What if We Had Been in Charge? The Sociologist as Builder of Rational Institutions

Abstract

In this postscript, I argue that a sociological approach to regulating securities markets requires a clear stance on the relationship between price and value, one that combines (a) the contrarian thesis that there are objective criteria by which one can assess value more accurately than the current market price; (b) the constructionist thesis that prices are governed by commonly known beliefs that can vary substantially from the objective reality they purport to reflect; and (c) the realist thesis that the market comprises powerful mechanisms (arbitrage and learning) that, when working properly, close the gap between the contrarian's private belief and common knowledge, thus producing reasonable prices. This integrated “rationalist” perspective understands the real estate bubble as the product of institutional conditions that fostered pluralistic ignorance regarding the extent of bearish sentiment. Regulatory prescriptions focus on support for transparent pricing and a relative evenhandedness in the institutional support provided for bulls/optimists and bears/pessimists.