The 1987 crash ended the Barnesian performativity of classic option-pricing theory

Evidence

The 1987 crash has not been repeated. Up to the time of writing, no subsequent event (not even the attacks of September 11, 2001) has presented the danger to the financial system it posed. Yet 1987 has left its traces. It ended the period of the Barnesian performativity of classic option-pricing theory and replaced it with a seemingly permanent volatility skew. — Donald MacKenzie, An Engine, Not a Camera, 942

The extent of portfolio insurance’s role in the 1987 crash is not clear. Nevertheless, if it did play a role, it would indeed be a case of counterperformativity. First, on the log-normal model underpinning Black-Scholes-Merton the crash was, as already noted, an event whose probability was vanishingly small. Second, both the crash and, paradoxically, perhaps to an even greater extent the partial recovery that took place immediately afterward are hard to account for in standard efficient-market terms as rational responses to new information. Third, the crash was the historical trauma that, at least in U.S. options markets, gave rise to the volatility skew and thus ended the Barnesian performativity of the classic form of option theory. — Donald MacKenzie, An Engine, Not a Camera, 1167

Categorization

• XREF: This is the pivotal historical claim of MacKenzie’s performativity argument — that 1987 broke the self-fulfilling loop between Black-Scholes and market prices, connecting directly to the whole book’s thesis. — connects to: The 1987 crash permanently shifted the S&P options market’s implied distribution toward crash expectations. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 143; Option pricing theory serves as the test case for performativity. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 124; The 1987 crash permanently broke Black-Scholes fit with market prices — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 150 (+7 more)
• DEFINE: Barnesian performativity is defined earlier; this passage marks its historical endpoint in options markets, useful for nailing the concept’s scope.
• corroborated: 2 independent passages support this claim — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 942; Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1167

Broader Connections

• The skew’s persistence after 1987 undermines the discovery narrative of option pricing #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1163