## An Engine, Not a Camera: How Financial Models Shape MarketsIn 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. |

### What people are saying - Write a review

#### Review: An Engine, Not a Camera: How Financial Models Shape Markets

User Review - John Farr - GoodreadsThis is a wonderfully informative book on the history and sociology of financial theory. The author shows a great command of the subject matter, which I found impressive as he is a sociologist by ... Read full review

#### Review: An Engine, Not a Camera: How Financial Models Shape Markets

User Review - Taylor - Goodreadsa canonical, must-read in the social studies of finance. Read full review

### Contents

1 | |

2 Transforming Finance | 37 |

3 Theory and Practice | 69 |

4 Tests Anomalies and Monsters | 89 |

5 Pricing Options | 119 |

6 Pits Bodies and Theorems | 143 |

7 The Fall | 179 |

8 Arbitrage | 211 |

Appendix D The BlackScholes Equation for a European Option on a Non DividendBearing Stock | 283 |

Appendix E Pricing Options in a Binomial World | 285 |

Appendix F Repo Haircuts and Reverse Repo | 289 |

Appendix G A Typical SwapSpread Arbitrage Trade | 291 |

Appendix H List of Interviewees | 293 |

Glossary | 297 |

Notes | 303 |

Sources of Unpublished Documents | 331 |

9 Models and Markets | 243 |

Appendix A An Example of Modigliani and Millers Arbitrage Proof of the Irrelevance of Capital Structure to Total Market Value | 277 |

Appendix B Lévy Distributions | 279 |

Appendix C Sprenkles and Kassoufs Equations for Warrant Prices | 281 |

333 | |

Series List | 369 |

371 | |

### Common terms and phrases

academic analysis anomalies arbitrage arbitrageurs Asset Pricing Model banks Barnesian beta Black and Scholes Black-Scholes Black-Scholes-Merton model Board of Trade Board Options Exchange bonds call option Capital Asset Pricing Chicago Board Options contract corporations crash difﬁculties dividends effect efﬁcient efﬁcient-market hypothesis empirical equation Eugene Fama example expected return Fama ﬁeld ﬁgure ﬁnance theory ﬁnancial economics ﬁnancial markets ﬁnd ﬁrms ﬁrst Fischer Black ﬁt ﬁxed ﬂoor ﬂuctuations Friedman futures contract hedge implied volatility index funds index futures inﬁnite inﬂuence investment investors Jack Treynor Leland Lévy distributions log-normal LTCM LTCM’s managers Mandelbrot Mark Rubinstein market makers Markowitz mathematical Meriwether Merton Merton Miller Modigliani and Miller Myron Scholes O’Brien October option pricing option theory percent performativity portfolio insurance position proﬁts random walk reﬂect risk riskless rate Rubinstein Samuelson securities sell Sharpe signiﬁcant skew speciﬁc stock price strike price swap spread theoretical theorists theory’s Thorp tion Treynor underlying stock warrant