On Performativity: Option Theory And The Resistance Of Financial Phenomena

The issue of performativity concerns the claim that economics shape rather than merely describe the social world. This idea took hold following a paper by Donald MacKenzie and Yuval Millo entitled "Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange" (2003). That paper constitutes an important contribution to the history of economic thought, since it provides an original way to focus on the scientific construction of the real economy. The authors discuss the empirical success of the Black– Scholes–Merton (BSM) model on the Chicago Board Options Exchange during the period from 1973 to 1987. They explain this success in part as instead of discovering pre-existing price regularities, the model was used by traders to anticipate option prices in their arbitrages. As a result, option prices came to correspond to the theoretical prices derived from the BSM model. In the present article I show that this is not a completely correct conclusion, since the BSM model never became a self-fulfilling model. I would claim that the October 1987 stock market crash is empirical proof that the financial world never fit with the economic theory underpinning the BSM.