The Black-Scholes theory reframed options trading as legitimate efficient pricing rather than gambling.

Evidence

As the work of Black and Scholes became well known, it undermined the long-standing cultural association between options and gambling: … Black-Scholes was really what enabled the exchange to thrive… It gave a lot of legitimacy to the whole notions of hedging and efficient pricing, whereas we were faced in the late 60s-early 70s with the issue of gambling. That issue fell away, and I think BlackScholes made it fall away. It wasn’t speculation or gambling, it was efficient pricing. I think the SEC very quickly thought of options as a useful mechanism in the securities markets and it’s probably that’s my judgment the effects of Black-Scholes. I never heard the word “gambling” again in relation to stock options traded on the Chicago Board Options Exchange. (Rissman interview) That the theoretical work of Black and Scholes could effectively be deployed to defend options’ legitimacy did not, however, mean that the theory was adequate as an empirical description of prices. — Donald MacKenzie, An Engine, Not a Camera, 705 (#expands, via linked claim)

This, then, is the environment into which Black-Scholes-Merton option theory was launched in 1973 (I will return below to the simpler theory of futures prices). The theory’s abstract mathematics might seem to inhabit a world quite different from the deeply social, intensely bodily interaction of trading pits. The Black-Scholes-Merton model, however, began to have effects on the Chicago Board Options Exchange almost immediately. Even more effectively than the economics of Baumol, Malkiel, and Quandt, the Black-Scholes analysis enabled the Options Exchange to rebut the charge that options were morally disreputable. — Donald MacKenzie, An Engine, Not a Camera, 703 (#corroborates, via linked claim)

It seems to have been reading about Malkiel and Quandt’s favorable economic analysis of options in an article in the magazine Institutional Investor (Malkiel and Quandt 1968) that drew the attention of a leading member of the Board of Trade: the grain trader Edmund O’Connor. Options were desirable but traded only ad hoc. Might the Board not profitably standardize them and trade them in a busy, efficient Chicago pit? — Donald MacKenzie, An Engine, Not a Camera, 651 (#corroborates, via linked claim)

Categorization

• XREF: connects to: Efficient-markets and random-walk theory legitimized options against their scandalous reputation. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 62; Black-Scholes rhetoric replaced ‘gambling’ with ‘efficient pricing’ in options discourse — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 705; The Black-Scholes model legitimized options trading by rebutting gambling stigma — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 703 (+13 more)

Related

• The Black-Scholes model legitimized options trading by rebutting gambling stigma (similarity 0.96)
• Black-Scholes rhetoric replaced ‘gambling’ with ‘efficient pricing’ in options discourse (similarity 0.94)
• Black-Scholes theory erased the stigma of options as gambling (similarity 0.92)
• Black-Scholes legitimized options despite fitting prices only approximately (similarity 0.90)
• The Black-Scholes methodology reshaped economists’ and regulators’ thinking beyond derivatives. (similarity 0.89)
• Efficient-markets and random-walk theory legitimized options against their scandalous reputation. (similarity 0.88)
• Fairer option pricing let 1970s exchanges prosper where predecessors failed (similarity 0.87)
• 1960s economists reframed stock options as rational and desirable despite Wall Street’s dismissal (similarity 0.87)
• Options pricing theory grew despite options being a minor financial instrument (similarity 0.87)
• Academic theory directly motivated the creation of the organized options exchange (similarity 0.86)
• Efficient-markets theory helped legitimate options trading that regulators had long banned (similarity 0.86)
• Organized options trading alone could explain post-model price convergence to Black-Scholes (similarity 0.86)
• Black-Scholes-Merton theory shaped exchange fortunes before markets changed to match it. (similarity 0.86)
• Market prices converged toward Black-Scholes values within a few years of the CBOE’s founding (similarity 0.86)
• Black-Scholes-Merton pricing fit observed options data only approximately at launch. (similarity 0.85)

Broader Connections

• Black-Scholes rhetoric replaced ‘gambling’ with ‘efficient pricing’ in options discourse #expands (0.95) — Donald MacKenzie, An Engine, Not a Camera, 705
• The Black-Scholes model legitimized options trading by rebutting gambling stigma #corroborates (0.92) — Donald MacKenzie, An Engine, Not a Camera, 703
• Academic theory directly motivated the creation of the organized options exchange #corroborates (0.75) — Donald MacKenzie, An Engine, Not a Camera, 651