Pre-Black-Scholes option valuation needed investor risk attitude as an unobservable input

Evidence

Sprenkle’s formula for the value of a warrant to an investor (equation 2 in appendix C) involved three unknowns: the expected extent of the stock’s appreciation in price by the warrant’s expiry date; the standard deviation of the stock’s anticipated price distribution at expiry; and the “price” the investor was prepared to pay for a warrant’s leverage. The price of leverage would be negative for a risk-averse investor, zero for a risk-neutral investor, and positive for a risk-seeking investor. — Donald MacKenzie, An Engine, Not a Camera, 536

Categorization

• XREF: Directly sets up the contrast with Black-Scholes, which eliminates the risk-preference term entirely via hedging; relevant to the performativity thesis since this is the pre-model state of option pricing. — connects to: Attempts to infer investor risk attitudes from market prices failed empirically — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 538; Risk-neutral valuation yields the identical option price as arbitrage arguments — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1285; Early warrant pricing theory grounded market price in marginal investors’ expectations and preferences — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 537 (+5 more)

Broader Connections

• Risk-neutral valuation yields the identical option price as arbitrage arguments #expands (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1285
• Early warrant pricing theory grounded market price in marginal investors’ expectations and preferences #corroborates (0.78) — Donald MacKenzie, An Engine, Not a Camera, 537