The Black-Scholes equation is a version of the physicists’ heat equation.

Evidence

The models described in the chapters that follow are the outcomes of analytical thinking, of the manipulation of equations, and sometimes of geometric reasoning. They are underpinned by sophisticated economic thinking, and sometimes by advanced mathematics, but computationally they are not overwhelmingly complex. The Black-Scholes-Merton model of option pricing, for example, yields as its central result a differential equation (the “Black-Scholes equation” equation 1 in appendix D) that has no immediately obvious solution but is nevertheless a version of the “heat” or “diffusion” equation, which is well known to physicists. — Donald MacKenzie, An Engine, Not a Camera, 41

Categorization

• XREF: Connects to the reader’s physics background — the heat/diffusion equation linking finance theory to physics is a classic case of physics envy in economics, also echoed in Mirowski’s cyborg science thesis discussed in the next paragraph. — connects to: The Black-Scholes model reduces to a known physics equation solvable by hand — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 41
• CANDY: That option pricing’s core equation reduces to the heat equation physicists use for diffusion is a nice elevator fact.