The Social Dynamics and Mechanisms in the Operation of Wall Street

Abolafia makes it clear in his writings that bond traders on Wall Street create their own version of economic behavior. Self-centeredness on the trading floor is defined as opportunism, and what is normally rationality appears to be hyper-rationality. These two strategies employed by bond traders define how they behave in an economically rational way. Abolafia writes that economists have increasingly recognized that “rationality is not a simple fact of nature” (Abolafia 1996, pg. 22). In a typical economic man, he writes, one uses “fully ordered preferences, immaculate computing power, and perfect information” (Abolafia 1996, pg. 23). What was once the ideal type of rationality has now been replaced by forms of bounded rationality such as cognitive biases and rational foolishness. Rational calculation is often replaced by these biases and heuristics due to the fact that people don’t behave as perfect rational maximizers, and there are cognitive limits to how much information one can truly analyze during the trading process. Sociologists began to explain economic behavior in terms of the four major mechanisms outlined by Dobbin; institution, power, network, and cognition. In this paper I will use these four concepts of sociological mechanisms laid out by Frank Dobbin in his writings to evaluate the use of hyper-rationality in bond traders on Wall Street.

Bond traders display a form of bounded rationality as mentioned before, that may be referred to as hyper-rationality. These types of bond traders are those that make the most of analytical methods while still incorporating factors of instinctive judgement in the decision-making process. Hyper-rationality is shown in behaviors or ritualized customs used in the trading period. The most important factors in this behavior of hyper-rationality rely on context-dependent versions of vigilance and their own instinctive judgement. Sociology adds social institutions that are scripts which define behavior that are tied to social roles. Those scripts are called conventions at the collective level and cognitive schemas at the individual level (Dobbin 2004, pg. 4).

Sociologists use institutions as a way to explain how human behavior is shaped. These institutions are conventions, customs, and norms that are enforced by laws, rules, and tradition that provides a broader logic for understanding the world around us and justify one’s actions. The practice of hyper-rationality strategies in bond traders is an example of an institution. Bond trading is unpredictable and can change at any time, and because of this the trading of bonds is connected in practice and in the minds of bond traders on Wall Street. Based on Dobbin’s concept of institutions, they persist because they create a structure of tendencies which guide behavior and come to make sense to individuals. Hyper-rationality is an institution on Wall Street because it is a tradition of vigilance in analyzing large amounts of data while also using personal intuition to make trades. Abolafia writes, “Recruits to the trading floor seeking extraordinary wealth do not arrive on Wall Street and create the world anew” (Abolafia 1996, pg. 28). A new trader must be exposed to the continued use of strategies of more senior traders on the floor and learn the norms of hyper-rationality that define the behavior of more experienced traders on Wall Street. This institution helps to explain the use of hyper-rationality on Wall Street because it shows how a trader’s comprehension of traditional trading customs has become a standard format for successful bond trading. They survive until challenged.

Next, we take a look at networks in the bond market. The theory of network is defined by the idea that social location influences personality and behavior. A person’s network shapes how they conduct themselves and their understanding of how individuals in other roles in the same social location should behave. Social networks carry new ideas and information and are enforced by social norms. Hyper-rationalism in bond traders is an example of this concept of a network. During a novice trader’s internship, these new recruits learn which indicators and methods of assessment are most traditionally valued on Wall Street. Hyper-rationality entails handling continuous information overload using the traditional principle of vigilance as described in the paragraph on institutions, requiring them to be agile and incredibly focused. Hyper-rationality in bond traders helps them to make appropriate decisions about how to behave based on their social position, like fulfilling their promise to sell bonds at a particular price in the market to combat institutional norms such as opportunistic behavior of self-centered deception.

Most information about bond traders is learned through social networks. Through these networks, bond traders are able to search for and assimilate a wide range of information that one believes may be useful in their decision making. Trading flows are consistently overwhelmed by economic indicators and the translations of those indicators. Bond traders learn their daily routine of the job from the occupational network and are then associated with a network and its routines. Bond traders display interpersonal networks which offer behavioral scripts or conventions. These networks also suggest that bond traders should strive for autonomy, as self-interest runs rampant on Wall Street. Networks convey cultural systems so that the conventions of empowerment are delivered with a new model for human inspiration.

The third mechanism described by Dobbin is power. Power influences the evolution of new traditions, when an influential person in the bond market approves the behavior of others and when they influence legal institutions. Power is viewed “as the ability to shape how others view the world and their own interests” (Dobbin 2004, pg. 6). Hyper-rationality therefore is an example of power. Bond traders continuously participate in a consistent and antagonizing search of print, electronic, and interpersonal information sources. Abolafia writes, “There is a sense that indicators must be assessed because they are available” (Abolafia 1996, pg. 23). Every indicator they evaluate signifies a possible resource for decreasing the uncertainty involved in important purchases or sales of bonds. Hyper-rationality in bond traders is occasionally attributed to checking, sorting, and a rush to indicate value.

Since the beginning of capitalism, prosperous entrepreneurs have been the ones in a position to instruct others on the best way to run a business. Success in the bond market gives powerful traders the ability to define what can be considered as rational behavior, and economic authority coincides with political influence and how they can conduct themselves. As is implied in this paper, bond trading is an incredibly competitive line of work to be in and involves intense price lobbying. Power shapes public policies that regulate competition amongst companies as well as the pricing customs of companies. This type of power over economic customs functions through industry networks, political networks, and professional networks which shape the frameworks for new business approaches. Based on these networks, bond traders follow consistent behaviors set by powerful individuals that are successful in trading floors.

Moving on to the final mechanism defined by Dobbin, we examine cognition. At the personal level it is the carrier of traditions, offering schemas through which people make sense of conventions and a way to challenge them. Cognition is used to define the process of making sense of the world around us as well as its social conventions. As stated by Dobbin, “the human mind is programmed to develop categories, casual frameworks, and maps of the world” (Dobbin 2004, pg. 6). Hyper-rationality as a practice is an example of cognition as a sociological mechanism. Bond traders share a culture which influences personal cognitive designs, and in cognition behavior can be directly traced to human nature and instinct. Traders are by nature calculating, convincing, and even somewhat systematic. Bond trading is explained using mathematical formulas that in the end show how self-interests are formed. It is an industry which illustrates how social structures develop to permit people to seek self-interest. Despite this they do not change human characters, but instead trigger them. This shows that economic behavior is further defined by tradition rather than biology. Many of the techniques employed by traders are learned instead of one’s mind being innately programmed to develop these techniques themselves. The degree to which behavior is instructed instead of being generic differs in people, and bond traders are no exception. In addition, cognitive theory provides insight into the history of hundreds of thousands of trades, which help turn interpretations of indicators into predictions. When people are exposed to different scenarios, they take in information which they can use to make decisions.

In conclusion, Abolafia discussed the social dynamics involved in the day-to-day operations of Wall Street, examining the fact that the bond markets are not spontaneously created by exchange activities. Economic behavior is shaped by outside forces of society and those around you, instead of innate human behaviors. Hyper-rationality is a result of many factors, which relate to the four mechanisms outlined by Dobbin in his sociological view of the economy.