Performativity Definition - Investopedia

Performativity refers to the potential for economic theory or financial models to change the world and the individuals within it so that they better reflect the ... TableofContents Expand TableofContents WhatIsPerformativityinEconomics? UnderstandingPerformativity EvidenceofPerformativity Counterperformativity Economy Economics WhatIsPerformativityinEconomics? Theperformativitythesissuggeststhateconomicorfinancialmodels,ratherthanobjectivelymeasuringsomeaspectofreality,insteadhelpshapethataspectofrealitytotheformthatthemodeldescribes.Thatis,performativitydescribesthenotionthateconomictheorydoesnotmerelydescribetheworldasitappearsbuthasthecapacitytoactupontheworldandindoingsomaketheeconomy—andtheagentswithinit—appearmorelikethetheoryitself. KeyTakeaways Performativityreferstothepotentialforeconomictheoryorfinancialmodelstochangetheworldandtheindividualswithinitsothattheybetterreflectthetheoryitself.Thissuggeststhat—ratherthanpassivelydescribingsomeaspectoftheeconomy—financialmodelshavethepowertochangeit.Counterperformativity,incontrast,istheconceptthattheubiquitoususeofaneconomicmodelinsteadmakestheworldappearlesslikethetheory. UnderstandingPerformativity Performativitybroadlydescribesthesocialprocessbywhichanutterance,inscription,model,etc.,possessesthecapacitytoinfluencetheworldthatitintendstodescribe.ThelinguisticphilosopherJ.L.Austincoinedthisterminthecontextofa"performativeutterance"todistinguishexpressionsthatdosomethingfromthosethatreportonanalready-existingstateofaffairs. Performativeutterancesarethosewordsthatchangeoralterthestateoftheworld.Forexample,"Inowpronounceyoumanandwife,"spokenbyanordainedminister,transforms"bride"and"groom"into"husband"and"wife,"notonlysymbolicallybutalsoinsocialreality.Thatsocialrealityismanifestedinculturalandreligiousrecognition,treatmentbythelaw,andmodificationstotaxationandhouseholdfinances,tonamejustafew. Whenaneconomicmodeldescribing,forexample,marketefficiencyorhowtopricesomeassetmakesitswayintotheworld,ithastheforcetochangethosestructuressothatthemarketbeginstofitthemodelinsteadofthemodelpassivelyportrayingthemarket.EconomicsociologistDonaldMacKenzieproposesthreemannersofeconomicperformativity.Hecallsthestrongestandmostinterestingtype"Barnesian"(afterthesociologistandtechnologyscholarBarryBarnes).InBarnesianperformativity,"thepracticaluseofanaspectofeconomicsmakeseconomicprocessesmoreliketheirdepictionbyeconomics." Thisideastandsincontrasttothemodelsresearchersinthenaturalsciencesmake.TousetheformulasofNewtonianphysicsdoesnotinanymeaningfulwayinfluencethebehaviorofgravityonmassivebodies,nordoesthewidespreaduseofthelawsofthermodynamicschangeanypracticalmeasureofentropy. Economics(aswellastheothersocialsciences)isdifferentinthatwhatit"measures"doesnotexistoutsideofsociety—thereisnoeconomytostudyifthereisnobodyproducing,consuming,borrowing,orinvesting. EvidenceofPerformativity