent after the PM's stern dismissal of the protesters and their demands. The benchmark interest rate spiked by more than 2 per cent and the default insurance premiums on the Turkish debt went up by more than 60 basis points to 183. In the process, it is claimed that several billion US dollars have exited the Turkish stock and bond market. For the PM and his supporters, these were the signs that the interest lobby decided to destabilize the Turkish economy not just to earn higher interest fees but also to thwart the rise of Mr Erdogan and Turkey to global power status. Nevertheless, in the weeks preceding the protests, the developed and emerging country stock markets have been jittery because the signs that the US and Japanese central banks might reverse their monetary expansion policies have got stronger. The prospect of such a reversal has led to sellings in the stock markets including the Turkish one which have benefited from the monetary expansion policies and negative interest rates. The Gezi Park protests in Turkey and the government's reaction have exacerbated the downward momentum in the Turkish assets. Nevertheless, the stock market has recouped most of its losses and the benchmark interest rates and the default risk premium on Turkey have loosened down as the protesters and the PM have started dialogue on how to resolve the issue peacefully.
In the early days of the protests, the Turkish stock market fell by more than 10 per cent. Picture by Katrina.Tuliao ( [CC BY 2.0 (], via Wikimedia Commons
If there had been an intent on the part of the interest lobby to topple Mr Erdogan by causing social, economic and financial mayhem, it seems like the lobby has decided to stop playing their part in the financial realm without a reason. The PM and his supporters argue that it has been their uncompromising determination to stay in government and fight any international conspiracy that has scared the interest lobby. Yet, so far there has been no investigation from the Turkish financial regulators on any local or international financial actor **. On the other hand, the Turkish economy has been and will be vulnerable to change of sentiments in international markets mainly because of its low savings rate (one of the lowest across emerging markets) and its dependence on foreign capital to reach its target of becoming a high income country in the next 10 years. Such dependency on foreign capital has actually made the Turkish investors more sensitive to global economic events than domestic economic agenda. In this context, increasing the crackdown rhetoric on foreign capital would add   unnecessary strain on Turkey's ability to borrow in international markets and make things worse for Mr Erdogan's rule.

For long Mr Erdogan's rhetoric of being the victim- turned-hero who can advance Turkey beyond a military tutelage has helped his popularity among the masses. Now that Mr Erdogan seems to have harnessed most of the branches of state authority, he turns to shadowy rhetorical figures such as the interest lobby to explain the growing national discontent with his polarizing rule and reinforce his rank and file. 

*This essay was written in the beginning of June 2013 when the Gezi Park protests were raging in Istanbul and the rest of Turkey. The essay appeared in an edited book titled Reflections on Taksim – Gezi Park Protests in Turkey (Bulent Gokay and Ilia Xypolia eds September 2013, pp. 50-1) The book  is available at

** SPK- Capital Markets Board of Turkey actually started an investigation into foreign investors and their local brokers at the end of June 2013, requesting detailed documentation from the latter . According to a recent news report in Hurriyet, a national newspaper, the investigation was still on at the end of 2013 owing to the CMB's data requests from foreign capital market regulators. According to undisclosed CMB sources cited in the news report, the investigation is not expected to produce any conclusive evidence of market manipulation on the part of foreigners and their local brokers.  (In Turkish)

Monday, 28 January 2013

Gut feeling, instinct, flair and knack: the recipe to be a successful trader?

One will find reference to these phenomena in academic and popular accounts on success in financial trading. Explanations based on gut feeling, instinct, flair and knack are usually given by research informants or author-cum-professionals to make a distinction between the bright and the drab on trading floors. Fenton-O'Creevy et al (2004) in their book titled Traders provide very telling accounts as such from investment bankers in the UK. According to these accounts, flair/knack seems to be some sort of amplified cognitive power, likened to those animal senses, which is argued to work at multiple times the capacity of ordinary human-beings, making gut feelings/intuitive judgments in the face of ever changing figures on computer screens successful. Traders also contrast this special cognitive type with "too much of an academic mind", albeit recognizing the importance of having sound technical knowledge on financial markets.  However there seems to be no agreement about the sources of  flair and intuition among traders. Is it about experience or god-given talent? Nor do they seem to agree on the reliability of flair and intuition as  reliable recipes for trading success. Some senior traders and trading floor managers are sceptical of their floor traders' justifications of trading actions/success based on flair and intuition as such accounts somehow “blackboxes” what traders actually think and do, and undermine their accountability and jeopardize their organization.

