Monday, January 24, 2011

Gleadall, The Metaphysics of Markets

Simon S. Gleadall, a former professional derivatives trader, raises some important questions in The Metaphysics of Markets (2010; available through Lulu). Let’s look at two. Do derivatives exist? What does it mean to place a value on financial instruments?

Initially the first question might appear outright silly because since derivatives are traded, surely they exist. Moreover, we know what they are: they are instruments that derive their value from some underlying asset. Gleadall argues, however, that this definition is inadequate. For one thing, the price of a spot product can become derivative to that of its alleged derivative. Consider the example of a market in a stock or a future that gets pinned around the strike of an option.

Gleadall suggests that “derivatives ought to be considered not so much as a product set but as a concept. Derivativeness might be more apposite than derivative.” It might be viewed as akin to property, which is not an object but “a series of rights and powers over objects.” (p. 61) As the author concludes, considering the extraordinary power of derivatives, the fact that their true nature remains elusive is disquieting.

Second, Gleadall tackles the problem of valuation methods. Invoking Kant, he contends that “true knowledge of valuation could well be not merely practically unattainable but a priori theoretically inaccessible. … [B]ankers all too often forget that their trading in assets because they are ‘mis-valued’ is an act of faith. Their valuation is a subjective impression of what is quite likely an unknowable or even non-existent true objective value. Nothing more.” (p. 70) He shows how the ignorance of value plays out in the real world when competing traders, whose positions are equal and opposite in terms of inventory, can both be awarded bonuses because their profitability is “valued” using their own models.

The Metaphysics of Markets is a significant first stab at dealing with a wide range of philosophical problems that beset the understanding of financial markets—ontological, epistemological, and ethical. It’s not a polished book: it could definitely have benefited from a good editor. But it introduces themes that are all too often ignored in the analysis of markets. Moreover, it sounds a clarion call to “formally establish the Philosophy of Finance as a stand-alone academic subject.” (p. 202) It’s a book I’m glad to have.

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