Comments on Market Devices – round 3.5

September 9, 2008

This post does not address the great comments that the ‘round three’ post got, but only refers to Daniel’s post. Hence, ’round 3.5′ …

In a way Daniel’s post takes the post-AOM discussion a full circle and brings us back to the claim about the model’s inaccuracy. But, we’re not in square one any longer. Why? Mainly, because the discussion and the evidence around it (see the quotes from Derman and others) show us that many market participants were fully aware that the Black-Scholes-Merton model was not accurate and still (and this the crucial point) found it very useful and continued to shape markets with it as a tool. The point about inaccuracy of the model was there to show, in a provocative way, that what is important in markets are the interactive interpretations and constitutive actions of the various actors that make them up. That is, ‘usefulness’ is more important than ‘inaccuracy’. It is also true that once again, the only ones left scratching their heads while desperately trying to rebuild a coherent picture ‘the universe’ were EMH-following financial economists. The rest moved along, creating increasingly complex derivative contracts, trading algorithms and order routing systems, all using types of blatantly ‘non Black-Scholes-Merton’ distributions. And no, this is not a cheap snide at financial economists. We, economic sociologists should be aware and indeed, document and analyse, the effects that economics has on the shaping of institutions (someone said performativity?). Also, there are some financial economists who do ‘sociological’ work in disguise, but more on this in ‘round four’.

About the AOM session and being shell shocked: I was not shell shocked by the discussion, not at all. I thought that it was an invigorating and thought-provoking exchange. Being in a yacht that almost capsized into the pacific and then doing a mad rush to the airport to drop a rental and catch a flight, now that’s shell shock material…

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