In the face of these mystifying accounts from their interlocutors, Fenton O'Creevy et al put forward “tacit knowledge” with two sub-categories to better capture the conceptual essence of flair and intuition. The first category represents the not-so-easy to articulate embodied knowledge of traders that comes from their trading and market experiences within a professional career perspective. It consists of personal heuristics and trading styles. The second category represents knowledge on a particular situation in the market and personal position taken. This is kept tacit because sharing it would jeopardize trader's chances of success. Abolafia (1998) writing about the analytic conclusions driven from his ethnography on Wall Street, Making Markets, mentions knack and intuition of traders (I think he specifically gets his inspiration from the bond traders he observed at investment banks on Wall Street). Abolafia understands knack/intuition as one of the cognitive tools of traders such as their institutionalized and shared myths and norms about how a number of markets and securities should move in tandem and what the price levels should be, given the historical and existing circumstances. These are part of the “market folklore” as Abolafia calls it.

Despite intimating a sense of durability and idiosyncrasy at individual level, the professionals' accounts on knack/flair and intuition/gut feeling are qualified in the above studies by the notion of reflexivity among traders, namely placing one's actions and thoughts within the context of other actions and thoughts, judging what these might be, and accounting for them in determination of one's trading strategy. The often quoted analogy, also present in Fenton-O'Creevy et al (2004), to explain reflexivity as a major driving force in financial market dynamics belongs to Keynes (1936). It is about a fictional selection contest held by a newspaper in which entrants are asked to choose the six most beautiful faces among the pictures of 100 female models presented in the paper. The winner is whose selection of the six is most similar to the average selection of the whole entrants. Keynes therefore argued that a more rational strategy than choosing according to one's own preference /judgment for beauty would be to take into consideration what other entrants would choose for the most beautiful six, with possible higher degrees of anticipating the outcomes of other entrants' anticipations as such. Keynes used this analogy to support his argument that  given the inherent lack of knowledge we have about the long-run (apart from the fact that we will all be dead!) it might be more profitable to assume that there is a convention or general truth in financial markets upheld by the aggregate of the participants on the state of things associated with market trading- albeit changeable in the very near future in the face of events unfolding- that determines market outcomes, and more profitable then to search for the properties of this truth and its dynamics of change, than to search for an intrinsic value of investments  existing independently of this social dynamic. If future is uncertain with respect to exact calculations or accurate forecasts, partly owing to lack of information and partly owing to the above described reflexive social dynamic in financial markets, then can we maybe better qualify these elusive concepts of knack/flair and intuition/gut feeling that are often evoked in scholarly and popular discussions about financial markets?

One succinct answer comes from a discussion, brought to my attention by my colleague Asgeir Torfasson from Gothenburg Research Institute, between two distinguished researchers on human decision making, David Kahneman and Gary Klein (2009). Klein represents a research school called Naturalistic Decision Making which simply conceptualizes intuition  as pattern recognition from cues available in an environment in which decision-maker has experience. Here the experience may refer to simple (non-professional) common-sense knowledge, for instance that to distinguish between cat and dog and how they ordinarily behave, or to more sophisticated knowledge of professionals such as stockbrokers, and to what Abolafia refers to as shared norms and myths about price levels. Kahneman' and his associates' understanding of intuition on the other hand is inspired by their heuristics and biases approach to human cognition and decision-making. In this approach, the focus is on how we substitute a target attribute, something we are required to estimate, with a cue that is ordinarily given or evoked in the task and does not statistically regress with the target attribute. Simply put, the heuristics and biases approach studies the ways in which we violate statistical properties of different realms of life, and instead see coherent plots or patterns in relation to common-sense or experience-based views about these realms.

