ABSTRACT This paper describes and analyses the history of the fundamentalequation of modern financial economics: the Black-Scholes (or Black-Scholes-Merton)option pricing equation. In that history, several themes of potentially generalimportance are revealed. First, the key mathematical work was not rule-following butbricolage, creative tinkering. Second, it was, however, bricolage guided by the goalof finding a solution to the problem of option pricing analogous to existingexemplary solutions, notably the Capital Asset Pricing Model, which had successfullybeen applied to stock prices. Third, the central strands of work on option pricing,although all recognizably ‘orthodox’ economics, were not unitary. There wassignificant theoretical disagreement amongst the pioneers of option pricing theory;this disagreement, paradoxically, turns out to be a strength of the theory. Fourth,option pricing theory has been performative. Rather than simply describing a pre-existing empirical state of affairs, it altered the world, in general in a way that madeitself more true.Keywords Black-Scholes, bricolage, option pricing, performativity, social studies offinanceAn Equation and its Worlds:Bricolage, Exemplars, Disunity andPerformativity in Financial EconomicsDonald MacKenzieEconomics and economies are becoming a major focus for social studies ofscience. Historians of economics such as Philip Mirowski and the smallnumber of sociologists of economics such as Yuval Yonay have beenapplying ideas from science studies with increasing frequency in the lastdecade or so.1Established science-studies scholars such as Knorr Cetinaand newcomers to the field such as Izquierdo, L´epinay, Millo and Muniesahave begun detailed, often ethnographic, work on economic processes,with a particular focus on financial markets.2Actor-network theoristMichel Callon has conjoined the two concerns by arguing that an intrinsiclink exists between studies of economics and of economies. The economy isnot an independent object that economics observes, argues Callon (1998).Rather, the economy is performed by economic practices. Accountancyand marketing are among the more obvious such practices, but, claimsCallon, economics in the academic sense plays a vital role in constitutingand shaping modern economies.Social Studies of Science 33/6(December 2003) 831–868© SSS and SAGE Publications (London, Thousand Oaks CA, New Delhi)[0306-3127(200312)33:6;831–868;039200]www.sagepublications.comThis paper contributes to the emergent science-studies literature oneconomics and economies by way of a historical case study of option†pricing theory (terms marked †are defined in the glossary in Table 1). Thetheory is a ‘crown jewel’ of modern economics: ‘when judged by its abilityto explain the empirical data, option pricing theory is the most successfultheory not only in finance, but in all of economics’ (Ross, 1987: 332). Overthe last three decades, option theory has become a vitally important part offinancial practice. As recently as 1970, the market in derivatives†such asoptions was tiny; indeed, many modern derivatives were illegal. ByDecember 2002, derivatives contracts totaling US$165.6 trillion wereoutstanding worldwide, a sum equivalent to around US$27,000 for everyhuman being on earth.3Because of its centrality to this huge market, theequation that is my focus here, the Black-Scholes option pricing equation,may be ‘the most widely used formula, with embedded probabilities, inhuman history’ (Rubinstein, 1994: 772).The development of option pricing theory is part of a larger trans-formation of academic finance. Until the 1960s, the study of finance was amarginal, low status activity: largely descriptive in nature, taught in busi-ness schools not in economics departments, and with only weak in-tellectual linkages to economic theory. Since the 1960s, finance has be-come analytical, theoretical and highly quantitative. Although mostacademic finance theorists’ posts are still in business schools, much of whatthey teach is now unequivocally part of economics. Five finance theorists –including two of the central figures discussed here, Robert C. Merton andMyron Scholes – have won Nobel prizes in economics.This intellectual transformation was interwoven with the rapid expan-sion of business schools in the US. In the mid-1950s, US business schoolswere producing around 3000 MBAs annually. By the late 1990s, thatfigure had risen to over 100,000 (Skapiner, 2002). As business schoolsgrew, they also became more professional and ‘academic’, especially afterthe influential Ford Foundation report, Higher Education for Business (Gor-don and Howell, 1959). At the same time, the importance of the financesector in the US economy grew dramatically, and increasing proportions offinancial assets were held not directly by individuals but by organizationssuch as mutual funds and pension funds. These organizations formed aready job market for the growing cohorts of students trained in finance.The transformation of the academic study of finance is the subject of afine history by Bernstein (1992), and the interactions between this trans-formation, the evolution of US business schools, and changing capitalmarkets have been analysed ably by Whitley (1986a, 1986b). However,what the existing literature has not done fully is to ‘open the black box’ ofmathematical finance theory. That – at least for the theory of option pricing– is this paper’s goal.4Limitation of space means that the focus of this paper is on themathematics of option pricing theory and on its intellectual context. Theinteraction between theory and practice – the processes of the adoption bypractitioners of option pricing theory, and the consequences of its adoption832 Social Studies of Science 33/6– is the subject of a ‘sister’ paper (MacKenzie and Millo, forthcoming),although the issue of performativity means that the subject-matter of thatpaper will be revisited briefly below.In this article, four themes will emerge. I would not describe them as‘findings’, because of the limitations on what can be inferred from a singlehistorical case-study, but they may be of general significance. The firsttheme is bricolage. Creative scientific practice is typically not the followingof set rules of method: it is ‘particular courses of action with materials atTABLE 1TerminologyArbitrage; arbitrageur Trading that seeks to profit from price discrepancies; a