Option pricing theory developed as Kuhn-style normal science elaborating the random-walk model

Evidence

Even warrants were of limited substantive importance. Rather, developing a theory of option and warrant pricing was a way of elaborating the randomwalk model of stock prices: a form of “normal science” in Kuhn’s (1970) terms. As Cootner put it, “options obtain their value from the price of the underlying shares” (1964, p. 373). If one had a well-defined mathematical model of the fluctuations of stock prices (and, the issues discussed in chapter 4 aside, the log-normal random walk seemed to offer such a model), then it appeared as if all one had to do was some relatively easy mathematical analysis to reach a formula for the expected value of a warrant or option. — Donald MacKenzie, An Engine, Not a Camera, 532

Categorization

• XREF: MacKenzie frames the field’s trajectory via Kuhn’s normal science — connects to STS literature on how scientific fields progress and to the book’s overall performativity thesis. — connects to: Probabilistic valuation methods migrated from actuarial science into financial markets via Gaussian risk models — Ève Chiapello, Financialisation of Valuation, 33; Option pricing theory serves as the test case for performativity. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 124; Random-walk ideas of security prices predate the 1950s by a century — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 257 (+3 more)
• DEEPTHINKING: The recognition that a theory can be developed as normal-science elaboration of an underlying model even when the instrument itself is economically trivial reveals something general about how financial economics advanced — a useful lens for the whole performativity argument.

Broader Connections

• Option pricing theory did not describe markets but remade them in its own image #expands (0.75) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 182