Here the static and dynamic properties of the realm with reference to causal and statistical relationships and how they can be learned or anticipated are the most important determinants of whether intuition can succeed in the cognitive task at hand. For instance Kahneman and Klein (2009) refer to different environments such as high validity, zero-validity, and wicked- where feedback is actually misleading. Each of these environments implies different levels of certainty in the way observed patterns lead to anticipated outcomes. Another important assumption made regarding intuition is that it is 'automatic, arises effortlessly, and often come to mind without immediate justification' (page 519). Yet, 'skilled intuition', which thrives on experience and knowledge in a specific domain, is distinguished from the intuitive heuristics we use in situations not necessarily relevant to our specific expertise such as anchoring our estimates with reference to a value given in the task. Drawing on the research made in both approaches, Kahneman and Klein make several observations about finance professionals and financial markets in their article. The summary is that finance professionals, as experts, are not that bright in making judgments for the long-term and on larger, interwoven and close to zero-validity domains that the financial markets and their surrounding environs are. These environs are argued to be unlike the narrow and high validity domains in which for example a fireman or a midwife operate and has better mastery. Is it therefore not surprising that major financial crises continue to happen almost in a cyclical manner and smart investors and traders consistently fail to correct those less-smart professionals and their mistakes?

Two points can complement the discussion of intuition in financial markets by Kahneman and Klein- although it should be stated here that the authors refer to finance professionals as one the many examples for professional groups that do not perform very well in prediction tasks- other professional groups such as psychologists are mentioned too with reference to their failure in such tasks owing to our tendency to see coherent plots instead of using our statistical and logico-scientific reasoning. The first is the origins or basis of intuitive judgments:  calculative models, conventions and formulas; ongoing market experience including social connections and reflection on how models actually work; and organizational and institutional frameworks in which financial trading happens. The second is related to these epistemic sources, and what sociologists call “social construction of reality”. Simply put, as a domain of activity, financial markets can be conceptualized as epistemic fields constituted of roles, norms, and classificatory schema generated, shared, internalized, performed and modified by members of the domain. Of course, there are multiple subdomains in financial markets, marked by geography, securities traded, historical evolution and so on, and there are distinguishable epistemic conventions such as calculative models within a subdomain. However, a general awareness of these domains and deeper reflexive knowledge about the domain where one operates underpin one's cognitive and calculative activities, including intuition and more complex cognitive and decision tasks such as valuing an option contract and calculating how other actors calculate- these belonging to what Kahneman and Klein (2009) classify as System 2 in human cognition, System 1 being intuition and heuristics.

The type of reflexivity Keynes referred to is not incompatible with the social construction of reality as both notions combine personal judgment/calculation with judgment/calculation on what others think and do, and thus allow for strategic action. From a practical point of view, these analytic observations can also cast sociological light on the recurring puzzle of why behavior of traders and analysts are seemingly imitative (one high profile case is the Long-term Capital Management's failure, that powerful hedge-fund part-run by Nobel laureates in economics- MacKenzie, 2003 provides a very accessible sociological explanation for non-specialists), and why there happens dangerous and crisis-generating lock-ins or second-order dangers with reference to financial models and qualitatively traceable conventions to evaluate financial securities (see Holzer and Millo 2005 for a conceptual and empirical discussion;  MacKenzie 2011 on such origins of the credit crisis of 2007/8; and Beunza and Stark 2011 for reflexive strategic action gone wrong in the case of quantitative finance/merger arbitrage community). Once socially constructed, these socio-technical devices and conventions can trap their creators and users in a cognitive and calculative bubble.

