The market changed to fit Black-Scholes rather than the reverse

Evidence

This empirical success was not due to the model describing a preexisting reality: as noted, the initial fit between reality and model was fairly poor. Instead, two interrelated processes took place. First, the markets gradually altered so that many of the model’s assumptions, wildly unrealistic when published in 1973, became more accurate. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 107

Categorization

• XREF: Core performativity claim, counter to the standard descriptive view of finance theory. Builds on the article’s own thesis introduced in the preceding sections. — connects to: Regulatory and technical changes made Black-Scholes assumptions come true — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 107; 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 (+1 more)
• DEEPTHINKING: The inversion of explanation direction—market conforming to theory, not theory describing market—is the paradigm-shifting core of social studies of finance.

Related

• Black-Scholes-Merton theory shaped exchange fortunes before markets changed to match it. (similarity 0.92)
• Market conditions moved toward the model’s assumptions partly because of the model itself (similarity 0.90)
• Black-Scholes price deviations fell from 2 percent to under 1 percent by 1986 (similarity 0.89)
• Black-Scholes legitimized options despite fitting prices only approximately (similarity 0.88)
• The Black-Scholes model gained market traction slowly, not through instant self-fulfilling prophecy. (similarity 0.88)
• The Black-Scholes methodology reshaped economists’ and regulators’ thinking beyond derivatives. (similarity 0.88)
• Option pricing theory did not describe markets but remade them in its own image (similarity 0.88)
• The model’s assumptions became more realistic as markets restructured around it (similarity 0.87)
• Option market prices initially diverged from the Black-Scholes model but converged (similarity 0.87)
• Performativity claims must be distinguished from the market merely converging on a correct theory. (similarity 0.86)
• Organized options trading alone could explain post-model price convergence to Black-Scholes (similarity 0.86)
• Market prices converged toward Black-Scholes values within a few years of the CBOE’s founding (similarity 0.85)
• Economic theory succeeded in derivatives markets partly by making markets conform to it (similarity 0.85)
• Financial theories can become true by guiding the practices they describe (similarity 0.85)
• Option pricing converged on economic models through traders copying other users. (similarity 0.84)

Broader Connections

• Regulatory and technical changes made Black-Scholes assumptions come true #corroborates (0.92) — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 107
• Black-Scholes-Merton theory shaped exchange fortunes before markets changed to match it. #expands (0.90) — Donald MacKenzie, An Engine, Not a Camera, 629
• Option market prices initially diverged from the Black-Scholes model but converged #corroborates (0.80) — Donald MacKenzie, An Engine, Not a Camera, 735
• The Black-Scholes theory reframed options trading as legitimate efficient pricing rather than gambling. #qualifies (0.75)