The central argument in Beckert’s book (see previous blog post) is that modern capitalism systematically generates uncertainty, and even builds on uncertainty as opportunity, and that people deal with this uncertainty by means of creating, mobilizing and relying on fictions in order to be able to act in a reasonable way. I add the term ‘reasonable’ here, since I think that this aspect remains neglected in Beckert’s argument: The fictions are reasons given for taking certain actions, and therefore the fictions play an important role in constructing capitalism as a rational system. For example, business plans are reasons for justifying certain investment decisions, and the plans rely on other forecasts of markets to give additional evidence. Yet, as Beckert convincingly argues (and every serious economist should agree), all these activities in forecasting the future are in vain and mostly fail in the face of uncertainty. When judging business cycle forecasts ex post, researchers often conclude that tossing coins is not worse in accuracy. Thus, we face a paradox: Rationality and fictions are two sides of one coin.

This notion of rationality differs fundamentally from the notion that economics employs, and that is also maintained by behavioural economists. This notion is essentialist in the sense that it is conceived as a property that people have, even people’s brains. If brains cannot properly calculate probabilities, economists diagnose irrationality. But how should we deal with the phenomenon that a whole industry of forecasters constructs probabilities that cannot be justified as reflecting the fundamental fact of uncertainty? What should we do about the fact that economists teach students to apply probability calculus on investment decisions even though it is impossible to apply this calculus on real world decisions?

One thing is that we could argue that capitalism is a system in which rationality has become an ideology or even religion, in the exact sense that there are many activities that build on transcendental references (such as ‘the markets’), there are sacred spaces and places (such as central banks, CEO headquarters or Apple CEO performances) and many sacred items (such as luxury goods) which are combined into a belief system that drives individual actions without being justifiable by scientific reasoning. That might sound outrageous for economists (perhaps they are the priests of that religion?), but may be much more acceptable for sociologists and anthropologists as a way to account adequately for capitalism as a social formation.

In the context of INSOSCI, we do not need to deal with those ‘bigger’ issues, however. We can just ask how could we translate such views into a perspective on behaviour towards risk? I think that the social-intuitionist approach that we already used in the context of herding can be helpful again (as suggested and employed in the work of Lea Diederichsen). This view argues that rational arguments are ex post reasons given to justify decisions that were mainly taken on emotional grounds. More or less, this is Beckert’s view on investment decisions, as an example. Entrepreneurs develop emotional stances that drive their actions. Even on the individual level, they would need to construct reasons that justify their decisions, and even more so when they need to convince other investors when presenting a business plan. This is when uncertainty is translated into risk. One could argue that this is step necessary to develop rational action plans. Mr Elon Musk may be driven by strong emotions, but eventually he must adopt a business engineering approach that mostly follows rational design in order to be effective and efficient.

However, this also creates the conditions for the resurgence of emotions. There are two settings where this is salient. One is success. For example, success is a status phenomenon, because what counts in competition is whether you are better than others (which translates, for example, in investor’s confidence). As we know from neuroscience research, success creates emotional states which can in turn drive expectations in a certain direction, such as producing over-confidence. The other is failure. Failure also has emotional consequences. In sum, there is a cycle of states in which emotion-driven action creates needs for reasoning, and results from actions create emotions that in turn generate actions for which reasons need to be given. In other words, there is an oscillation between two types of individual states, which only in conjunction can explain behaviour.

This hypothesis could be very interesting when considering decisions that operate as sequences that happen within a very short time span, such as trading with stocks. How can we define ‘rationality’ in such a context? Obviously, individuals would need to develop psychological meta-constructs by which they become able to manage their oscillating states. In other words, rationality would not be a property of single decisions, but of those sequences and the behavioural stances that undergird them.

Turning back to Beckert, these behavioural stances may be sustained by fictions, in particular projections of identities, present and future. This leads our attention to individual behavioural disciplines, and even back to the issue of religion. We could even go back to Max Weber’s celebrated account of the rise of capitalism as expression of Calvinist beliefs. In this view, rationality is an emergent aspect of ‘Lebensführung’, conducting one’s life. I think that this is a line of thinking that could be very productive in understanding behaviour towards risk, especially when dealing with professionals.