Black-Scholes legitimized options despite fitting prices only approximately

Evidence

That the theoretical work of Black and Scholes could effectively be deployed to defend options’ legitimacy did not, however, mean that the theory was adequate as an empirical description of prices. As we saw in chapter 5, when Black and Scholes tested their formula against prices in the ad hoc New York options market, they found only approximate agreement (Black and Scholes 1972). — Donald MacKenzie, An Engine, Not a Camera, 707

Categorization

• DEEPTHINKING: The crux of performativity: a model can be socially transformative while being empirically imperfect — legitimacy and descriptive accuracy diverge.
• XREF: connects to: The Black-Scholes equation’s assumption of known underlying prices failed on NASDAQ’s dealer structure. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 130; Options pricing theory grew despite options being a minor financial instrument — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 530; Black-Scholes-Merton pricing fit observed options data only approximately at launch. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 625 (+8 more)

Broader Connections

• The Black-Scholes theory reframed options trading as legitimate efficient pricing rather than gambling. #expands (0.95)
• Convertible bonds traded at prices inconsistent with Black-Scholes option valuations #exemplifies (0.92) — Donald MacKenzie, An Engine, Not a Camera, 967
• Index option prices embed a skew that actual price movements do not justify #exemplifies (0.92) — Donald MacKenzie, An Engine, Not a Camera, 911
• Efficient-markets and random-walk theory legitimized options against their scandalous reputation. #contradicts (0.85) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 62
• Organized options trading alone could explain post-model price convergence to Black-Scholes #qualifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1153