chapter  9
17 Pages

Crisis, what crisis?

Uncertainty, risk, and financial markets 1
WithStephen C. Nelson, Peter J. Katzenstein

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The outbreak of the crisis of 2008 reminds us that financial markets are domains characterized by measurable risks as well as by unquantifiable uncertainties – a point that was often elided in the run-up to the crisis. How do sophisticated financial market players and regulators cope in environments rife with risks and uncertainties? In this chapter we emphasize the centrality of ‘Knightian’ uncertainty for the analysis of financial markets, and, further, we illustrate how the social ordering of finance is shaped by social conventions employed by agents to (contingently) stabilize an unstable and uncertain domain. The chapter begins by providing a brief conceptual clarification of risk and uncertainty, before turning to the role of conventions for minimizing future uncertainty. In contrast to large parts of the literature in International Political Economy and International Relations, we argue that social conventions not only play an important – and underappreciated – role for dealing with uncertainty and for stabilizing uncertain environments, but that they are also invoked as part of a social performance to create and sustain the given order. We substantiate our claims with illustrative evidence from domains both public (Central Banking) and private (Credit Rating Agencies).