Decision-making

ECSA is approaching decision-making, and thus human behavior and subjectivity, in a different way than usual in economics, game-theory and finance. The roots of the decision-making model in finance lie in the axiomization of expected utility in Von Neumann and Morgenstern’s A Theory of Games and Economic Behavior, which relied upon lotteries to differentiate between the strength of preferences (i.e., the quantitative measurement of desires) and beliefs about the likelihood of outcomes. Since this was in the first chapter of a book that would provide the formal foundations for game theory, expected utility theory and game theory became the way to analyze human action. In the hands of e.g. Donald Davidson, it would provide the framework for his work in the philosophy of action and language (the “belief-desire” model now dominant in the analytic philosophy of action) and in the hands of John Rawls and Robert Nozick, it would frame contemporary discussions in moral philosophy – with Rawls providing the liberal side of neoliberalism and Nozick its libertarian counterpart. It’s hard to overestimate Rawls’ and Nozick’s influence in defining the parameters of moral theory to this day; Rawls provided the now classic argument for distributive justice while Nozick made libertarian thought philosophically acceptable. The game theoretic model becomes “decision-making under uncertainty” in economics and finance, and expected utility theory is a fundamental presupposition of portfolio theory and most of finance; indeed, early portfolio was cluttered with “indifference curves” and “interpersonal comparisons of utility” until the development of the Capital Asset Pricing Model (CAPM), which demonstrated that with a small set of assumptions, everyone would pick the same portfolio, i.e., the market portfolio, and one could jettison indifference curves. Binomial trees, perhaps the most popular way of pricing options, are usually interpreted as “decision-trees”, reinforcing the notion that market-making could be analyzed by a decision-making model. However, there is also a different tradition of thinking about decision-making and human action. It includes "thinking" that is driven by affect and emotions, pointing to a different model of subjectivity than "punctual decision-making under uncertainty". It is present for example in Henri Bergson’s discussion of qualitative magnitudes and the pre-quantitative modulation of intensities in affects, feelings, and emotions, where a very different model emerges – speaking of affects and feelings as acting like waves, “swamping” or “carrying us away” in their turbulence. The basic model for affects is what Mihaly Csikzentmihalyi has called “flow”. This "flow" tradition, that can be traced back to Spinoza, is that affect and emotions are "wave-like" and flow is an affective "peak" experience of effortless concentration in which one loses sense of time. Bergson, for example, insists that subjective experience is mediated by time in the form of duration – the flow of time from the present to the past and future. This differs from the "empty, homogenous" time of mathematics and science, in which all events are supposed to take place. In linguistics, calendar time is contrasted to indexical time, i.e., tense in the form of past, present, and future. Temporal reference shifts with every event of speaking, and is logically intensional, as are verbs of thinking, feeling, and speaking and modality (necessity and possibility). Logic, mathematics, and science are logically extensional which means that substitution of identities doesn't change truth value. But we could say, in a language that Bergson wouldn't have used, that in fact subjectivity and indexicality are both logically intensional. If we combine the intensionality of intentionality with the intensionality of indexical time, we provide intentional states with an intensional temporal dynamic; the indexicality of time in the form of duration (the flow time from past to present and future and vice versa) provides the dynamics for subjectivity – represented in verbs of thinking, feeling, and speaking. We start to see a path starting with everything being in motion and having a basic volatility, which is then transformed into "images" by perception that are made interpretable and meaningful by the passage of time, especially memory. Resonance represents the sympathetic alignment of subjectivities, which are stimulated by mutual "intunement". Because for Bergson all matter is in motion and vibrating, it's not hard to see him as providing an account of subjectivity that is compatible with volatility. We think “rational decision-making under uncertainty” is far too narrow and restricted framework to understand and model our behavior, and it must be exploded to include wave-properties of the flow-model of affect that interacts with the decision-making model in situations such as this following discussion of market-making by Elie Ayache (2008: 36-37): “Through the dynamic delta-hedging and the anxiety that it generates (Will I execute it right? When to rebalance it, etc.), the market-maker penetrated the market. He penetrated its volatility and he could now feel it in his guts. In a word, he became a dynamic trader. He now understood – not conceptually, but through his senses, through his body – the inexorability of time decay, the pains and joys of convexity”. “Delta-hedging,” “time decay,” and “convexity” are technical terms that refer to different aspects of the Black-Scholes formula for pricing options, which presupposes all the apparatus of von-Neumann-Morgenstern expected utility theory. In the act of trading each of these quantitative terms are associated with particular affects – “anxiety,” “inexorability,” “pains and joys” – that are felt by the trader “in his guts.” Trading brings together a quantitative dimension compatible with the expected utility and decision theory and a qualitative dimension that is more describable in terms of the ebb and flow (“modulation”) of affective intensities rather than any form of decision-making. Ayache’s description portrays market-making not in terms of rational decision-making, but in affective terms that would fit extreme sports, a not surprising choice, as traders often describe trading as “surfing the volatility wave.” Trading is less like a decision-making process than a “flow experience” that is shared among expert practitioners such as musicians, dancers, athletes, and traders. In this ethnographic description by Caitlin Zaloom of open outcry in the pits of the Chicago Commodities Exchange, moments of decision-making “ride” upon the ebb and flow of socially shared affects (Out of the Pits, 2006:135): “Traders speak of their best trading moments in ways that make them sound like mystical engagements. They need to abandon self-consciousness to gain full access to the market’s interior and use discipline to block outside contexts from their conscious thoughts and to enhance their abilities to read, interpret, and ultimately merge with the market. Traders often speak of being “in the zone” or of a “flow” experience. In the zone, economic judgments and actions seem to come without effort from the instincts of the trader. The market and the trader merge, giving him special access to the natural rhythms of financial fluctuations.” Our wager is that the economic space protocol turns the individual punctual event of decision-making more into an experience of an aggregate behavior that "flows." See Economic intellect.