To come back to flair and intuition and to conclude this essay, I think Fenton O' Creevy et al and Klein et al better capture the sociological essence of intuition. Flair and intuition are not mystical cognitive processes. They cannot be pinned down to individual psychological and error-prone pseudo-statistical/scientific reasoning either. The extant sociological literature demonstrates that cognition and decision-making happen in socially constructed socio-technical environments where actors have varying depths and breadth of knowledge about their immediate sub-domains and the larger field of financial market. In this context, intuition can be seen as quick pattern recognition, followed by a judgment on what happened and/or what will happen. Intuitive success and flair can therefore be partly explained by where in this socially constructed environment individuals position themselves, and with what types of capital sources (i.e., economic, cultural (epistemic) and social) they pursue their own interests. Nevertheless, even positions and the socio-technical systems financial markets are do not stay put. As discussed above, there are second order dangers or cognitive-blindness that parts or the whole of the strategically or naively internalized evaluative conventions can generate. I think there is no need to mystify flair and intuition or to couch system-allowed successes as monumental testimony to powers of intuition and special talents and skills. I think more interesting are the stories of those prophets who warn in euphoric times about impending second-order dangers and existing cognitive-blindness generated by shared models and conventions of thinking and making decisions.


Abolafia, M (1998) Markets as Cultures: An Ethnographic Approach in M. Callon (ed) Laws of the Markets. Blackwell, Oxford. 69-85.

Beunza, D. and Stark, D. (2011) From Dissonance to Resonance: Cognitive Interdependence in Quantitative Finance. Available at

Fenton O’Creevy, M., Nicholson, N, and Soane, E. and Willman, P. (2004) Traders: risks, decisions and management in financial markets. Oxford University Press, Oxford ,

Holzer, B., and Millo, Y. (2005) From Risks to Second-order Dangers in Financial Markets: Unintended Consequences of Risk Management Systems. New Political Economy 10(2): 223-246.

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Sunday, 8 May 2011

Sensemaking and Storytelling in Financial Markets: Evidence from Istanbul

I defended my PhD thesis on 19 April. The title of my thesis is “Sense-making and Storytelling in Financial Markets: the case of the Istanbul Stock Exchange”. As it can be inferred from the title, the study is about how market actors make sense of data/information flows in digitized and remote access financial markets and what role storytelling might have in this cognitive activity. What I refer to by story/storytelling is the cognitive process in which we establish cause-effect relationships between events and actions. According to the sense-making literature, this is the most commonly used mode of knowledge and explanation among human beings and it is informed by temporality and causality. That is to say, events and actions are put in a sequence according to the perceived cause-effect relationships. The other mode of knowledge and explanation is usually described as categorical knowledge. This is a more deductive method in which the existing scientific or technical knowledge is evoked to demonstrate events and actions as manifestations of these “facts”. Temporality therefore becomes a non-factor in categorical explanations. Of course, it is recognized in the literature that both modes of knowledge and explanation can be used together but what matters here is storytelling relies on putting observed/known events and actions in a non-random temporal order according to a perceived cause-effect relationship among them.

What is significant about digitized financial markets or what Karin Knorr-Cetina and Alex Preda call 'scopic market systems' is that all the data/information from different parts of the world is represented on computer screens in a flow mode. That is to say, data/information (including price) is presented in a sequential manner. Moreover, there are multiple flows that happen contemporaneously. It is therefore easier for market actors to make connections among these multiple streams. Although market actors also rely on categorical knowledge in their sense-making activity (and use risk and valuation models accordingly), it is storytelling that can be expected to be the most dominant way of reducing uncertainty about the past, present and future in the face of multiple flows. This premise might actually sound antithetical to the mainstream finance’s assumption that prices include all available data/information (or market actors actually know what happened in the past). The main reason for this is that the ever present dazzling stream of data/information on the screens is not self-explanatory. That is to say, the screens don’t talk back to market actors and tell them what has happened and what will happen! Such a higher datum is only achieved by market actors’ interpretative or calculative efforts with a view to incorporating price and other  data into their investment decisions.

While the conceptual framework for the role of narratives in sense-making in digital financial markets looks like this, my thesis empirically answers the following questions: do market actors ever resort to storytelling in their sense-making activity? If so, would there be different types of stories in terms of their content and plot structures? If there are, where do these differences come from? I tried to answer these questions with a field work in the ISE in 2008/9. I accessed four intermediary organisations plus an asset management company. My full day observations were around 75 days and I collected over 1200 sense-making stories. These field sites generated around 8% of the annual trading volume in the ISE in 2008/9. They represented different types of investors such as domestic retail, foreign institutional and domestic institutional investors.

