The Black-Scholes model gained market traction slowly, not through instant self-fulfilling prophecy.

Evidence

If that use had been as rapid and widespread as later accounts (e.g., Passell 1997) have suggested, it would raise the possibility that the model’s success was a simple self-fulfilling prophecy. Matters were, however, slower, more complex, and more interesting than that. It was not immediately clear to all participants that one needed an option pricing model. Initially, the CBOE traded only call options and did so in a bear market, in which calls with high strike prices seemed always to expire unexercised, because the stock price remained below the strike price. A good income could therefore be earned by selling those calls without bothering with theory or hedging. “Sell the 280s and drive a Mercedes,” became the motto of at least some traders, referring to highstrike-price ($280) calls on IBM, then the stock on which options were most heavily traded (Doherty interview). Sophisticated models might not seem necessary even for options for which the probability of exercise was higher. Participants could, for example, turn to rule-of-thumb pricing heuristics like those used in the ad hoc options market. … One manager, Michael Greenbaum, tried to teach pricing theory to market makers: “He’d stay late to give seminars and two people would show up, and it would be Joe Doherty [Sullivan’s deputy, who became a CBOE trader] and somebody else, and they were already fully sold disciples… . He’s trying to bring in some new technology [option pricing theory] and nobody would use it or pay for it” (Carusillo and Struve interview 1). — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 111

Categorization

• SEED: Angle: the performativity of financial theory is a slow, contested, infrastructure-building process rather than a self-fulfilling prophecy — a counter-narrative to the sudden-triumph story told in retrospect.
• XREF: Connects to the reader’s own research on performativity of finance theory — McKenzie’s work and the ‘an engine, not a camera’ thesis, and how real adoption lagged. — connects to: Option market prices initially diverged from the Black-Scholes model but converged — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 735; Black-Scholes-Merton theory shaped exchange fortunes before markets changed to match it. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 629; Market pricing regimes shift with historical events, not gradual efficiency gains — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 151 (+1 more)
• ADDENDUM: Complements the argument in ‘On Sacrifice’ and the infrastructure theme: theory here operates as a contested technology nobody initially wanted — a useful counterpoint to clean narratives of diffusion.

Related

• Black-Scholes-Merton theory shaped exchange fortunes before markets changed to match it. (similarity 0.89)
• The market changed to fit Black-Scholes rather than the reverse (similarity 0.88)
• Market conditions moved toward the model’s assumptions partly because of the model itself (similarity 0.88)
• Market prices converged toward Black-Scholes values within a few years of the CBOE’s founding (similarity 0.88)
• Option pricing theory did not describe markets but remade them in its own image (similarity 0.87)
• Organized options trading alone could explain post-model price convergence to Black-Scholes (similarity 0.87)
• Option market prices initially diverged from the Black-Scholes model but converged (similarity 0.87)
• Black-Scholes fit option prices well for eleven years, then stopped after 1987 (similarity 0.85)
• Black-Scholes-Merton pricing fit observed options data only approximately at launch. (similarity 0.85)
• Traders using the pricing model actively made market prices conform to the model (similarity 0.85)
• The model’s use helped create the price patterns the model predicted (similarity 0.85)
• Option pricing converged on economic models through traders copying other users. (similarity 0.85)
• Option theory infrastructure allows derivatives markets to exist at current scale (similarity 0.85)
• The Black-Scholes methodology reshaped economists’ and regulators’ thinking beyond derivatives. (similarity 0.85)
• Black-Scholes legitimized options despite fitting prices only approximately (similarity 0.85)

Broader Connections

• Option market prices initially diverged from the Black-Scholes model but converged #corroborates (0.90) — Donald MacKenzie, An Engine, Not a Camera, 735
• Black-Scholes-Merton theory shaped exchange fortunes before markets changed to match it. #corroborates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 629
• Using a model can make markets conform less well to it. #contradicts (0.85) — Donald MacKenzie, An Engine, Not a Camera, 92
• Market pricing regimes shift with historical events, not gradual efficiency gains #corroborates (0.72) — Donald MacKenzie, An Engine, Not a Camera, 151