Black and Scholes priced options via CAPM while Thorp sought arbitrage without it

Evidence

Finding a satisfactory solution to the problem of option pricing turned out to be harder than it looked. In chapter 5 the development of the eventually successful solution by Fischer Black and Myron Scholes is contrasted with the work of Edward Thorp, a mathematician famous for showing how to beat the house at blackjack by “card counting” (that is, keeping a careful, systematic mental record of the cards that have been played). Black and Scholes were trying to solve a theoretical problem by applying the Capital Asset Pricing Model; Thorp was working on option pricing without use of the CAPM, and his chief goal was identifying arbitrage opportunities. — Donald MacKenzie, An Engine, Not a Camera, 141

Categorization

• XREF: The CAPM-vs-arbitrage contrast foreshadows how different theoretical commitments produce different models — central to the performativity thesis about models shaping markets differently. — connects to: Deriving the Black-Scholes equation required invoking CAPM’s riskless-rate logic. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 581; Black and Scholes doubted CAPM’s accuracy while building their model on it — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1116; The arbitrage argument produces the Black-Scholes partial differential equation. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 95 (+3 more)

Broader Connections

• Deriving the Black-Scholes equation required invoking CAPM’s riskless-rate logic. #corroborates (0.92) — Donald MacKenzie, An Engine, Not a Camera, 581
• The arbitrage argument produces the Black-Scholes partial differential equation. #expands (0.88) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 95
• Black and Scholes doubted CAPM’s accuracy while building their model on it #complicates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1116