Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-31T20:33:25.741Z Has data issue: false hasContentIssue false
  • English
  • Français

Is Economics Performative? Option Theory and the Construction of Derivatives Markets

Published online by Cambridge University Press:  11 June 2009

Donald Mackenzie
Donald Mackenzie
Affiliation:
School of Social & Political Studies, University of Edinburgh, Adam Ferguson Building, Edinburgh EH8 9LL, Scotland. Email: [email protected].
Get access Rights & Permissions [Opens in a new window]

Extract

The thesis that economics is “performative” (Callon 1998) has provoked much interest but also some puzzlement and not a little confusion. The purpose of this article is to examine from the viewpoint of performativity one of the most successful areas of modern economics, the theory of options, and in so doing hopefully to clarify some of the issues at stake. To claim that economics is performative is to argue that it does things, rather than simply describing (with greater or lesser degrees of accuracy) an external reality that is not affected by economics. But what does economics do, and what are the effects of it doing what it does?

That the theory of options is an appropriate place around which to look for performativity is suggested by two roughly concurrent developments. Since the 1950s, the academic study of finance has been transformed from a low-status, primarily descriptive activity to a high-status, analytical, mathematical, Nobel-prize-winning enterprise. At the core of that enterprise is a theoretical account of options dating from the start of the 1970s. Around option theory there has developed a large array of sophisticated mathematical analyses of financial derivatives. (A “derivative” is a contract or security, such as an option, the value of which depends upon the price of another asset or upon the level of an index or interest rate.)

Type
Research Article
Information
Journal of the History of Economic Thought , Volume 28 , Issue 1 , March 2006 , pp. 29 - 55
Copyright
Copyright © The History of Economics Society 2006