Leaving aside the number of stories collected over the observation period, the field observations showed that storytelling was the main mode of making sense of the flows rather than a calculative mode that generated quantified predictions. However, the collected stories showed variance in regards to their content and plot structures in accordance with market actors’ individual and organisational identities. To give an example, among the three domestic sales teams that I observed and where domestic retail investors were served, more than 40 % of the stories fixed an event or news (that were to) happen(ed) abroad as the cause of what was (to be) observed in the ISE. In one of these field sites, this ratio went up to 54 %. This was mainly because of their clients’ preference for trading in ISE futures contracts in line with what was happening in the leading economies and global futures markets. On the other hand, in two observation sites where institutional investors from Europe and North America were served, this correlation/cause-effect logic between world markets and the ISE went below 20 %. More interestingly, the institutional sales teams that served foreign institutional investors usually kept this type of "market abroad" stories to themselves to coordinate trading activity in Istanbul whereas the domestic sales teams told most of the "market abroad" stories to their clients with a view to encouraging them to trade. Although these stories used the same logic of cause-effect or correlation when there was no news event abroad, their frequency and mode of delivery demonstrated that organisational identities/resources affected the cognitive scheme market actors adopted.

This was not surprising for the following reason. As a social resource for intermediaries, investors in the ISE showed distinctions in their investment activities. For instance domestic retail investors on average invested for several week periods and generated bulk of the trading volume in the ISE whereas foreign institutional investors on average held their portfolios unchanged for a few  months and traded infrequently. These dispositions of investment therefore led to differences in narratives as sense-making outcomes with regard to their frequency, content, and mode of delivery.

Another significant example of different dispositions among investor types and their manifestation in story outcomes comes from the domestic retail investor scene. In addition to the three field sites of domestic retail activity, I observed a fourth site in which retail investors were more interested in thinly traded and/or guided shares thanks to high net worth/high frequency trading retail actors, a.k.a. “domestic speculators”. This fourth site was significantly different from the three domestic sales sites where I had the chance to observe a representative sample of the 100,000 or so core domestic retail investors who traded in relatively liquid and large-capitalisation shares. These three sites had hardly generated any stories about “domestic speculators” or guided moves in shares. Dealers and clients in these sites seemed content with what they observed on market screens. On the other hand, in the fourth site, the domestic retail investors and their intermediary seemed to go beyond the market screens and relied on their network relationships to access what I call “private” information. This information was mainly about these guided moves in shares and what a number of influential actors in share trading were up to. In the fourth site, 20 % of the stories relied on this type of “private” knowledge. The three “mainstream” domestic sales sites on the other hand relied on this type of “private knowledge” in less than 5 % of the cases (in one field site, one dealer and his high net worth client skewed the instance of private knowledge use single-handedly –otherwise the percentage was less than 2%).

This last example is quite telling about the post-2001 cognitive revolution that took place in the ISE. A great majority of the domestic retail investors do no longer rely on the 1990s’ most significant type of information, namely “private” information. In today’s ISE, majority of domestic retail investors make their investment decision in accordance with the data/information flows from the world economies and markets and Turkey as available in real-time on their market screens. This is despite the fact that short-term investment disposition of domestic retail investors shape the use of these data/information flows, mostly into an opportunistic cognitive stance.

In fact, the local data vendors have been catering for this opportunistic stance of domestic retail investors by generating calculation and representation modules on market screens that allow investors to harness a plethora of data/information on price, trading volume, and data on companies and economies. On the other hand, the most important cognitive device among institutional investors, especially foreigners, seems to be analyst reports on companies, sectors and macro economy and politics of Turkey. These reports are based on calculative and probabilistic frames that forecast future price movements. What I observed during my residence in the institutional sales departments was that most of the in situ stories told to clients were based on or disciplined by these analyst reports and thus paid attention to the calculated risk and return projections.

