In An Engine, Not a Camera, Donald MacKenzie argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes.Paraphrasing Milton Friedman, MacKenzie says that eIn An Engine, Not a Camera, Donald MacKenzie argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes.Paraphrasing Milton Friedman, MacKenzie says that economic models are an engine of inquiry rather than a camera to reproduce empirical facts. More than that, the emergence of an authoritative theory of financial markets altered those markets fundamentally. For example, in 1970, there was almost no trading in financial derivatives such as "futures." By June of 2004, derivatives contracts totaling $273 trillion were outstanding worldwide. MacKenzie suggests that this growth could never have happened without the development of theories that gave derivatives legitimacy and explained their complexities.MacKenzie examines the role played by finance theory in the two most serious crises to hit the world's financial markets in recent years: the stock market crash of 1987 and the market turmoil that engulfed the hedge fund Long-Term Capital Management in 1998. He also looks at finance theory that is somewhat beyond the mainstream -- chaos theorist Benoit Mandelbrot's model of "wild" randomness. MacKenzie's pioneering work in the social studies of finance will interest anyone who wants to understand how America's financial markets have grown into their current form....
|Title||:||An Engine, Not a Camera: How Financial Models Shape Markets|
|Number of Pages||:||377 Pages|
|Status||:||Available For Download|
|Last checked||:||21 Minutes ago!|
An Engine, Not a Camera: How Financial Models Shape Markets Reviews
In many ways I've modeled my dissertation after this book. It's contemporary economic sociology at its best, I think.
This is a wonderfully informative book on the history and sociology of financial theory. The author shows a great command of the subject matter, which I found impressive as he is a sociologist by training. The big idea of this book is that the models that financial theorists introduce to their MBA students (Black-Scholes, CAPM, etc.) end up impacting the prices of the very securities that they are supposed to value. In this way, finance practitioners mistake these models as being a "camera" that is used to mistakenly assess the world than an "engine" used to understand how markets operate. MBAs then use the snapshots from this "camera" in order to force prices of different securities in line with what the models suggest they should be. This can result in systemic mis-pricings and other problems. MacKenzie does an impressive job of teasing out the implications of this through extensive research and interviews with academics and practitioners. The book reminded me of an updated version of Bernstein's "Capital Ideas," a history of financial theory that came out some time in the 80's. MacKenzie is more academic and draws more heavily on sociological theory, but it makes the text no less readable, in my opinion.Strongly recommended for anyone interested in finance.