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An Engine, Not a CameraHow Financial Models Shape MarketsDonald MacKenzieThe MIT PressCambridge, MassachusettsLondon, England
© 2006 Massachusetts Institute of TechnologyAll rights reserved. No part of this book may be reproduced in any form by anyelectronic or mechanical means (including photocopying, recording, or informationstorage and retrieval) without permission in writing from the publisher.This book does not constitute financial advice, and it is sold with the understandingthat neither the author nor the publisher is engaged in rendering investing, legal,accounting, or other professional service. If investment advice or other expert assistanceis required, the services of a competent professional person should be sought.MIT Press books may be purchased at special quantity discounts for business or salespromotional use. For information, please email special_sales@mitpress.mit.edu orwrite to Special Sales Department, The MIT Press, 55 Hayward Street, Cambridge,MA 02142.Set in Baskerville by SNP Best-set Typesetter Ltd., Hong Kong. Printed and boundin the United States of America.Library of Congress Cataloging-in-Publication DataMacKenzie, Donald A.An engine, not a camera : how financial models shape markets / Donald MacKenzie.p. cm. — (Inside technology)Includes bibliographical references and index.ISBN 0-262-13460-81. Capital market—Mathematical models. 2. Derivative securities—Mathematicalmodels. 3. Financial crises—Mathematical models. 4. Financial crises—Casestudies. I. Title. II. Series.HG4523.M24 2006 332'.01'5195—dc22 200505211510987654321
Page 1 and 2: An Engine, Not a CameraHow Financia
Page 3: Inside Technologyedited by Wiebe E.
Page 8 and 9: ContentsAcknowledgementsix1Performi
Page 10 and 11: AcknowledgementsTo research and to
Page 12: An Engine, Not a Camera
Page 15 and 16: 2 Chapter 1influence grew, he took
Page 17 and 18: 4 Chapter 1global and apparently im
Page 19 and 20: 6 Chapter 1but does not oblige the
Page 21 and 22: 8 Chapter 1The mathematicization of
Page 23 and 24: 10 Chapter 1‘explains’ much by
Page 25 and 26: 12 Chapter 1we might call the “ep
Page 27 and 28: 14 Chapter 1and the trace of owners
Page 29 and 30: 16 Chapter 1performs, shapes and fo
Page 31 and 32: 18 Chapter 1means that it is used,
Page 33 and 34: 20 Chapter 1Third, in Robert K. Mer
Page 35 and 36: 22 Chapter 1Difficulties remain eve
Page 37 and 38: 24 Chapter 1of stock-price changes
Page 39 and 40: 26 Chapter 1of science and the hist
Page 41 and 42: 28 Chapter 1of LTCM’s crisis pres
Page 43 and 44: 30 Chapter 1a Barnesian strand to t
Page 45 and 46: 32 Chapter 1Chapter 6 turns to the
Page 47 and 48: 34 Chapter 1own applications was im
Page 50 and 51: 2Transforming FinanceIn the 1950s,
Page 52 and 53: Transforming Finance 39States: the
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Transforming Finance 41A second pap
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Transforming Finance 43simplified a
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was inadequate: “. . . they have
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Transforming Finance 47in a year’
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Transforming Finance 49Figure 2.1Th
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Koopmans as head of the Cowles Comm
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Transforming Finance 53100). Instea
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Transforming Finance 55follows from
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Although Sharpe did not know it at
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Transforming Finance 59The market,
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Transforming Finance 61successive t
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Transforming Finance 63made a mista
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Transforming Finance 65walk was a b
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Transforming Finance 67could not ha
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70 Chapter 3A New SpecialtyAnother
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72 Chapter 3focusing on stocks and
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74 Chapter 3which “an individual
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76 Chapter 3the Wall Street Journal
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78 Chapter 3theory? Buffett’s inv
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80 Chapter 3security analysis today
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82 Chapter 3“securities are corre
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84 Chapter 31978, p. 62) The 1970s,
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86 Chapter 3proponent of efficient-
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88 Chapter 3development preceded an
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90 Chapter 4(CRSP). Even Fama and M
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92 Chapter 4disappears when we cont
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94 Chapter 4theorist Stephen Ross o
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96 Chapter 4phenomena to merit a sp
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98 Chapter 4interpreted in more tha
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100 Chapter 4smallest 20 percent of
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102 Chapter 4were right and the cou
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104 Chapter 4The testimony of arbit
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106 Chapter 4“The random walk the
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108 Chapter 4Though the case of a s
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110 Chapter 4that is closer to that
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112 Chapter 4If changes in short ti
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114 Chapter 4the data better than t
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116 Chapter 4the tools that are ava
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118 Chapter 4were vanishing—what
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120 Chapter 5prices tended to rise
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122 Chapter 5Warrants and other for
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124 Chapter 5determining warrant pr
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126 Chapter 5Thorp and Kassouf depi
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128 Chapter 5decisions typically in
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130 Chapter 5Among the assets to wh
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132 Chapter 5in August 1970, becaus
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134 Chapter 5cases aside, a rationa
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136 Chapter 5So Merton set to work
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138 Chapter 5The mathematical compl
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140 Chapter 5prices in this way was
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142 Chapter 5The Black-Scholes-Mert
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144 Chapter 6Plywood and shrimp did
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146 Chapter 6of the dollar itself w
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148 Chapter 6to close the “gold w
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150 Chapter 6the pedestrian, “the
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152 Chapter 6held my hand tightly a
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154 Chapter 6would help him, “inc
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156 Chapter 6remain stable in membe
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158 Chapter 6Black-Scholes analysis
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160 Chapter 6sold, but they were no
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162 Chapter 6become interested in o
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164 Chapter 6Black’s sheets to th
