Post-1987 option pricing may be rational given the crash’s trauma, not irrational.

Evidence

If true, this is a striking finding: participants in one of high modernity’s most efficient, sophisticated markets have been behaving irrationally. Such a conclusion, however, seems to us to involve too narrow a view of rationality. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 155

Categorization

• DEFINE: Frames the article’s core move: broadening rationality to include historically situated, experience-driven belief rather than the abstract rationality of standard economics.
• DEEPTHINKING: This is the hinge of the whole performativity argument — that ‘irrational’ market behavior is only irrational under a narrow conception of rationality, and that trauma-driven learning is itself rational. The essay-length reconsideration of what counts as rational behavior after disaster is the paper’s paradigm-shifting core.
• XREF: connects to: The 1987 crash traumatized U.S. derivatives markets in ways absent elsewhere. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 165; The 1987 crash’s minimal economic impact hides how traumatic it was for market participants. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 155; The persistent option skew reflects rational trauma from 1987, not mispricing — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 915 (+5 more)

Related

• The persistent option skew reflects rational trauma from 1987, not mispricing (similarity 0.90)
• The 1987 crash traumatized U.S. derivatives markets in ways absent elsewhere. (similarity 0.89)
• Explaining post-1987 option prices requires crash frequencies roughly four times historical rates (similarity 0.87)
• The 1987 crash’s minimal economic impact hides how traumatic it was for market participants. (similarity 0.87)
• Index option prices since 1988 embed an irrational crash premium beyond any plausible expectation (similarity 0.86)
• The 1987 crash taught options markets that unhedged put sales posed systemic risk (similarity 0.85)
• The 1987 crash permanently shifted the S&P options market’s implied distribution toward crash expectations. (similarity 0.84)
• The 1987 crash ended the Barnesian performativity of classic option-pricing theory (similarity 0.84)
• The 1987 crash permanently broke Black-Scholes fit with market prices (similarity 0.83)
• Performativity has limits that historical crises can break, producing theory-resistant market anomalies (similarity 0.83)
• The post-1987 options skew was primarily an American rather than global phenomenon (similarity 0.80)
• The 1987 crash ended the Black-Scholes model’s empirical fit for good (similarity 0.80)
• The post-1987 volatility skew became a permanent feature of index options (similarity 0.80)
• The October 1987 crash ended the flat volatility curve predicted by Black-Scholes (similarity 0.79)
• Collective institutional trauma, not objective risk, sustains the volatility skew (similarity 0.79)

Broader Connections

• The persistent option skew reflects rational trauma from 1987, not mispricing #corroborates (1.00) — Donald MacKenzie, An Engine, Not a Camera, 915
• Explaining post-1987 option prices requires crash frequencies roughly four times historical rates #qualifies (0.80) — Donald MacKenzie, An Engine, Not a Camera, 913
• The 1987 crash taught options markets that unhedged put sales posed systemic risk #expands (0.75) — Donald MacKenzie, An Engine, Not a Camera, 931