A sociological approach to judgment and decision-making in financial markets

What is it about?

In this paper, I propose a sociological framework on making judgements and decisions in financial markets. By this, I highlight market actors' identities and positions (e.g., being a retail investor) in the market and how these become effective in the way they make sense of market events and make decisions. I demonstrate how identities and positions are intertwined with market actors' resources for judgements and decisions. These resources are social (relational), economic, and cultural (knowledge). A sociological framework differs from economics and behavioural theories of financial judgments and decisions, which understand them as a matter of individual rationality (having preferences, access to information including probabilities of outcomes, and being consistent across time) or lack thereof. Instead, a sociological approach understands such rationality or lack of it, or any type of market behaviour including judgements and decisions as an achievement of individual actors' collective identities and resources. This can also explain why seemingly irrational behaviour (e.g., noise trading) and their market level manifestations (e.g., excess volatility) persist in markets.

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Why is it important?

I propose a narrative approach to demonstrate how sociological dynamics shape individual judgements and decisions on financial value and legitimacy. Market actors continuously narrate market events as they experience them. These narratives and how market actors act on them seem to be repetitive and routine-like but distinguishable according to the narrator and his/her identity. The narrative content can therefore be systematically studied to explore the sociology of a given market. The paper showcases this approach in the case of the Turkish stock market which is composed of different types of investors and intermediaries. These actors, despite looking at the same market events via similar technologies of observation and calculation, tend to see and judge the same market events very differently or incoherently in terms of financial values and legitimacy in the market.

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