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

Normal Accidents of Expertise

Charles Perrow used the term “normal accidents” to characterize a type of catastrophic failure that resulted when complex, tightly coupled production systems encountered a certain kind of anomalous event. These were events in which systems failures interacted with one another in a way that could not be anticipated, and could not be easily understood and corrected. Systems of the production of expert knowledge are increasingly becoming tightly coupled. Unlike classical science, which operated with a long time horizon, many current forms of expert knowledge are directed at immediate solutions to complex problems. These are prone to breakdowns like the kind discussed by Perrow. The example of the Homestake mine experiment shows that even in modern physics complex systems can produce knowledge failures that last for decades. The concept of knowledge risk is introduced, and used to characterize the risk of failure in such systems of knowledge production

Kuhn e as ciências sociais

No texto, são expostos os motivos básicos pelos quais o vocabulário emprestado de Thomas Kuhn - notadamente o termo paradigma - e o modelo de desenvolvimento científico exposto pelo autor em seu A estrutura das revoluções científicas foram tomados de empréstimo em textos que discutem a epistemologia das ciências sociais. A conclusão é que as supostas aplicações do modelo kuhniano às ciências sociais se baseiam em leitura que não encontra qualquer apoio no autor e, principalmente, obscurecem as implicações mais amplas de sua obra.<br>The article shows for what reasons the vocabulary and the model for scientific growth of Thomas Kuhn were borrowed by epistemologists of the social sciences. The conclusion is that the texts produced in this vein are based in a shallow understanding of the author's main implications