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166 Chapter 6in the terminology of
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Pits, Bodies, and Theorems 169As th
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Pits, Bodies, and Theorems 171In 19
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Pits, Bodies, and Theorems 173The M
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Pits, Bodies, and Theorems 175Futur
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Pits, Bodies, and Theorems 177By 19
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180 Chapter 7the size of position i
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182 Chapter 7and then to adjust a p
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184 Chapter 7on the markets.” If
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186 Chapter 7. . . the crowd detect
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188 Chapter 7300 points at that tim
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190 Chapter 7with the main “blue
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192 Chapter 7In the absence of a mo
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194 Chapter 7the large number of sm
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196 Chapter 7‘crashes’ can occu
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198 Chapter 7Indeed, sunshine tradi
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200 Chapter 7pension funds wished t
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202 Chapter 7is a limit case of the
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204 Chapter 7draw on it. However, a
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206 Chapter 7realized he had to sel
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208 Chapter 7options, whereas a rel
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210 Chapter 7bar [margin requiremen
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212 Chapter 8Bonds, Derivatives, an
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214 Chapter 8From the mid 1970s on,
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216 Chapter 8sophistication in orde
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218 Chapter 8to arbitrage would typ
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220 Chapter 8LTCM’s returns befor
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222 Chapter 8quantities of five-yea
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224 Chapter 8Was LCTM’s Trading A
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226 Chapter 8find anyone inside or
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228 Chapter 8Even if the details of
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230 Chapter 8Initially, the Russian
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232 Chapter 8Furthermore, as market
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234 Chapter 8Quite reasonably, Meri
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236 Chapter 8Information Act shows
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238 Chapter 8Table 8.1Average impli
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Table 8.3LTCM’s thirteen major po
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242 Chapter 8A Global Microstructur
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244 Chapter 9Making ModelsAs with c
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246 Chapter 9When research producti
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248 Chapter 9into a “working rout
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250 Chapter 9dividend discount mode
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252 Chapter 9Derivatives were haunt
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254 Chapter 9competently and with a
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256 Chapter 9many were Ph.D. studen
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258 Chapter 9As a result, the Black
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260 Chapter 9It is conceivable that
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262 Chapter 9It is also plausible
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264 Chapter 9The more stable prices
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266 Chapter 9anticipation of how ou
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268 Chapter 9emphasizes the ways in
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270 Chapter 9from this knowledge? T
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272 Chapter 9not exist a close subs
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274 Chapter 9treat markets not in t
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Appendix AAn Example of Modigliani
Page 292:
Appendix BLévy DistributionsThe di
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282 Appendix Csuch as a warrant or
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284 Appendix DBlack’s work with S
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286 Appendix EThe portfolio of a un
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288 Appendix E$400$200$100$100$50$2
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290 Appendix Fquestion. Party A fin
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292 Appendix Gto the haircut was 3
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294 Appendix HLocation ofInterviewe
Page 310 and 311:
GlossaryThis glossary contains the
Page 312 and 313:
Glossary 299expected value If a qua
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Glossary 301preferred stock Stock w
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NotesChapter 11. Leo Melamed, email
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Notes to pp. 11-16 30523. See, for
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41. A “limit order” to buy an o
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13. Another source recommended to M
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43. See, e.g., Galison 1994; Jeriso
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Notes to pp. 83-91 31318. Source: O
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quantity of the product that will b
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44. The role of Clark’s work is e
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normal distribution. Using the Tayl
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11. See, e.g., Hull interview. Abol
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4. Brady Commission 1988, pp. 40-41
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Notes to pp. 210-221 325derivatives
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Notes to pp. 239-253 32726. For Ger
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19. Miller’s own theory of “vir
Page 344:
Sources of Unpublished DocumentsBla
Page 347 and 348:
334 ReferencesArmatte, Michel. 1998
Page 349 and 350:
336 ReferencesBlack, Fischer. 1975b
Page 351 and 352:
338 ReferencesBruck, Connie. 1989.
Page 353 and 354:
340 ReferencesCox, John C., Jonatha
Page 355 and 356:
342 ReferencesFama, Eugene F., and
Page 357 and 358:
344 ReferencesGennotte, Gérard, an
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346 ReferencesHassoun, Jean-Pierre.
Page 361 and 362:
348 ReferencesJensen, Michael C., a
Page 363 and 364:
350 ReferencesKushner, H.J. 1967. S
Page 365 and 366:
352 ReferencesMacKinlay, A. Craig.
Page 367 and 368:
354 ReferencesMelamed, Leo, with Bo
Page 369 and 370:
356 ReferencesModigliani, Franco. 1
Page 371 and 372:
358 ReferencesPassell, Peter. 1997.
Page 373 and 374:
360 ReferencesRoss, Stephen A. 1976
Page 375 and 376:
362 ReferencesSEC Division of Marke
Page 377 and 378:
364 ReferencesStambaugh, Robert F.
Page 379 and 380:
366 ReferencesVoorhees, Mark. 1988.
Page 381 and 382:
368 ReferencesZorn, Dirk M. 2004.
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370Maggie Mort, Building the Triden
Page 385 and 386:
372 IndexCalculators, 159, 160Calis
Page 387 and 388:
374 IndexJournal of Finance, 38Jour
Page 389 and 390:
376 IndexSamuelson, P., 8-12, 31, 6
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