This was unlike the majority of stories told in the domestic sales departments that looked to short-term news and market movements abroad, especially in the DOW (USA) and the DAX (Germany)! I also observed that domestic retail investors had a knack in turning all types of information/data flows into short-term trading opportunities. They did so with the vernacular knowledge about the ISE's internal dynamics (for instance, that domestic retail investors traded frequently in the ISE according to what happened abroad- this actually sustained a perception of one-way correlation between the world markets and the ISE). That was why domestic retail investors perceived analyst reports as yet another opportunity to do short-term trades or even ask themselves the question whether foreigners would do the opposite of what they said in their analyst reports. In my thesis, I discussed the historical roots of these distinctive cognitive schemata among the different types of investors in the ISE. This discussion was a more substantial version of my article in Competition and Change.

In sum, I stress the following two points in my thesis. First of all, despite the digitization in financial markets which have brought more and more events and actions in to a calculative and abstract space, market actors, irrespective of their roles, identities and resources, make sense of these digitized and abstracted flows in a narrative mode. This means that market actors cannot be conceptualized as cognitive creatures that rely solely on calculation. Secondly, because financial markets are formed of individual and organisational actors who have different historical roles, identities and resources, one can talk of distinctive cognitive schemata and consequent differences in storytelling outcomes. This undermines the normative notion of a unitary universal rationality for all the market actors in financial markets.

My gratitude goes to all of the market actors who helped me in my field research in Istanbul. Without them, this study would never have been completed.

Tuesday, 26 April 2011

"Finans Piyasalarinda Anlamlandirma ve Hikaye Anlatimi: Istanbul Borsasi Vakasi"

19 Nisanda doktora tezimi basariyla savundum. Tezimin basligi "Finans Piyasalarinda Anlamlandirma ve Hikaye Anlatimi: Istanbul Borsasi Vakasi". Basliktan biraz anlasilacagi uzere piyasa aktorlerinin dijital uzaktan erisim piyasalarinda gunluk haber ve veri akisini nasil anlamlandirdiklari ve bunu yaparken hikaye/anlantilari nasil kullandiklarini inceledim. Anlatidan kastim gunluk hayatta olaylar arasinda sebep sonuc ve baska iliskileri hikaye formatinda nasil kurdugumuz. Aslinda hikaye/anlati yani "storytelling" insanlarin hayatlarinda en cok basvurduklari anlamlandirma yontemi. Insanlar bunu yaparken zaman ve sebep sonuc iliskisini kendilerine rehber olarak aliyorlar. Yani aciklamaya calistigimiz olaylar sonuclar bir kronoloji otesi sebepsellik icinde anlam kazaniyor. Diger yontem ise daha bilimsel olan, var olan bilinen bilimsel katagorik gerceklerden yola cikarak olan olaylari bu kategorik gerceklerin bir yansimasi olarak zamandan ve mekandan bagimsiz gormek.Tabi insanlar hikaye anlatirken bu kategorik gerceklerden de faydalaniyorlar fakat burada onemli olan hikayenin gozlenen bilenen olaylari sebeb sonuc icinde bir siraya koymasi.

Dijital finans piyasalarin ilginc bir ozelligi dunyanin dort bir tarafindan haber ve verileri akim (flow) seklinde piyasa aktorlerinin bilgisayar ekranlarina aktarmasi. Yani haberler ve veri (fiyat verisi dahil olmak uzere) kendi iclerinde sirali bir sekilde akmakta. Bircok akim bir araya geldiginde ise piyasa aktorleri icin bu akimlar arasinda hikaye formatinda sebep sonuc iliski kurmak daha kolay hale gelmekte. Piyasa aktorleri bunu yaparken kategorik gerceklerden faydalanmakla beraber (buna bagli olarak degerleme modelleri, risk analizi araclari kullanilabilir) hikaye/anlati formati anlamlandirma ve gecmis ve gelecekle ilgili bilinmezlikleri minimize etme konusunda en cok basvurulan yontemlerden biri. Bu finans teorisinin fiyatlarin var olan butun haberleri yansittigi, yani gecmisin aslinda bilindigi onermesine de ters bir durum teskil etmekte. Bunun en onemli sebebi bas dondurucu yogunlukta ve coklukta akan bilgi/veri akisi, ekranlarda her an var olmasina ragmen, bu akisin toplami kendi basina bir anlam ifade etmemekte. Yani ekranlar dile gelip piyasa aktorlerine olan biteni yorumlamamakta! Bu anlami /yorumu piyasa aktorleri kendi bilissel cabalariyla yaratip yatirim faaliyetlerine baglamak durumunda.

