Post-crisis risk models internalized social imitation as a financial risk factor.

Evidence

JWM Partners’ revised risk model thus incorporates the possibility that an imitative, overlapping arbitrage “superportfolio” will again come into being, and that its unwinding will not merely exacerbate a crisis but will even override the “flight to quality” that typically accompanies crisis. The new risk model was informed by the experience of LTCM’s 1998 crisis, not by economic sociology or by the social studies of finance, but it is an acknowledgement of the social, imitative aspect of financial risk. — Donald MacKenzie, An Engine, Not a Camera, 1231

Categorization

• XREF: This is a concrete instantiation of the book’s performativity thesis: a model shaped by a sociological understanding of markets, even if derived from experience rather than sociology proper. — connects to: Imitation-based microstructure can defeat the risk reduction promised by diversification — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1089; Self-reflexive trust generates extra motivation as risk increases — Niklas Luhmann, Trust and Power, 260; Post-investment opportunism exploits sunk asset and verification costs. — Diego Gambetta, Trust - Making and Breaking Cooperative…, 2540 (+1 more)
• SEED: Angle: how practitioners absorb social-science insights without ever reading sociology — the ‘underground sociology’ of post-crisis risk models.

Broader Connections

• Self-reflexive trust generates extra motivation as risk increases #corroborates (0.72) — Niklas Luhmann, Trust and Power, 260
• Post-investment opportunism exploits sunk asset and verification costs. #expands (0.72) — Diego Gambetta, Trust - Making and Breaking Cooperative…, 2540
• Digital economic incentives reward manic, bridge-burning behavior during crises #exemplifies (0.72) — Naomi Klein, Doppelganger, 343