Option pricing converged on economic models through traders copying other users.

Evidence

Gradually, then, the CBOE participants began to price options as economists suggested homo œconomicus should. In the ad hoc New York market, and in the early months of the CBOE, prices were often set following simple rules of thumb. Participants then were more like the heuristic followers, with bounded rationality, posited by Herbert Simon (e.g., Simon 1955) than fully rational neoclassical homines œconomici. But even those participants who were not convinced by, or entirely ignorant of, Black, Scholes, and Merton’s elegant reasoning were pushed toward Black-Scholes-Merton pricing as increasing numbers of other participants used the model. As far as pricing is concerned, the process, at least until 1987, nicely fits Callon’s formulation: “Yes, homo economicus does exist, but is not an a-historical reality; he does not describe the hidden nature of the human being. He is the result of a process of configuration… . Of course it mobilizes material and metrological investments, property rights and money, but we should not forget the essential contribution of economics in the performing of the economy” (Callon 1998, pp. 22–23). — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 183

Categorization

• XREF: This is the performativity thesis in action — connects directly to Callon and the wider social-studies-of-finance literature around the Black-Scholes model. — connects to: Option market prices initially diverged from the Black-Scholes model but converged — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 735; Black and Scholes converged on option pricing through shared technique rather than joint insight. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 578; Option pricing theory did not describe markets but remade them in its own image — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 182 (+7 more)
• DEFINE: Confirms economics performs rather than merely describes the market; homo economicus is a configuration, not a discovered nature.

Related

• Organized options trading alone could explain post-model price convergence to Black-Scholes (similarity 0.89)
• Market prices converged toward Black-Scholes values within a few years of the CBOE’s founding (similarity 0.88)
• Option market prices initially diverged from the Black-Scholes model but converged (similarity 0.87)
• Option pricing theory did not describe markets but remade them in its own image (similarity 0.86)
• Markets can be performatively constructed by agents who are not atomistic homo economicus (similarity 0.86)
• Economic theory succeeded in derivatives markets partly by making markets conform to it (similarity 0.85)
• The Black-Scholes model gained market traction slowly, not through instant self-fulfilling prophecy. (similarity 0.85)
• Black-Scholes-Merton theory shaped exchange fortunes before markets changed to match it. (similarity 0.85)
• The market changed to fit Black-Scholes rather than the reverse (similarity 0.84)
• Traders using the pricing model actively made market prices conform to the model (similarity 0.84)
• Black-Scholes legitimized options despite fitting prices only approximately (similarity 0.83)
• Black-Scholes-Merton pricing fit observed options data only approximately at launch. (similarity 0.83)
• Option price must equal the cost of a continuously adjusted replicating portfolio. (similarity 0.82)
• Option theory infrastructure allows derivatives markets to exist at current scale (similarity 0.82)
• Fairer option pricing let 1970s exchanges prosper where predecessors failed (similarity 0.82)

Broader Connections

• Option market prices initially diverged from the Black-Scholes model but converged #corroborates (0.95) — Donald MacKenzie, An Engine, Not a Camera, 735
• Economic theory succeeded in derivatives markets partly by making markets conform to it #corroborates (0.95) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 9
• Option pricing theory did not describe markets but remade them in its own image #corroborates (0.90) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 182
• Black and Scholes converged on option pricing through shared technique rather than joint insight. #qualifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 578
• Organized options trading alone could explain post-model price convergence to Black-Scholes #qualifies (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1153
• Mathematicization of options trading happened through, not despite, pit trading’s bodily social structures #complicates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 755
• Markets carry explicit traces of the specific pricing models they use #corroborates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 899