Iste benim tezim bu noktada su sorulari cevapliyor: Piyasa aktorleri gercekten hikaye/anlati yontemine basvuruyorlar mi? Eger basvuruyorlarsa, acaba anlattiklari hikayeler arasinda icerik ve mantik acisindan bazi farkliliklar var mi? Varsa bu farkliliklar neden kaynaklaniyor? Bu sorulari Istanbul Borsasinda yaptigim gozlem calismalariyla cevaplamaya calistim. 4 araci kurum ve bir portfoy yonetim sirketinde (2008/2009 yillarinda borsa islem hacminin yaklasik %8'ini gerceklestirdiler) yaklasik 75 tam-gun piyasa aktorlerini gozlemleyerek onlarin anlik anlamlandirma faaliyetlerini kaydettim. Buradan cikan anlatilarla/hikayelerle (1200 civarinda) bu sorulari cevaplamaya calistim. Oncelikle piyasa aktorleri anlatilara cok sik basvurmakta. Piyasa ekranlarindaki akislari surekli sekilde anlamlandirmaya calisip bunlari yatirim kararlarina baglama ugrasi icerisindeler. Fakat burada piyasa aktorlerinin kisisel ve kurumsal kimlikleri (ornegin araci kurumun sadece yerli bireysel yatirimcilara veya yabanci kurumsal yatirimcilara hizmet vermesi gibi) anlatilan hikayelerin icerigini etkilemekte. Bir ornek vermek gerekirse, gozlemledigim uc ayri yurtici satis departmaninda anlatilan hikayelerin %40'indan fazlasi yurtdisi piyasalarda ve ekonomilerde ne olduguna dair. Bir araci kurumda, vadeli islemler piyasinda aktif olarak islem yapan yerli yatirimcilara hizmet esnasinda, bu oran % 54'e kadar cikmakta. Ote tarafta ise, yabanci kurumsal yatirimcilara hizmet veren iki departmanda bu oran %20'nin altinda. Daha da ilginci, yurtici satis departmanlari bu hikayelerin buyuk bir kismini musterilerine anlatirken, kurumsal satis departmanlarinda bu hikayelerin cogu departman icinde kalmakta. Aslinda anlam/icerik bazinda bu farkliliklar bizlere sunu anlatmakta, araci kurumlar musteri tiplerine gore farkli bilissel cerceveler gelistirip ona gore piyasadaki veri akisini yorumlamakta. Turkiye Sermaye Piyasasi Araci Kuruluslar Birligi (TSPAKB) istatistiklerine gore, yerli bireysel yatirimcilar kisa vadeli yatirim yapip cok fazla islem yapmakta. Ote tarafta yabanci kurumsal yatirimcilar portfoylerini cok daha uzun sure ellerinde tutup islem hacminde o kadar etkili olmamakta. Bu tercihlerin yansimalari piyasa aktorlerinin anlattiklari hikayelerin iceriginde ve sikliginda gorulmekte.

Farkli bilissel cercevelere bir baska ornek ise gene yerli bireysel yatirimcilardan gelmekte. Ornegin gozlemledigim uc yurtici satis departmanindaki yatirimcilarin cogu, ki bu yatirimcilar TSPAKB'nin istatistiklerine gore yerli yatirimcilar arasinda en onemli 100 bin kisilik grup icindeler hisse sahipligi anlaminda, buyuk ve likit tahtalarda islem yaparken, bir dorduncu gozlem yerinde, bir araci kurumun subesinde, daha kucuk ve az likit tahtalarda da islem yapan yatirimcilari gozlemleme sansim oldu. Bu yatirimcilar digerlerinin aksine, piyasa ekranlarinin otesindeki ozel bilgilere ulasilabilecek cesitli sosyal aglar icinde bulunmaktalar. Ornegin piyasamizda etkili olan yerli spekulatorler ve onlarin yarattigi momentum veya gudumlu fiyat hareketleri. Calismamda bu tur bilgileri ozel (private) bilgi olarak adlandirdim. Sonucta subede gozlemledigim bu tip yerli bireysel yatirimcilar, anlattiklari hikayelerin % 20'sinde bu tip bilgilere basvurup piyasa ekraninda olan olaylari anlamlandirdilar. Bu oran diger uc yurtici satis departmanda % 5'in altinda.

