Framing Financial Markets

1
Framing Financial Markets

• A Methodological Approach
• by
• Sheila Dow

2
Purpose

• To provide an account of the methodology of
  analysis of financial markets in terms of framing
• To argue that framing in the economy should be
  incorporated in the framing of theoretical
  analysis of financial markets
• To argue that this requires openness to other
  disciplines

3
The Meaning of Framing in Finance

• Framing involves assigning boundaries in terms of
  perception, meaning and communication
• Framing is a prerequisite of knowledge
• Framing of financial markets is done by
• Economists methodology for analysing finance
• Policy-makers
• Financial market players
• Households and businesses who use financial
  markets

4
Traditional Framing in Mainstream Finance Theory

• Logical positivism rationally constructed
  theories to be tested against facts
• Theories built on rationality assumptions about
  atomistic individuals
• Separability of economic behaviour)

5
Mainstream Finance TheoryFrom the 1980s input
from other disciplines

• Issues of the availability of facts, and
  learning/ cognition
• Behavioural finance
• Experimental evidence
• But source of framing not explored
• Reference to Adam Smith

6
New Methodological Framing?

• Retention of logical positivist framing,
  requiring formal expression
• Continuing tension between (rationalist) theory
  and (behavioural) applied
• Kahneman (2003) Theories in behavioral
  economics have generally retained the basic
  architecture of the rational model, adding
  assumptions about cognitive limitations designed
  to account for specific anomalies.

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Framing by Policy-Makers

• Instrumental approach to theory as a frame
• Emerging pluralism
• Model uncertainty
• Communication requires different framing for
  different audiences
• Reflexivity between framing of CB and markets

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Framing by Market Players

• Use of mainstream framing in form of quants
• Social framing
• Social networks as frames
• Institutional framing
• Framing by power relations
• Performativity/reflexivity wrt frames
  theoretical agency
• Rhetoric markets as exercises in persuasion

9
Framing by Households/Businesses

• Real experience of cost and availability of
  credit, changes in wealth
• Limited knowledge use rules of thumb for
  decision-making, conditioned by sentiment
• Reflexivity understanding and performativity

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Back to Theory

• Critical realism structure of knowledge should
  reflect nature of subject matter
• Open system reality requires open system
  analysis, drawing on other disciplines
• Implies that theory should start with framing in
  the economy

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Framing from real experienceEx. 1 Old
Behavioural Econ.

• Inductivist (case studies), allows for non-formal
  expression, disequilibrium
• Draws on psychology, sociology
• Satisficing rather than optimising behaviour
• Simons bounded rationality
• Leibensteins X-inefficiency

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Ex. 2 Minskys Financial Instability Hypothesis

• Starts with practice of assessing risk under
  uncertainty, builds to macro theory of financial
  instability
• more emphasis on systemic issues, power relations
• Scope for input from psychology, sociology,
  politics

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Conclusion

• Mainstream approach is a real part of financial
  policy and market practice, so must be an element
  in analysis of financial markets
• But it cannot successfully explain all of
  practice, for theory or policy purposes
• An inter-disciplinary approach requires an open
  theoretical system, allowing for a pluralistic
  methodology