The Social Dimensions of Black Scholes
The Social Dimensions of Black Scholes
Saturday, June 25, 2016: 10:45 AM-12:15 PM
262 Dwinelle (Dwinelle Hall)
All financial economic analyses of the pricing of derivatives take the position of the primacy of the Black Scholes formula for options pricing. The analyses may be tweaked in numerous directions, but the centrality of Black Scholes formula is undisputed. As the quantitative analyst Emanuel Derman (forthcoming) says “the breakthrough achievement it represents has dominated finance over the past forty years (p.12). This is true not only theoretically but practically. As former derivative trader Nassim Taleb observes: “no experienced trader would willingly trade Black-Scholes-Merton for another pricing tool” (1997:109). Even further, resolving the BS pricing equation through the use of the finite difference method has become the standard, programmed into the computer programs and handheld calculators used by traders. Finance economists as a group have argued that the discovery of the Black and Scholes options pricing formula is akin to the discovery of the structure of DNA: both discoveries spawned “new fields of immense practical importance: genetic engineering on the one hand and, on the other, financial engineering” (financial economist Zvi Bodie on the PBS documentary Nova, quoted in Planes 2013). A modest approximation is that yearly the face value of derivatives priced using the BS model is considerably north of global production (BIS 2012). Large numbers aside, the power of derivatives to inflect economic life and the centrality of Black Scholes in the pricing of those derivatives define it as one of the primary driving technologies of the culture of financial circulation. There is again the alternative view from the standpoint of the evolution of capitalism: that the Black and Scholes formula is sociohistorically specific to the work and workings of the derivative markets and a key component of the deeper performative subject responsible for recreating a specific mode of totality.