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Sociology of Wall Street Key Concepts
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Sociology of Wall Street Key Concepts
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SOCIOLOGY OF WALL STREET KEYCONCEPTS QUESTIONS AND ANSWERS
mFor what purposes are stocks primarily used? (Hint: they're almost For what purposes are stocks
primarily used? (Hint: they're almost
never used to raise capital for the corporation issuing the
stock.) - -Stocks allow founders/owners to transfer ownership (and cash out)
-Stocks are speculative investments (investors hoping the price increases) and an income stream
(dividends)
-when you buy stock, the money goes to other owners, not to the company itself (corporations typically
get money for investment through credit)
-shareholder value has turned the stock market into a market for corporate control
Why is there a tradeoff between opportunism and restraint, and
how do traders solve this problem? - -There's a tradeoff between opportunism and restraint because
traders want to make as much money as they can, but if there's too much cheating, no one will want to
do business with them
-Tradeoff between short-term self-interest and long-run survival of the market
-Traders solve this problem by creating "fair" competition by constructing and maintaining it by setting
rules as to what is and is not okay, and what's a gray area
Why did opportunism thrive in the bond market in the 1980s? - 1. No face-to-face relationships: since
the bond market is over-the-counter, trades happen through computers or phones or through
intermediaries, which creates a weak reputational network--harder to enforce norms
2. Trades are separated from their customers by the sales force: traders feel little obligation to either
salespeople or their customers
3. The most opportunistic firms provide the most profits, so customers accept some degree of
opportunism
4. Traders believe that customers expect them to be opportunistic, but customers can't predict which
trades they'll get cheated on
-limited formal (legal) controls: 1980s was period of low enforcement of SEC rules
-traders have private info about state of market and about customers
What does it mean to say that markets are socially constructed
, institutions? (This is a key unifying idea of the course.) - -People ("actors") behave within networks and
institutions that the people themselves continuously create (and re-create)
-Through interaction, people construct norms, scripts, and strategies that guide their future behavior
-Market making is different on the NYSE, the CBOT, and in bond markets, because market makers are
embedded in different social contexts
-rational maximizing is interpreted differently on these different markets
-they are institutions because they are a collection of stable rules and relationships that make trading
possible
-market makers are embedded in multiple, overlapping communities operating at different institutional
levels (e.g, banks, stock exchanges, groups of other market makers)
-markets don't emerge spontaneously from people trading; trading takes place within stable institutional
arrangements (institutions define the market, not other way around)
-markets are shaped by conflicts between powerful actors trying to build markets to their advantage
How did real, material structures enable opportunism and hyper-rationality in 1980s bond markets? - In
the pit of the CBOT, traders that had more experience would stand on the upper tiers of the pit, and new
and inexperienced traders would sit at the lower levels of the pit until they moved up. Those at the
bottom had little exposure and couldn't do as many trades as those at the top
Opportunism:
-limited formal (legal) controls: 1980s was period of low enforcement of SEC rules
-limited informal controls: weak social relationships among traders
-asymmetric info: traders have private info about market and customers
Hyper-rationality:
-continuous flow of info
-high uncertainty about prices, appearance of bids/offers puts limits on prediction, which encourages
vigilance (maximum accuracy) but also intuitive leaps in decisions
-high-stakes outcomes make deliberate, exhaustive calculation worthwhile
How do futures markets act as cartels? - they act as cartels that police their boundaries and ensure that
fair competition exists within those boundaries while eliminating competition from outside them. This is
necessary because futures markets are a site of "free" competition, which is a carefully organized,
artificial social arrangement; futures trading happens in open-outcry pits that look chaotic and self-
organizing, so need strict rules (formal & informal) created and enforced by social relationships and
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