The thesis that economics is “performative” (1998) has provoked much interest but also some puzzlement and not a little confusion. The purpose of this article is to examine from the viewpoint of performativity one of the most successful areas of modern economics, the theory of options, and in so doing hopefully to clarify some of the issues at stake. To claim that economics is performative is to argue that it does things, rather than simply describing (with greater or lesser degrees of accuracy) an external reality that is not affected by economics. But what does economics do, and what are the effects of it doing what it does?
That the theory of options is an appropriate place around which to look for performativity is suggested by two roughly concurrent developments. Since the 1950s, the academic study of finance has been transformed from a low-status, primarily descriptive activity to a high-status, analytical, mathematical, Nobel-prize-winning enterprise. At the core of that enterprise is a theoretical account of options dating from the start of the 1970s (Black-Scholes). Around option theory there has developed a large array of sophisticated mathematical analyses of financial derivatives. (A “derivative” is a contract or security, such as an option, the value of which depends upon the price of another asset or upon the level of an index or interest rate.)
…Away from the hubbub, computers were used to generate Black-Scholes prices. Those prices were reproduced on sets of paper sheets which floor traders could carry around, often tightly wound cylindrically with only immediately relevant rows visible so that a quick squint would reveal the relevant price. While some individual traders and trading firms produced their own sheets, others used commercial services. Perhaps the most widely used sheets were sold by Fischer Black himself: see Figure 2. Each month, Black would produce computer-generated sheets of theoretical prices for all the options traded on US options exchanges, and have them photocopied and sent to those who subscribed to his pricing service. In 1975, for example, sheets for 100 stocks, with 3 volatility estimates for each stock, cost $1,271.09$3001975 per month, while a basic service with one stock and one volatility estimate cost $63.55$151975 per month (1975b, “The Option Service: An Introduction”)
At first sight, Black’s sheets look like monotonous arrays of figures. They were, however, beautifully designed for their intended role in “distributed cognition” (1995a and b). Black included what options traders using the Black-Scholes-Merton model needed to know, but no more than they needed to know—there is virtually no redundant information on a sheet—hence their easy portability. He found an ad hoc but satisfactory way of dealing with the consequences of dividends for option pricing (an issue not addressed in the original version of the model), and devoted particular care to the crucial matter of the estimation of volatility. Even the physical size of the sheets was well-judged. Prices had first to be printed on the large computer line-printer paper of the period, but they were then photo-reduced onto standard-sized paper, differently colored for options traded on the different exchanges. The resultant sheets were small enough for easy handling, but not so small that the figures became too hard to read (the reproduction in Figure 2 is smaller than full-scale).
How were Black’s sheets and similar option pricing services used? They could, of course, simply be used to set option prices. In April 1976, options trading began on the Pacific Stock Exchange in San Francisco, and financial economist Mark Rubinstein became a trader there. He told me in an interview that he found his fellow traders on the new exchange initially heavily reliant on Black’s sheets: “I walked up [to the most active option trading ‘crowd’] and looked at the screen [of market prices] and at the sheet and it was identical. I said to myself, ‘academics have triumphed’” (2000).