Performativity has limits that historical crises can break, producing theory-resistant market anomalies

Evidence

The performativity of classic option pricing theory was, however, not a matter of simple self-fulfilling prophecy (see Merton 1949) or of the discovery of the correct way to price options. It was a contested, historically contingent outcome, ended by a historical event, the 1987 crash. No feedback loop of performativity stabilized the assumption of lognormal stock price movements. The crash was a grotesquely unlikely event on such an assumption and thus undermined its credibility. Nor, as we have seen, was the market reaction to 1987 a simple matter of rational learning from the rejection of the null hypothesis of log-normality. The strength and persistence of the skew becomes understandable only once 1987’s threat to the very existence of derivatives markets is grasped. No economist—indeed no identifiable person—invented the skew; economists have yet to reach any consensus on how best to theorize it. It was, we have argued, the upshot of a collective trauma, held in place subsequently in part by a concern that has an edge of morality to it. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 188

Categorization

• XREF: This sets the boundary conditions on performativity theory that Callon’s own framing glosses — a crucial corrective the reader following the performativity literature should track. — connects to: Performativity has real limits; markets still need culture and trust — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 25; Performativity can only be judged through historical study of markets — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 47; Economic crises alone do not directly cause fundamental historical events — Antonio Gramsci, Selections from the Prison Notebooks, 766 (+5 more)
• DEEPTHINKING: That performativity can be undone by events no theory licenses — and that the durable residue (the skew) is collective trauma with a moral edge, not rational updating — is a paradigm-exceeding insight worth sitting with.
• QUESTION: The claim that the skew persists partly through moral disapproval (‘shit-sellers’ facing obloquy) — worth probing how moral economies interact with model-driven pricing beyond this single case.

Related

• Post-1987 option pricing may be rational given the crash’s trauma, not irrational. (similarity 0.83)
• The 1987 crash ended the Barnesian performativity of classic option-pricing theory (similarity 0.80)
• Market actions based on efficient-market models can create anomalies those models cannot explain (similarity 0.80)
• Performativity can only be judged through historical study of markets (similarity 0.80)
• Performativity has real limits; markets still need culture and trust (similarity 0.80)
• Option pricing theory serves as the test case for performativity. (similarity 0.80)

Broader Connections

• Market actions based on efficient-market models can create anomalies those models cannot explain #complicates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1166
• Economic crises alone do not directly cause fundamental historical events #corroborates (0.75) — Antonio Gramsci, Selections from the Prison Notebooks, 766
• Market anomalies shrink once identified, partly because traders exploit them. #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 433
• Accumulating anomalies pointed toward a Kuhnian revolution in finance #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 426
• Compressed decision time makes financial markets prone to cascading collapse #corroborates (0.72) — David Harvey, The Condition of Postmodernity, 1938
• Efficient market theory could not imagine internally-generated systemic crisis #complicates (0.70) — Mark Blyth, Austerity, 130