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Austin, J. L. (1962) How to Do Things With Words (Oxford: Clarendon).Google Scholar
Austin, J. L. (1970) Philosophical Papers, 2nd edition (Oxford: Clarendon).Google Scholar
Bachelier, Louis (1900) Théorie de la speculation, Annales Scientifiques de l'Ecole Normale Supérieure, third series, (17), pp. 22–86.Google Scholar
Barnes, Barry (1983) Social Life as Bootstrapped Induction, Sociology, 17 (4), pp. 524–45.CrossRefGoogle Scholar
Barnes, Barry (1988) The Nature of Power (Cambridge: Polity).Google Scholar
Bernstein, Peter L. (1992) Capital Ideas: The Improbable Origins of Modern Wall Street (New York: Free Press).Google Scholar
Black, Fischer (1975a) Fact and Fantasy in the Use of Options, Financial Analysts Journal, 31 (4), pp. 36–41, 61–72.Google Scholar
Black, Fischer (1975b) The Option Service: An Introduction, Personal papers of Mark Rubinstein.Google Scholar
Black, Fischer (1988) The Holes in Black-Scholes, Risk, 1/4 (03), pp. 30–32.Google Scholar
Black, Fischer, and Scholes, Myron (1972) The Valuation of Option Contracts and a Test of Market Efficiency, Journal of Finance, 27 (2), pp. 399–417.CrossRefGoogle Scholar
Black, Fischer, and Scholes, Myron (1973) The Pricing of Options and Corporate Liabilities, Journal of Political Economy, 81 (3), pp. 637–54.CrossRefGoogle Scholar
Bourdieu, Pierre (1991) Language and Symbolic Power (Cambridge: Polity).Google Scholar
Brady Commission (1988) Report of the Presidential Task Force on Market Mechanisms (Washington, D.C.: U.S. Government Printing Office).Google Scholar
Bronzin, Vinzenz (1908) Theorie der Prämiengeschäfte (Leipzig and Vienna: Franz Deuticke).Google Scholar
Callon, Michel (1986) Some Elements of a Sociology of Translation: Domestication of the Scallops and the Fishermen of St Brieuc Bay, in: Law, John (Ed) Power, Action and Belief: A New Sociology of Knowledge? (London: Routledge and Kegan Paul), pp. 196–233.Google Scholar
Callon, Michel (1998) The Laws of the Markets (Oxford: Blackwell).Google Scholar
Callon, Michel (2004) Economies as Co-Performances: Economics's Contribution: How to Get Rid of Austin without Losing Him. Powerpoint presentation to workshop, The Performativities of Economics, Paris, August 29–30.Google Scholar
Callon, Michel, and Muniesa, Fabian (2003) Les marchés économiques comme dispositifs collectifs de calcul, Réseaux, 21 (122), pp. 189–233.CrossRefGoogle Scholar
Cox, John C., and Rubinstein, Mark (1985) Options Markets (Englewood Cliffs, N.J.: Prentice-Hall).Google Scholar
Didier, Emmanuel (2004) Les statistiques “performent” elles l'économie? Paper presented to workshop at The Performativities of Economics, Paris, August 29–30.Google Scholar
Faulhaber, Gerald L., and Baumöl, William J. (1988) Economists as Innovators: Practical Products of Theoretical Research, Journal of Economic Literature, 26 (2), pp. 577–600.Google Scholar
Galai, Dan (1977) Tests of Market Efficiency of the Chicago Board Options Exchange, Journal of Business 50 (2), pp. 167–97.CrossRefGoogle Scholar
Gastineau, Gary L. (1975) The Stock Options Manual (New York: McGraw-Hill).Google Scholar
Gastineau, Gary L. (1979) The Stock Options Manual, 2nd edition (New York: McGraw-Hill).Google Scholar
Gladstein, M. L. (1999) Interview conducted by author, New York, 15 11 1999.Google Scholar
Holm, Petter (2003) Which Way is Up on Callon? Sociologisk Årbok, 1, pp. 125–56.Google Scholar
Hull, John C. (2000) Options, Futures, & Other Derivatives (Upper Saddle River, NJ: Prentice-Hall).Google Scholar
Hutchins, Edwin (1995a) Cognition in the Wild (Cambridge, MA: MIT Press).Google Scholar
Hutchins, Edwin (1995b) How a Cockpit Remembers Its Speeds, Cognitive Science, 19 (3), pp. 265–88.CrossRefGoogle Scholar
Jackwerth, Jens Garsten (2000) Recovering Risk Aversion from Option Prices and Realized Returns, Review of Financial Studies, 13 (2), pp. 433–51.Google Scholar
Jackwerth, Jens Garsten, and Mark, Rubinstein (1996) Recovering Probability Distributions from Option Prices, Journal of Finance, 51 (5), pp. 1611–31.CrossRefGoogle Scholar
Kairys, Joseph P. Jr, and IIIValerio, Nicholas (1997) The Market for Equity Options in the 1870s, Journal of Finance, 52 (4), pp. 1707–23.Google Scholar
Kassouf, Sheen T. (1965) A Theory and an Econometric Model for Common Stock Purchase Warrants (Brooklyn, NY: Analytical Publishers).Google Scholar
Krishna, Daya (1971) “The Self-Fulfilling Prophecy” and the Nature of Society, American Sociological Review, 36 (6), pp. 1104–107.CrossRefGoogle Scholar
Latour, Bruno (1987) Science in Action (Cambridge, MA: Harvard University Press).Google Scholar
