Implied volatility concepts and calculation devices are constitutive of economic action

Evidence

How should one theorize the articulation between performativity and markets seen as networks, cultures, and moral communities? The answer, it seems to us, must involve both impoverishing and enriching conventional economic views of the rational actor. A necessary impoverishment is the acknowledgment of humans’ limited information-processing and calculational capacity and thus the recognition that a key role is played by simplifying concepts such as “implied volatility” and material means of calculation such as Black’s sheets or Autoquote. That concepts and material means are constitutive of economic action—that economic action is distributed cognition in the sense of Hutchins (1995)—implies that the economic theory crystalized in concepts and devices can indeed be performative, even if not (as emphasized above) in any simple sense of selffulfilling prophecy, but as the outcome of a conflictual, embedded process. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 200

Categorization

• DEFINE: Places ‘distributed cognition’ and ‘implied volatility as simplifying concept’ — key apparatus terms for understanding how theory becomes performative.
• XREF: connects to: Option prices are routinely quoted in implied volatility, a purely theoretical construct — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1130; Implied volatility reduces diverse option prices to one number, marking Black-Scholes’ cultural imprint — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1131; Traders’ arbitrage activity made the pricing model appear empirically true — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126

Related

• Implied volatility reduces diverse option prices to one number, marking Black-Scholes’ cultural imprint (similarity 0.88)
• Option prices are routinely quoted in implied volatility, a purely theoretical construct (similarity 0.88)
• Option pricing theory did not describe markets but remade them in its own image (similarity 0.87)
• Implied volatility turned options of disparate stocks into one comparable metric. (similarity 0.87)
• Economic action as distributed cognition is what makes embedded theory genuinely performative. (similarity 0.85)
• Trading more volatile stocks made mental pricing calculations riskier and models indispensable (similarity 0.81)
• Human cognitive limits make simplifying concepts and calculating devices constitutive of complex markets. (similarity 0.81)
• Modern options pricing derives from arbitrage logic, not directional beliefs. (similarity 0.81)
• Option theory infrastructure allows derivatives markets to exist at current scale (similarity 0.81)
• The Black-Scholes equation excludes expected returns and risk aversion entirely (similarity 0.81)
• Option pricing converged on economic models through traders copying other users. (similarity 0.81)
• The growth and risk of options trading made pricing models indispensable (similarity 0.80)
• Economic theory succeeded in derivatives markets partly by making markets conform to it (similarity 0.80)
• Financial pricing formulas actively construct the markets they purport to measure (similarity 0.80)
• Pre-Black-Scholes option models relied on unmeasurable parameters (similarity 0.80)

Broader Connections

• Option prices are routinely quoted in implied volatility, a purely theoretical construct #exemplifies (0.92) — Donald MacKenzie, An Engine, Not a Camera, 1130
• Implied volatility reduces diverse option prices to one number, marking Black-Scholes’ cultural imprint #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 1131
• Traders’ arbitrage activity made the pricing model appear empirically true #exemplifies (0.80) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 126