Onewell-researchedexampleofaneconomicmodelbecomingperformativeistheBlack-Scholes-Merton(BSM)modelforpricingoptionscontracts,whichrationalizedthederivativesmarketsinChicagowhenitwasintroducedtotradersinthe1970sand'80s. Equippedwiththisparticularequation,calculatedbycomputerserversandinscribedas"theoretical"pricesonpapersheetsorterminalscreens,optionstraderswerechangedfromcarryingoutwhatamountedtoeducatedguessworkwhenpricingandtradingoptionsintocalculativearbitrageurs,buyingupoptionscontractswhentheywerepricedtoolowandsellingthemwheretheywerepricedtoodear.Theoptionsmarketitselfcametopersistentlyfulfilltheprices"revealed"bythemodel. AsMacKenzieargues,"financialeconomics…didmorethananalyzemarkets;italteredthem."Thisinfluencesuggeststhatfinancialandeconomicmodelsdohavethepotentialtoshapemarketsatthestructurallevel. Otherexamplesofperformativityhavebeenidentifiedintheconstructionofauctionmarkets(e.g.,bytheFCCtoauctionbandwidthrightsfromTVstationstomobilephonenetworks)toappearlikerationalandefficientWalrasianauctions. Counterperformativity Thoughperformativityarguesthatthepervasiveuseofaneconomicmodelcaninfluencetheworldtoappearmorelikethetheoryitselfovertime,theoppositeconceptofcounterperformativityarguesthattheuseofamodelinsteadmakestheworldappearlesslikethetheorywouldpredict. Thoughthismayseemcounterintuitive,severalexamplesdoexist.Oneisthepervasiveuseofmodernportfoliotheory(MPT)amongpassiveindexinvestingstrategies.MPTusesamean-varianceoptimizationtechniquetoarriveatthemost"efficient"portfolioforaninvestor,maximizingtheirexpectedreturngiventheirlevelofrisktolerance.Theresultisaportfoliowithanoptimalsetofassetclassallocationweights. Thismodel,however,assumesthatmarketsareefficientand,asaresult,doesnottakeassetpricesintoaccount;instead,itsimplyinformsyouwhatpercentageofyourportfolioshouldbeinvestedinwhichassetclasses(e.g.,40%domesticstocks,25%foreignstocks,25%corporatebonds,and10%Treasuries).AnindexinvestorfollowingMPTwouldsimplypurchaseanindexmutualfundorexchange-tradedfund(ETF)representingthoseassetclassesatthemarketprice.If,however,inthelimitingcasethateverybodyinthemarketfollowstherecommendationsofMPT,nobodyislefttopricethecomponentsofthoseindexes,andthemarketsbecomeinefficientduetoalackofpricediscovery. Asecondexampleofcounterperformativityistheuseofbehavioraleconomicsto"nudge"peopletomakemorerationalinfluencebehaviortomakeforoptimaloutcomes.Accordingtothetheoryofbehavioraleconomics,humanbeingsarenotrationalactorsbutmakesystematicerrorsinjudgmentbasedoncognitiveandemotionalerrorsandbiases.Thesepsychologicalfaultsincludelossaversion,time-inconsistentpreferences,anchoring,andtheendowmenteffect,amongseveralotherphenomena. Therecognitionofthesemisstepsandtheuseofcorrectivenudgesthatareinformedbythefindingsofbehavioraleconomics,however,steerindividualstomakebetterchoicesandachievemorerationaloutcomes.Thus,thepervasiveuseofbehavioraleconomicstonudgeordisciplinemakespeopleappearlesslikebehavioraleconomicspredicts(andinsteadmorelikemainstreameconomicmodelsthatassumerationalactorspredict). ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. StanfordUniversity,DepartmentofPhilosophy."TheStanfordEncyclopediaofPhilosophy:JohnLangshawAustin." DonaldMacKenzie."AnEngine,notaCamera:HowFinancialModelsShapeMarkets."MITPress,2006 DonaldMacKenzie&YuvalMilo."ConstructingaMarket,PerformingTheory:TheHistoricalSociologyofaFinancialDerivativesExchange,"AmericanJournalofSociology,vol.109,no1,July2003,pp.107-145. CompareAccounts AdvertiserDisclosure × TheoffersthatappearinthistablearefrompartnershipsfromwhichInvestopediareceivescompensation.Thiscompensationmayimpacthowandwherelistingsappear.Investopediadoesnotincludealloffersavailableinthemarketplace. 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