The persistent option skew reflects rational trauma from 1987, not mispricing

Evidence

If Jackwerth is right, and options are indeed mispriced, this is a striking finding: participants in one of high modernity’s most sophisticated markets have been behaving irrationally. Such a conclusion, however, seems to me to involve too narrow a view of rationality. Because of the limited wider effects of the 1987 crash, it is hard now to recapture just how traumatic it was to those most centrally involved. The arbitrageur Eric Rosenfeld, then at the investment bank Salomon Brothers, recalls “sitting at the [trading] desk and wondering about the end of the whole financial system” (quoted in Dunbar 2000, p. 97). — Donald MacKenzie, An Engine, Not a Camera, 915

Categorization

• DEFINE: This is Mackenzie’s core stance: ‘rationality’ must be widened to include the traumatic, institutional memory of a crash, not just forward-looking mathematical consistency.
• XREF: This institutionalizes the 1987 crash as a Bates/Jackwerth counterpoint; it also resonates with the broader performativity thesis - the crash reshaped what options traders priced in and how valuation models were deployed. — connects to: Post-1987 option pricing may be rational given the crash’s trauma, not irrational. — Donald MacKenzie & Yuval Millo, Constructing a Market, Performing Theory, 155; The post-1987 volatility skew became a permanent feature of index options — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 901; The skew’s persistence after 1987 undermines the discovery narrative of option pricing — Donald MacKenzie, An Engine, Not a Camera: How Financial…, 1163 (+2 more)
• DEEPTHINKING: Mackenzie’s reframing of ‘mispricing’ as rational institutional trauma is a genuinely paradigm-level move: it dissolves the efficient-markets verdict by questioning what counts as rational in the first place, without embracing behavioral-economics irrationality.

Broader Connections

• The skew’s persistence after 1987 undermines the discovery narrative of option pricing #complicates (0.85) — Donald MacKenzie, An Engine, Not a Camera, 1163
• Explaining post-1987 option prices requires crash frequencies roughly four times historical rates #qualifies (0.75) — Donald MacKenzie, An Engine, Not a Camera, 913