Is Economics Performative? Option Theory and the Construction of Derivatives Markets

Abstract

The thesis that economics is “performative” (Callon 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. 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.)