Black and Scholes doubted CAPM’s accuracy while building their model on it

Evidence

Similar ambivalence the capacity both to be committed to a model and, simultaneously, to doubt the extent of its empirical validity can be found in regard to more specific models. Black and Scholes, for example, drew crucially on the Capital Asset Pricing Model. However, they also knew (indeed, they had themselves showed in their collaboration with Jensen) that the empirical accuracy of the model, at least in its original form, was questionable, and they were involved in the proposal discussed in chapter 4 for an investment fund that would exploit this. — Donald MacKenzie, An Engine, Not a Camera, 1116

Categorization

• XREF: Connects to the performativity thesis’s core tension: model-builders both believing and doubting their tools parallels the ambivalence central to Mackenzie’s argument throughout. — connects to: Black and Scholes priced options via CAPM while Thorp sought arbitrage without it — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 141; The CAPM was embraced in Chicago but regarded skeptically at MIT — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 587; Early CAPM believers later turned against it through theoretical work — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 402 (+1 more)

Broader Connections

• Deriving the Black-Scholes equation required invoking CAPM’s riskless-rate logic. #expands (0.95) — Donald MacKenzie, An Engine, Not a Camera, 581