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Did Black-Scholes Cause the Housing Bubble?

by Felix Salmon Feb 19, 2008

Michael Lewis gets his nerd on in the March issue of Portfolio, wading into the Taleb vs Black-Scholes debate. But he actually seems to go even further than Taleb. Think of three levels of skepticism when it comes to the option market:

  1. The naive broker-dealer view: Black-Scholes enabled us to price options, and a large and efficient market is built on it.
  2. The Taleb view: Bachelier-Thorp (which predates Black-Scholes) enabled us to trade options, and a large and efficient market is built on it, and Black-Scholes is irrelevant.
  3. The Lewis view: Black-Scholes enabled us to price options, and a large market is built on it, and Black-Scholes is wrong, and so we're all doomed.
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