Re: [Pen-l] Benoit Mandelbrot and the wildness of financial markets: SciAm

[Jim Devine <jdevine03@xxxxxxxxx>]

Doug Henwood wrote:
> As I recall, there was initially some doubt about whether the classic
> Black-Scholes option pricing model was "correct" or not. But it was widely
> adopted, and became self-fulfilling. Prices gravitated towards their
> warranted BS (ha) levels.

In _Do Economists Make Markets? On the Performativity [yuk! jargon!]
of Markets_ (edited by MacKenzie _et al_), perhaps the best article is
by Donald MacKenzie. He argues that the introduction of B-S
"performed" options markets, i.e, shaped the actual behavior of
options prices to fit the B-S theory. But then after the 1987 panic,
B-S became "counterperformative." That is, the "practical use of an
aspect of economics [i.e., B-S] makes economic processes less like
their depiction by economics."

Phil Mirowki & Edward Nik-Khan's article is also very good, but
MacKenzie's is the best within the "Performativity" perspective. The
article by the founder of that school (Michel Callon) seems total B-S.
(My review of the book showed up in SCIENCE & SOCIETY, October 2008.)
-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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