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

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Overview

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, NobelPrize-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 fundLong-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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Editorial Reviews

From the Publisher
"A brilliant, extremely lucid account of the connections between financial economics and the development of futures, options, and derivatives markets between the 1950s and 2001." NeilFligstein American Journal of Sociology

" An Engine, Not a Camera is a compelling, detailed, and elegantly written exploration of the conditions in which finance economists help to make the world they seek to describe and predict. Donald MacKenzie has long been without equal as a sociologist of how late modern futures are brought into being and made authoritative. This is his best work yet."Steven Shapin , Franklin L. Ford Professor of the History of Science, HarvardUniversity

"Maggie Mort tells the fascinating and unusual story of the development of a high-tech submarine from the point of view of workers on the project."—Michel Callon, Ecole desMines de Paris

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Product Details

  • ISBN-13: 9780262633673
  • Publisher: MIT Press
  • Publication date: 9/30/2008
  • Series: Inside Technology
  • Edition description: New Edition
  • Pages: 392
  • Sales rank: 794,519
  • Product dimensions: 5.90 (w) x 8.80 (h) x 0.90 (d)

Meet the Author

Donald MacKenzie is Professor of Sociology (Personal Chair) at the University of Edinburgh.

His books include Inventing Accuracy (1990), Knowing Machines (1996), and Mechanizing Proof (2001), all published by the MIT Press. Portions ofAn Engine, not a Camera won the Viviana A. Zelizer Prize in economic sociology from the American Sociological Association.

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Table of Contents

1 Performing theory? 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
9 Models and markets 243
App. A An example of Modigliani and Miller's "Arbitrage proof" of the irrelevance structure to total market value 277
App. B Levy Distributions 279
App. C Sprenkle's and Kassouf's equations for warrant prices 281
App. D The Black-Scholes equation for a European option on a non-dividend-bearing stock 283
App. E Pricing options in a binomial world 285
App. F Repo, haircuts, and reverse repo 289
App. G A typical swap-spread arbitrage trade 291
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