An Engine, Not a Camera: How Financial Models Shape Markets
In An Engine, Not a Camera, Donald MacKenzie argues that the emergence of modern economic theories of finance affected financial markets in fundamental ways. These new, Nobel Prize-winning theories, based on elegant mathematical models of markets, were not simply external analyses but intrinsic parts of economic processes.
Paraphrasing Milton Friedman, MacKenzie says that economic models are an engine of inquiry rather than a camera to reproduce empirical facts. More than that, the emergence of an authoritative theory of financial markets altered those markets fundamentally. For example, in 1970, there was almost no trading in financial derivatives such as "futures." By June of 2004, derivatives contracts totaling $273 trillion were outstanding worldwide. MacKenzie suggests that this growth could never have happened without the development of theories that gave derivatives legitimacy and explained their complexities.
MacKenzie examines the role played by finance theory in the two most serious crises to hit the world's financial markets in recent years: the stock market crash of 1987 and the market turmoil that engulfed the hedge fund Long-Term Capital Management in 1998. He also looks at finance theory that is somewhat beyond the mainstream—chaos theorist Benoit Mandelbrot's model of "wild" randomness. MacKenzie's pioneering work in the social studies of finance will interest anyone who wants to understand how America's financial markets have grown into their current form.
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LibraryThing ReviewUser Review - PointedPundit - LibraryThing
Both the science and the art and practice of finance have experienced phenomenal growth since the 1970s. As a science, finance has evolved from a descriptive outpost on the economic frontiers to ... Read full review
1 Performing Theory?
2 Transforming Finance
3 Theory and Practice
4 Tests Anomalies and Monsters
5 Pricing Options
6 Pits Bodies and Theorems
7 The Fall
Appendix D The BlackScholes Equation for a European Option on a Non DividendBearing Stock
Appendix E Pricing Options in a Binomial World
Appendix F Repo Haircuts and Reverse Repo
Appendix G A Typical SwapSpread Arbitrage Trade
Appendix H List of Interviewees
Sources of Unpublished Documents