Efficient-markets and random-walk theory legitimized options against their scandalous reputation.

Evidence

A key role in undermining this kind of opposition to options was played by economics. During the 1960s, price data and the computer power to analyze them came together with key conceptual innovations. Economists postulated that stock price movements could be modeled with reasonable accuracy as random walks and that the U.S. stock market was “efficient” (responded to all publicly available information). In this burgeoning literature, increasing attention was paid to the valuation of options and similar derivatives. Amongst contributors were the Princeton economists Burton Malkiel and Richard Quandt, who argued that options’ reputation “as the ‘black sheep’ of the securities field” was undeserved. Their use was “a very desirable strategy for most investors” and “wholly rational,” although the ad hoc New York options market was “relatively inefficient” (Malkiel and Quandt 1969, pp. 6, 163, 165, and 167). — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 62

Categorization

• ADDENDUM: Directly extends the performativity thesis of the reader’s finance reading: academic theory (efficiency, black sheep reputation rebuttal) is what made the options market legitimate — theory creating the market it describes.
• DEFINE: Efficient-market hypothesis defined in passing: markets respond to all publicly available information.
• XREF: connects to: Financial valuation theory legitimizes financiers’ power by claiming they optimize resource allocation. — Ève Chiapello, Financialisation of Valuation, 36; The Black-Scholes model legitimized options trading by rebutting gambling stigma — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 703; The Black-Scholes theory reframed options trading as legitimate efficient pricing rather than gambling. (+16 more)

Related

• Efficient-markets theory helped legitimate options trading that regulators had long banned (similarity 0.92)
• 1960s economists reframed stock options as rational and desirable despite Wall Street’s dismissal (similarity 0.90)
• Black-Scholes legitimized options despite fitting prices only approximately (similarity 0.89)
• The Black-Scholes model legitimized options trading by rebutting gambling stigma (similarity 0.88)
• Black-Scholes theory erased the stigma of options as gambling (similarity 0.88)
• The Black-Scholes theory reframed options trading as legitimate efficient pricing rather than gambling. (similarity 0.88)
• Fairer option pricing let 1970s exchanges prosper where predecessors failed (similarity 0.86)
• Black-Scholes rhetoric replaced ‘gambling’ with ‘efficient pricing’ in options discourse (similarity 0.85)
• Options were once stigmatized securities but posed a tractable normal-science pricing problem (similarity 0.83)
• Option pricing theory did not describe markets but remade them in its own image (similarity 0.83)
• Consulting economists reframed options as legitimate investor strategy for regulatory approval (similarity 0.82)
• Economists’ endorsement legitimated derivatives markets that regulators viewed as gambling (similarity 0.82)
• Options pricing theory grew despite options being a minor financial instrument (similarity 0.82)
• Pre-1970s options were stigmatized as speculation and market manipulation tools. (similarity 0.82)
• Economic theory succeeded in derivatives markets partly by making markets conform to it (similarity 0.82)

Broader Connections

• The Black-Scholes model legitimized options trading by rebutting gambling stigma #corroborates (0.92) — Donald MacKenzie, An Engine, Not a Camera, 703
• The Black-Scholes theory reframed options trading as legitimate efficient pricing rather than gambling. #corroborates (0.90)
• Options were once stigmatized securities but posed a tractable normal-science pricing problem #qualifies (0.72) — Donald MacKenzie, An Engine, Not a Camera, 140