Market arbitrage requires only that investors prefer more wealth to less, not risk preferences

Evidence

The argument (outlined in more detail in appendix A) by which Modigliani and Miller sought to sweep aside such behavioral and institutional issues was as follows. Suppose that two investments are “perfect substitutes” (Modigliani and Miller 1959, p. 656), in other words that they are entitlements to identical income streams. If the prices of the two investments are not the same, then any holder of the dearer investment can benefit by selling it and buying the cheaper. Nothing need be assumed about investors’ willingness to take on risk, or about any “psychological” or “institutional” matters, other than that “investors always prefer more wealth to less” (Miller and Modigliani 1961, p. 412). “The exchange” of the dearer investment for the cheaper, Modigliani and Miller wrote, would be “advantageous to the investor quite independently of his attitudes to risk” (1958, p. 269). — Donald MacKenzie, An Engine, Not a Camera, 180

Categorization

• DEFINE: Defines the minimal behavioral assumption behind the Modigliani-Miller arbitrage argument — a key building block for the performativity thesis.
• XREF: connects to: Finance theory treats arbitrage as enforcing equal risk-adjusted returns — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1003; Constrained arbitrage allows finance-theory models to diverge from actual prices. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1213; Arbitrage enforces a real link that anchors derivatives to underlying assets — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 781 (+6 more)

Broader Connections

• Warrant prices are bounded by no-arbitrage constraints against stock prices #exemplifies (0.90) — Donald MacKenzie, An Engine, Not a Camera, 551
• Finance theory treats arbitrage as enforcing equal risk-adjusted returns #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1003
• Risk-neutral valuation yields the identical option price as arbitrage arguments #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1285
• The arbitrage argument produces the Black-Scholes partial differential equation. #expands (0.85) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 95
• Arbitrage enforces a real link that anchors derivatives to underlying assets #corroborates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 781
• Limited arbitrage capital can force abandonment of even certain-profit trades #complicates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 1217
• Constrained arbitrage allows finance-theory models to diverge from actual prices. #qualifies (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1213