The truth of value as practice in the financial industry

For some forty years, in a very diverse set of jurisdictions around the world, financial regulation has given the financial industry a central role in the distribution of money, taking as a reference the financial theory standardized after World War II. According to this conceptual framework, when independent investors use the cognitive tools developed in standard financial theory, they contribute to achieving market efficiency. Prices reflect the true value of traded assets and serve as signals for a socially optimal allocation of resources. Financial regulation distinguishes the category of qualified thought leadership investors, essentially employees of the financial industry who have been so designated based on their knowledge of financial theory and the means they have to apply it. Regulation establishes thus that the optimal allocation of money should be the result of these investors meeting in efficient markets within the financial industry.

As we have seen, this theory is the product of an intellectual history that assembles several ontologies and epistemologies that are more or less disconnected or contradictory. It mobilizes both a subjectivist epistemology, based on the freedom of the valuating gaze, and an objectivist epistemology, where the truth of the price is imposed on these subjects either as a social construct in a market or as a phenomenon of nature that is defined in relation to the rules of statistics. This theory gives the state a central role in determining of the standard of all value while also establishing that it should play no role in decisions about the distribution of money beyond guaranteeing a minimum revenue to the figure of the investor. The theory also implies using other sources of data, with their own ontologies and epistemologies, that are considered to provide legitimate information because they are the product of legitimate technical expertise, which is the only methodological corpus with which valuation is possible.

This theory is used to define the tasks of employees, specialized in different ways to define the value of assets and invest in them. The activities of valuation and investment are the product of salaried jobs in a commercial network of companies. The theory is part of career trajectories that occur through relations of hierarchy, cooperation, and competition within and between companies. In this process, the formulas and lines of reasoning of financial theory are considered the best tools for representing the interests of the legal owners of the money managed by financial employees. The increase in income, wages, and bonuses is supposed to reward the skillful application of the procedures of valuation and investment.

In these practices, employees must see themselves as bearing the investor’s gaze and as facing efficient markets. This places them in a tension in which the individual valuation of the investor is necessary to achieve market efficiency but becomes superfluous once that efficiency is reached. This tension becomes a contradiction when efficiency is both negated and asserted in the same formulas or in the same valuation or investment procedures.

Depending on their specialization, employees assemble in different ways the three definitions of financial value—fundamental, relative, and speculative—which are at the same time interdependent and opposed to each other; in addition, each of them contains its own different tensions and contradictions. On the one hand, employees express opinions on value that are supposed to be personal and to imply their conviction, their sincerity, their beliefs, or even their passion—something they do with different emotional relations to their work, whether attachment, rejection, ambivalence, or indifference. On the other hand, the procedures they follow presuppose the efficiency of markets. Procedures like the classical investment method thus ask employees to use their personal opinions to beat the indexes that are used based on the presupposition of market efficiency.

In this setting, financial value is defined by the future monetary gains of the owners of money. The idea that this value has a truth is based on the presupposition that this truth is revealed in prices resulting from investors’ exchanges in efficient markets. Recognizing themselves as the experts who apply this figure of the investor, employees can consider, as financial regulation does, that their professional space is where the efficient markets they presuppose in their procedures are realized. When procedures are applied correctly, the prices they lead to are seen as proof that this value and its truth are revealed and that the social effects of this valuation are legitimate. The financial industry is thus reasserted in everyday practice as the place where financial value is represented in a way that is true, so that this representation of value must be imposed on the rest of society as the signal leading to a socially optimal allocation of resources. The truth of value expressed in prices is thus considered to be both the result of a politically neutral technique and a standard of social justice in a political project instituted in financial regulation.

In order to give meaning to their practices, employees mobilize the political and moral references present in their methods. This is reinforced in situations considered crises, which are understood to call for justifications regarding the daily activity and the professional space of employees. This space is not the open arena where they meet to exchange as free and equal subjects, presupposed in liberal utopias, but rather an assemblage of companies, the entry to which requires mastering a method that is applied only in a salaried relation. Yet, it is by making reference to the political meanings of investor, efficient market, and value that these practices are justified for employees and, more importantly, for financial regulation and for those who accept its distributive effects.

There are many ways in which these lines of reasoning are challenged today within the financial industry. Here I mention three that have become increasingly important since I did the research on which this book is based. One concerns Islamic finance. As Rudnyckyj shows, Islamic finance is carried out as a global project by financial experts who combine the methods and lines of reasoning described in this book with religious precepts. They do so in order to expand their presence both within and outside the financial industry. They thus pose a challenge to the main financial imaginaries described in this book but can also appear as a new segment of the financial industry with which they are intimately connected.

Another development concerns the use of algorithms in investment and valuation. While algorithms are widely used in trading, they are also increasingly used as methods of valuation and investment. In this process, they may replace some of the professions that used to conduct these activities. This was, as we saw, Sébastien’s understanding of the impact of his software on investment management. But algorithms may also be used to change the lines of reasoning of valuation and investment methods, connecting financial data to other forms of data in statistical relations that are possible only for machines with high computing capabilities. Some companies are specializing in this approach, which tends to attribute to valuation and investment a new form of legitimacy, that of digitization and machine learning. Finally, another challenge is posed by the development of the Chinese financial industry. Its financial regulation enforces the methods and lines of reasoning, but financial companies are mainly state owned, and their explicit aim is to contribute to a nationally oriented state policy under the control of the Chinese Communist Party.