Empirical trading experience can block acceptance of a theory’s core assumptions.

Evidence

However, while Black and Scholes were trying to solve the problem of option pricing by deploying the Capital Asset Pricing Model, Thorp had little interest in the latter; he was aware of it, but not “at the expert level.” Indeed, for him the proposition (central to the mathematics of Black and Scholes, and in a different way to Merton’s analysis as well) that a properly hedged portfolio would earn only the riskless rate of interest would have stood in direct contradiction to his empirical experience. The entire point of his and Kassouf’s book Beat the Market (Thorp and Kassouf 1967) was that its authors had found they could earn far more than that from hedged portfolios. — Donald MacKenzie, An Engine, Not a Camera, 1106

Categorization

• XREF: Contrasts practitioner evidence with the performativity thesis — the market-efficiency assumption was a theoretical commitment, not an empirical finding, which is why Thorp’s contrary experience didn’t matter to its success. — connects to: Finance theory met smooth reception in academia but hostility from market practitioners. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 333; A theorist’s trading failure can vindicate a pricing model — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1119; Theory is assumed abstract the more it drags away from the personal (+3 more)

Broader Connections

• Using a model can make markets conform less well to it. #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 92
• Theory is assumed abstract the more it drags away from the personal #corroborates (0.75)
• A theorist’s trading failure can vindicate a pricing model #corroborates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 1119
• Trust is an assumed background in standard economics, not a studied variable #qualifies (0.72) — Diego Gambetta, Trust - Making and Breaking Cooperative…, 772