Are Financial Markets Organizations or Chaos?

marketsOrganizational Behavior and Financial Markets

By Holly A. Bell

In March I published an article in the journal Insights to a Changing World titled, “Efficient Financial Markets as Organizations: A Metaphoric Analysis”. The purpose of the article was to explore efficient financial markets from the perspective of organizational behavior. The purpose was not to establish patterns of behavior specifically, but to determine if the U.S. financial market shared the behavioral characteristics of other organizations or if it simply had non-ergodic qualities and acted in a chaotic manner. It was kind of a behavioral mental mapping exercise for me as I was working on another article that attempts to explain market volatility that will be published in another journal in the fall of 2012.

The premise was that if markets are informationally efficient (as has been empirically proven), there must be some form of organizational structure; otherwise there would be chaos, not efficiency. The conclusion was that markets do, by structure and definition, share characteristics of decentralized, dynamic network organizations. However, the more interesting conclusion is that markets share the behavioral characteristics of other organizations. The behaviors explored were Gareth Morgan’s metaphorical organizational behaviors described in his book Images of Organization. While the limited length of the paper only allowed exploration of the metaphorical behavioral characteristics of financial organizations as machines, brains, and flux and transformation, arguments could also be made for financial organizations as organisms, cultures, political systems, psychic prisons, and instruments of domination.

So why should you care that financial markets share organizational behavior characteristics with other organizations? It means that markets are inherently understandable, at least from a behavioral perspective, and can be monitored to assess risk and recognize potential behavioral changes that might indicate a threat to market stability. Yet many of the current tools utilized to understand financial markets are based on very intrinsic, rationality driven economic theories involving data analysis to ensure full reflection of available information and to minimize behavioral influences. Not much attention is given to environmental factors or the quasi-rational behavior of individuals within the financial market. Attempts have been made to remove human judgment and sentiment as much as possible with computerized systems and monetary and fiscal policies designed to minimize uncertainty. However, removing the behavioral analysis from the study of financial markets might contribute to the lack of understanding and mystic or non-ergodic qualities some apply to the market. A holistic approach incorporating organizational behavior might increase understanding and allow new patterns to emerge from the chaos.

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