Can Numbers Ensure Honesty? Unrealistic Expectations and the U.S. Accounting Scandal, Volume 50, Number 1

sense that they are mathematical (logical) projections of it. Like the other trading instruments I have described, then, derivatives and futures options are conflations of representation and exchange, for the representations of time and risk implicit in these trades create a purely notional trading environment whose only existence is electronic. Nevertheless, these electronic trades can have very real effects, as we have seen with the bankruptcies of Enron and WorldCom. When all of the financial instruments I have described are used together, as they typically are in sophisticated financial institutions, they mobilize both of the beliefs I have described: the belief that numbers are objective and true, and the belief that the market conforms to mathematically produced statistical probabilities. Thus executives at companies like Enron manipulated investors’ faith in future profits by backingin to earnings reports whose figures matched the numbers growth analysts supplied: they issued thousands of stock options to entice other executives to help pump up share prices, they used offbalance-sheet partnerships to book future profits as current gains and to keep debt off their books, trades can take several forms [20]. In the strategy called spread trading, for example, the trader buys one contract and sells another for the same commodity at the same time. Since one contract will typically make money and the other lose, the trader tries to get the spread, or the difference between the two contracts’ prices, to work in his favor. A derivatives trader can also hedge investments with a straddle, which enables the trader to buy a call (buy) and a put (sell) option on the same underlying investment at the same strike price, thus enhancing the probability that the trader will make money whether the price goes up or down. Or a trader can use a strangle, by buying a call and a put on the same underlying investment with different strike prices, each of which is far enough from the market price to make it statistically improbable that the option will be exercised. If someone does exercise an option the trader sold, the trader can then meet the ensuing obligation by exercising another option already purchased. Unlike all of the other financial instruments I have discussed, futures and derivatives options do not need to use representations about future or current earnings to make other investors believe and buy. As I have already argued, these other instruments have to inspire belief in investors because those investors’ purchases drive the price of shares up or down and thus enhance or deflate the value of one’s own shares and stock options. Even if futures and derivatives options do not depend upon inspiring belief in earnings figures, however, they do depend upon belief. Futures and derivatives trading depends upon the belief that the stock market behaves in a statistically predictable way, in other words, that mathematical equations accurately describe the market. Never mind that another set of numbers shows that these equations do not seem to work very well: these statistics reveal that between 75 percent and 90 percent of all futures traders lose money in any given year [20, p. 313]. Whatever the money lost or gained, the belief that the market is statistically predictable drives the mathematical refinement, and this belief inspires derivatives trading to escalate in volume every year.