The sociology of markets is an important yet largely unexamined issue for financial market participants. By sociology, we mean the role of financial institutions in asset price setting. Traditional finance theory posits that investors directly buy assets in the market, with the relationship between risk and return guiding their decisions. A sociological examination moves beyond this narrow focus and asks whether the rise and fall of financial institutions, and their associated incentives, has an impact on asset prices.
This report has three parts. First, we ask whether financial institutions matter. The theoretical answer is no but the practical answer is yes. Second, we explore three case studies that show how institutions matter. Finally, we consider where we might go from here—that is, where the money flows are, what the incentives look like, and what those two drivers may mean for asset prices.
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