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Contemporary finance as a critical cognitive niche

An epistemological outlook on the uncertain effects of contrasting uncertainty

Abstract

Cognitive niche construction theory provides a new comprehensive account for the development of human cultural and social organization with respect to the management of their environment. Cognitive niche construction can be seen as a way of lessening complexity and unpredictability of a given environment. In this paper, we are going to analyze economic systems as highly technological cognitive niches, and individuate a link between cognitive niche construction, unpredictability and a particular kind of economic crises.

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Notes

  1. That is, assuming there is no accident, no highjacking, no passenger activates the emergency break, no excessive and unjustified delay, etc.

  2. Jurassic Park can almost be considered as a biogenetic thought experiment, given the amount of scientific explanation Michael Crichton embedded in the book. Indeed, by the figure of the cynical mathematician Ian Malcom, played by Jeff Goldblum in the movie, Crichton greatly popularized chaos theory among laypeople.

  3. This perspective has generated some controversies, since the extent to which modifications count as niche-construction, thus entering the evolutionary scene, is not clear. The main objection regards how far individual or even collective actions can really have ecological effects, whether they are integrated or merely aggregated changes. On this point, see Sterelny (2005) and the more critical view held by Dawkins (2004). For a reply to these objections, see Laland et al. (2005).

  4. The evolutionary approach usually focuses on micro-economics, but one of the values of cognitive niche theory is that cognitive niches can be overlapping, coextensive and included one into the other—think of some major, foundational niches such as language (Clark 2005).

  5. In human reasoning, especially of the premise-conclusion sort, it is comparatively rare that the standards of deductive validity or statistico-experimental inductive strength are actually met. Accordingly, new standards for the so-called ‘third way’ reasoning (Woods 2013, chapter seven) should be found as a mixture of nonmonotonic, default, ceteris paribus, agenda-relevant, inconsistency-adaptive, abductive reasonings, for which neither standard deductive validity nor inductive strength are a good rule of assessment. The best recourse involves a significant restructuring of the varying provisions of families of nonmonotonic logics, crucially including the logic of abduction. Most ‘right’ reasoning is third-way reasoning, which owes its rightness to the meeting of requirements other than deductive validity (or inductive strength) (Magnani 2015b, p. 16).

  6. The notion of Terminator Niche is obviously modeled upon 1984 sci-fi action blockbuster The Terminator, in which Skynet, an AI system originally engineered to protect human beings from nuclear warfare, perceives humans as a threat and attacks first, causing nuclear holocaust and then building androids (“Terminators”) to hunt down remaining humans.

  7. This aspect will be examined further on about the emergence of contemporary finance as a terminator niche. As cognitive niches acquire also a moral value as orthodoxies, we can expect a violent reaction against those who suggest safer alternatives just because they are alternatives (Magnani 2011).

  8. For specific events (for instance a roulette table) we can calculate the probability of the outcome. Conversely for others—such as catastrophes and other events, which have been often used as the underlying of many derivatives instruments—we just cannot measure the probability of the outcome. “Amongst financial institutions themselves, financial products such as derivatives and credit default swaps were developed to reduce uncertainty, although in aggregate the effect turned out to be the increase in uncertainty on the onset of crisis” (Dow 2015, p. 40). Indeed John Maynard Keynes himself, in his “Treatise on probability” (Keynes 1921), neglected the possibility to build up a theory of expectations, even with help of probability calculus.

  9. Here understood as a pragmatic result. It depends on how you define uncertainty, an issue reinforcing the plea for a deeper epistemological analysis of economics. If we use the Knightian definition of uncertainty (Knight 1921) uncertainty is an “estimate”: a situation where the decision maker does not know the frequency distribution of the outcomes of a series of instances either because these instances are not homogeneous hence they cannot be grouped, or because historical data are not useful to predict the future. Often subjectivist theorists probability corresponds to the so-called “degree of belief” in a given proposition or event. (e.g. Savage, Lucas) have interpreted Knightian uncertainty as a lack of confidence in the likelihood of the occurrence of an event.

  10. We are talking about dismantling a cognitive niche. History shows that, in order to break the resilience of a cognitive niche, significant impetus is required: for instance, massive invasions, cataclysms and similar things.

  11. This extreme example shows how popular was the BSM model and related formula. Sholes and Merton, who shared the nobel prize for “new methods to determine the value of derivatives,” were appointed in the board of director of a hedge fund management firm. This also confirms our contention about economists playing a crucial role in gate-keeping the construction of the cognitive niche.

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Acknowledgments

We would like to thank Giovanna Magnani for her commitment and patience in explaining many details of economic theories and for making sure that the epistemological outlook made sense within an economical discourse. We also express our gratitude towards the two anonymous referees: the final form of this paper and the robustness of the argumentation is significantly indebted towards their knowledgeable comments and constructive criticism.

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Correspondence to Tommaso Bertolotti.

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Bertolotti, T., Magnani, L. Contemporary finance as a critical cognitive niche. Mind Soc 14, 273–293 (2015). https://doi.org/10.1007/s11299-015-0179-7

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Keywords

  • Cognitive niche construction
  • Technology
  • Financial crisis
  • Unpredictability