Bu son ornek aslinda 2001 sonrasi Istanbul Borsasinda yasanan bilissel devrimin en iyi orneklerinde birisi. Artik yerli yatirimcilarin onemli bir kismi 1990larin en onemli ozelliginden olan "ozel" bilgi kullanma yerine, yatirim faaliyetlerini piyasa ekraninda var olan bilgi ve haber akisina gore yapmakta. Tabi yerli bireysel yatirimcinin devam eden kisa vadeli yatirim aliskanligi bu bilgi akisini daha firsatci kullanmasina zemin hazirlamakta. Piyasa ekranlari da bu kisa vadeli egilime hizmet eden cesitli dijital araclar sunmakta yatirimciya. Obur tarafta ise, kurumsal yatirimcilar arasinda en onemli bilissel araclardan biri analist raporlari, yani sirketlerin nakit ve gider akislarini hesaplayan ve buna gore uzun vadeli fiyat tahmininde bulunan anlatilarla hesaplari birbirine ekleyen analizler. Gozlemlerimden cikarttigim sonuc yabanci yatirimcilara anlatilan hikayelerin cogu bu analist raporlarindaki cercevelerden yani uzun vadeli hesaplanabilir firsat ve risklerden ilham almakta, yurtdisinda DOW'da DAX'ta ne oldugundan degil! Diger taraftan yerli bireysel yatirimcilara anlatilan hikayeler bilgi akisinin her turlusunden kisa vadeli faydalanmaya yonelik ve Istanbul Borsasinin kendi ic dinamiklerini (ornegin yerli yatirimcilarin yurtidisinda olan biten olaylara gore cok sik islem yapmasini) goz onune alan hikayeler. O sebepten yerli bireysel yatirimcilar icin analist raporlari ya kisa vadeli al sat firsati ya da acaba yabancilar rapor cikarip tersini mi yapiyor sorusunu sorma firsati olarak gorulebiliyor. Tezimde ayrica bu bilissel cerceve farkliliklarinin tarihsel sebeplerini de tartistim. Bu tartisma bir onceki gonderimde bahsettigim makaledeki tartismanin bir benzeri fakat daha kapsamlisi.

Sonuc olarak tezimde su iki noktaya vurgu yapiyorum. Finans piyasalarinda dijitallesmeye ragmen, ki bu dijitallesme daha cok sayida olayin sayisallastirilip hesaplanabilir hale getirmekte, piyasa aktorleri soyutlastirilan, sayisallastirilan, dijitallestirilen bu akimlari anlati/hikaye formatinda anlamlandirmakta. Yani piyasa aktorleri sadece sayisal hesaplar yapan bilissel varliklar degil. Buna bagli olarak ikinci vurgum ise, finans piyasalarinin farkli bilissel cerceveleri ve gecmisleri ve kimlikleri olan gruplardan olusmus olmasindan dolayi, bu anlatilan hikayelerin birbirinden farkli olmasi. Yani finans piyasasindaki gruplar anlamlandirma ve yatirim faaliyetlerinde farkliliklar gostermekte. Bu da finans piyasalarinda tek bir rasyoneliteden ve bireysel, izole piyasa aktorlerinden bahsetmeyi zorlastirmakta.

Calismamda bana deskte olan tum piyasa calisanlarina, yatirimcilara ve regulatorlere minnettarim. Onlarsiz bu calismayi bitirmek dusunulemezdi.