Understanding performativity

Performativity broadly describes the social process by which an utterance, inscription, model, etc., possesses the capacity to influence the world that it intends to describe. The linguistic philosopher J. L. Austin coined this term in the context of a "performative utterance" to distinguish expressions that do something from those that report on an already-existing state of affairs.

Performative utterances are those words that change or alter the state of the world. For example, "I now pronounce you man and wife" spoken by an ordained minister transforms "bride" and "groom" into "husband" and "wife," not only symbolically but also in social reality in terms of cultural and religious recognition, treatment by the law, and modifications to taxation and household finances, to name just a few.

When an economic model describing, for example, market efficiency or how to price some asset makes its way into the world, it has the force to change those structures such that the market begins to fit the model instead of the model passively portraying the market. Economic sociologist

Donald MacKenzie proposes three manners of economic performativity, with the strongest and most interesting type referred to as "Barnesian" (after the sociologist and technology scholar Barry Barnes). In Barnesian performativity, "the practical use of an aspect of economics makes economic processes more like their depiction by economics."

This idea stands in contrast to the model-making done by researchers in the natural sciences. To use the formulas of Newtonian physics does not in any meaningful way influence the behavior of gravity on massive bodies, nor does the widespread use of the laws of thermodynamics change any practical measure of entropy.  Economics (as well as the other social sciences) is different in that what it "measures" does not exist outside of society—there is no economy to study if there is nobody producing, consuming, borrowing, or investing.

One well-researched example of an economic model becoming performative is the Black-Scholes-Merton (BSM) model for pricing options contracts, which rationalized the derivatives markets in Chicago when it was introduced to traders in the 1970s an '80s.

Equipped with this particular equation, calculated by computer servers and inscribed as "theoretical" prices on paper sheets or terminal screens, options traders were changed from carrying out what amounted to educated guesswork when pricing and trading options into calculative arbitrageurs, buying up options contracts when they were priced too low and selling them where they were priced too dear.

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