Searching for the Kuhnian moment : the Black-Scholes-Merton formula and the evolution of modern finance theory

The Black-Scholes-Merton formula has been put to widespread use by options traders because it provides a means of calculating the theoretically 'correct' price of stock options. Traders can therefore see whether the market price of stock options undervalues or overvalues them compared with their hypothetical Black-Scholes-Merton price, before choosing to buy or sell options accordingly. As a consequence of this close relationship between options pricing theory and options pricing practice, a strong performativity loop was activated, whereby market prices quickly converged on the hypothetical Black-Scholes-Merton prices following the dissemination of the formula. The theory has therefore had significant real-world effects, but how should we characterize the initial instinct to derive the theory from a philosophy of science perspective? The two books under review suggest that a Kuhnian reading of the advancement of scientific knowledge might well be the most appropriate. But, on closer inspection, it becomes clear that the publication of the Black-Scholes-Merton formula should not be seen as a Kuhnian moment with paradigm-shaping attributes. It is shown that, at most, the formula acts as an important exemplar which, via its use in the training of options pricing theorists and options pricing practitioners, reinforces the entrenchment of finance theory within the orthodox economics worldview

J.S. Bell's Concept of Local Causality

John Stewart Bell's famous 1964 theorem is widely regarded as one of the most important developments in the foundations of physics. It has even been described as "the most profound discovery of science." Yet even as we approach the 50th anniversary of Bell's discovery, its meaning and implications remain controversial. Many textbooks and commentators report that Bell's theorem refutes the possibility (suggested especially by Einstein, Podolsky, and Rosen in 1935) of supplementing ordinary quantum theory with additional ("hidden") variables that might restore determinism and/or some notion of an observer-independent reality. On this view, Bell's theorem supports the orthodox Copenhagen interpretation. Bell's own view of his theorem, however, was quite different. He instead took the theorem as establishing an "essential conflict" between the now well-tested empirical predictions of quantum theory and relativistic \emph{local causality}. The goal of the present paper is, in general, to make Bell's own views more widely known and, in particular, to explain in detail Bell's little-known mathematical formulation of the concept of relativistic local causality on which his theorem rests. We thus collect and organize many of Bell's crucial statements on these topics, which are scattered throughout his writings, into a self-contained, pedagogical discussion including elaborations of the concepts "beable", "completeness", and "causality" which figure in the formulation. We also show how local causality (as formulated by Bell) can be used to derive an empirically testable Bell-type inequality, and how it can be used to recapitulate the EPR argument.Comment: 19 pages, 4 figure

Integrating History and Philosophy of Science

Part One of the paper begins by recalling a historic conference in 1969 that argued the importance of work that would draw on both history and philosophy of science, two academic fields that had in the previous decades distanced themselves from one another. It goes on to review the rather mixed success of that appeal in the years since then and to suggest the need for a forum that would encourage work of that kind, of the sort that &HPS would offer. Part Two is, in effect, a case study taking a brief look at five moments in 17th century science and noting the emergence of two rather different, but in effect complementary, conceptions of natural science at that time

Is There a Well Defined Scientific Method?

Does science follow some sort of standard procedure, something that can be specified and communicated? Three centuries ago, Francis Bacon prophesied confidently that such a procedure could be devised so that the whole business of science could be done as though by machinery. In the years between, scientific research has grown from an obscure and unrecognized undertaking of a handful of virtuosos to a massive and concerted endeavor on the part of hundreds of thousands of persons . What has made such a fantastic expansion possible in such a short time? Is it that people have been taught the steps by which science is carried on, so that they can go off and carry research further on their own? This is the impression given by many elementary textbooks of science; indeed, this Baconian view of science is found on occasion among those who are themselves distinguished for their scientific work