Latour, Bruno (1999) Pandora's Hope: Essays on the Reality of Science Studies (Cambridge, MA: Harvard University Press).Google Scholar
MacKenzie, Donald (2001) Physics and Finance: S-terms and Modern Finance as a Topic for Science Studies, Science, Technology, and Human Values, 26 (2), pp. 115–44.CrossRefGoogle Scholar
MacKenzie, Donald (2003) An Equation and its Worlds: Bricolage, Exemplars, Disunity and Performativity in Financial Economics, Social Studies of Science, 33 (6), pp. 831–68.Google Scholar
MacKenzie, Donald (2004) The Big, Bad Wolf and the Rational Market: Portfolio Insurance, the 1987 Crash and the Performativity of Economics, Economy and Society, 33 (3), pp. 303–34.Google Scholar
MacKenzie, Donald (2006) An Engine, Not a Camera: How Financial Models Shape Markets (Cambridge, MA: MIT Press).CrossRefGoogle Scholar
MacKenzie, Donald and Millo, Yuval (2003) Constructing a Market, Performing Theory: The Historical Sociology of a Financial Derivatives Exchange, American Journal of Sociology, 109 (1), pp. 107–45.CrossRefGoogle Scholar
Mehrling, Perry (2005) Fischer Black and the Revolutionary Idea of Finance (New York: Wiley).Google Scholar
Merton, Robert C. (1973) Theory of Rational Option Pricing, Bell Journal of Economics and Management Science, 4 (1), pp. 141–83.Google Scholar
Merton, Robert C. (1976) Option Pricing when Underlying Stock Returns are Discontinuous, Journal of Financial Economics, 3 (1–2), pp. 125–44.Google Scholar
Merton, Robert C., and Bodie, Zvi (2005) The Design of Financial Systems: Towards a Synthesis of Function and Structure, Journal of Investment Management, 3 (1), pp. 1–23.Google Scholar
Merton, Robert K. (1948) The Self-Fulfilling Prophecy, Antioch Review, 8 (Summer), pp. 193–210.CrossRefGoogle Scholar
Millo, Yuval (Forthcoming) Talking about Risk: Risk Assessment Methods as Communicative Media in Financial Markets, Science, Technology, and Human Values, (under consideration).Google Scholar
Mirowski, Philip (1995) Mandelbrot's Economics after a Quarter Century, Fractals, 3 (3), pp. 581–600.CrossRefGoogle Scholar
Mirowski, Philip and Nik-Khah, Edward (2004) Markets Made Flesh: Callòn, Performativity, and a Crisis in Science Studies, augmented with consideration of the FCC auctions, Paper presented to workshop, The Performativities of Economics, Paris, August 29–30.Google Scholar
Parkinson, Michael (1977) Option Pricing: The American Put, Journal of Business, 50 (1), pp. 21–36.Google Scholar
Passell, Peter (1997) 2 Get Nobel for a Formula at the Heart of Options Trading, New York Times 10 15: D1 and D4.Google Scholar
Rissman, Burton R. (1999) Interview conducted by Author, Chicago, IL, 11 9.Google Scholar
Ross, Stephen A. (1987) Finance, in: Eatwell, John, Milgate, Murray, and Newman, Peter (Eds) The New Palgrave Dictionary of Economics, vol. 2, (London: Macmillan), pp. 322–36.Google Scholar
Rubinstein, Mark (1994) Implied Binomial Trees, Journal of Finance, 49 (3), pp. 771–818.CrossRefGoogle Scholar
Rubinstein, Mark (2000) Interview conducted by Author, Berkeley, CA, 06 12.Google Scholar
Scholes, Myron S. (1998) Derivatives in a Dynamic Environment, in: Les Prix Nobel 1997 (Stockholm: Almquist), pp. 475–502.Google Scholar
Searle, John R. (1996) The Construction of Social Reality (London: Penguin).Google Scholar
Seligman, Joel (1982) The Transformation of Wall Street: A History of the Securities and Exchange Commission and Modern Corporate Finance (Boston: Houghton Mifflin).Google Scholar
Swensen, David F. (2000) Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment (New York: Free Press).Google Scholar
Taleb, Nassim (1998) How the Ought Became the Is: Futures and OTC World, Black-Scholes-Merton Supplement, pp. 35–36.Google Scholar
Thorp, Edward O. and Kassouf, Sheen T. (1967) Beat the Market: A Scientific Stock Market System (New York: Random House).Google Scholar
Wellemeyer, Marilyn (1973) The Value in Options, Fortune 88/5 (11), pp. 89–96.Google Scholar
Whitley, Richard (1986a) The Rise of Modern Finance Theory: Its Characteristics as a Scientific Field and Connections to the Changing Structure of Capital Markets, Research in the History of Economic Thought and Methodology, 4, pp. 147–78.Google Scholar
Whitley, Richard (1986b) The Transformation of Business Finance into Financial Economics: The Roles of Academic Expansion and Changes in U.S. Capital Markets, Accounting, Organizations and Society, 11 (2), pp. 171–92.Google Scholar
Zimmermann, Heinz and Hafner, Wolfgang (n.d.) Professor Bronzin's Option Pricing Models (1908), typescript.Google Scholar