The Financial Logos: a speech act of financial models

A speech act in linguistics and the philosophy of language is (source: Wikipedia) an utterance that has performative function in language and communication. According to Kent Bach, « almost any speech act is really the performance of several acts at once, distinguished by different aspects of the speaker’s intention: there is the act of saying something, what one does in saying it, such as requesting or promising, and how one is trying to affect one’s audience ». The contemporary use of the term goes back to J. L. Austin’s development of performative utterances and his theory of locutionary, illocutionary, and perlocutionary acts. Speech acts are commonly taken to include such acts as promising, ordering, greeting, warning, inviting and congratulating.

In a paper published (2016) in Research in International Business and Finance, « The financial Logos: The framing of financial decision-making by mathematical modelling », I introduce the notion of “Financial Logos”.

I defined the Financial Logos as the speech act of financial risk mathematical models.

Ten years after the crisis, I argue that the Financial Logos continues to speak and to produce dangerous speech acts for the global financial system.









(source : presentation at the Kedge conference « Debunking Economics and reconsider Finance », 11/10/2017)

I hypothesize that this speech act contains a specific representation of risk, based on coninuity. In my paper, I use a performativity-based approach to describe the concrete action of the financial Logos on financial practices: the framing of financial decision-making by risk modelling. I argue that it is not possible to think of a given financial practice and financial regulation without epistemologically and sociologically thinking of the contribution of the mathematical modelling to this practice and this regulation.

The speech acts of financial risk mathematical models means that the financial real world is provoked by the financial Logos. The enactement of financier professionals follows the Logos roles and the “performance” of a financier professional is a theatrical performance.

For example, when one talks about the performance of a fund manager, it is possible to understand the word “performance” in two ways:

  1. Firstly, the performance measurement of the manager, using some specific techniques such as Sharpe ratio, risk-adjusted CAPM-based analysis etc., searching for the detection of what is due to skill and what is due to luck.
  2. Secondly a theatrical representation of the fund manager who performs (plays) his professionalism by using the tools described in the model of performance measurement. By performing his talent, the fund manager brings into existence the Sharpe’s CAPM.

The speech act of the Sharpe’s CAPM is the professionalism of the fund manager. In this sense, I argue that the CAPM speaks and what it speaks happens. The risk models are primary blocks of financial market building.

At the end (« Financial Logos« , p. 693), I recall a relevant Pierre Duhem’s 1893 warning, particularly lightening in the case of finance, and particularly lightened by the performativity approach of mathematical modelling in finance:

To industrialists who do not care about the correctness of a formula provided it is convenient, we recall that the simple, but false equation, it is sooner or later, by an unexpected contrast of logic, the company that fails, the dam that bursts, the bridge that collapses, it’s financial ruin, when this is not the disaster that mowing lives.

Two consequences from this analysis for ethics of finance ten years after the crisis:

  • The financial ethics needs to move to a postpositivistic stage: to move from « values » to « models »
  • The business ethics has to be completed with epistemic ethics: the epistemological analysis of risk models

Any diagnostic of the crisis has to take account of the speech acts of financial risk mathematical models.

Christian Walter

Actuaire agrégé, chercheur en philosophie et sciences sociales, spécialiste de la finance / Fully qualified actuary, my research activities relate to financial modelling, history of financial thought, epistemology of finance and ethics of finance.

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