The model’s assumptions contradicted actual early-1970s market conditions on every point.

Evidence

In the 1960s and at the start of the 1970s, these assumptions about market conditions were wildly unrealistic. Commissions (an important transaction cost) were high everywhere. Investors could not purchase stock entirely on credit (in the United States this was banned by the Federal Reserve’s “Regulation T”), and such loans would be at a rate of interest in excess of the riskless rate. Short-selling was legally constrained and financially penalized: stock lenders retained the proceeds of a short sale as collateral for the loan, and refused to pass on all (or sometimes any) of the interest earned on those proceeds (Thorp interview). — Donald MacKenzie, An Engine, Not a Camera, 628

Categorization

• XREF: This grounding of a now-famous formula in very specific institutional frictions (Regulation T, short-sale collateral) parallels the way the diamond-bourse chapters ground trust in institutional detail. — connects to: Empirical anomalies accumulated through the 1970s that potentially contradicted the efficient-market hypothesis. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 419; Market conditions moved toward the model’s assumptions partly because of the model itself — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1155; The model’s early assumptions were wildly unrealistic, constraining hedging practice. — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 739 (+1 more)

Broader Connections

• Empirical anomalies accumulated through the 1970s that potentially contradicted the efficient-market hypothesis. #contradicts (0.85) — Donald MacKenzie, An Engine, Not a Camera, 419
• The model’s early assumptions were wildly unrealistic, constraining hedging practice. #contradicts (0.80) — Donald MacKenzie, An Engine, Not a Camera, 739
• Market conditions moved toward the model’s assumptions partly because of the model itself #contradicts (0.75) — Donald MacKenzie, An Engine, Not a Camera, 1155
• Using a model can make markets conform less well to it. #contradicts (0.70) — Donald MacKenzie, An Engine, Not a Camera, 92