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.