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A nuanced perspective on episteme and techne in finance

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  • Millo, Yuval
  • Schinckus, Christophe

Abstract

The debates on the Black and Scholes model shed light on the distinction between practices (i.e. inductive know-how or techne) and theory (i.e. deductive know-why or episteme) in finance. We revisit the classical distinction, still accepted widely in the literature, between episteme and techne and develop a nuanced view by introducing two other levels of knowledge we will call “commanding knowledge” (epitaktike) and “practical wisdom” (phronesis). The major contribution of this paper is to use these four levels of knowledge (episteme, epitaktike, techne and phronesis) in order to highlight how this model subtly influenced financial practices by shaping the microstructure of the emerging Chicago Board Options Exchange (CBOE). Our analysis will then be completed by a re-interpretation of the existing literature about the performativity of the BSM model to show how these levels of knowledge combined each other in the evolution post-crash (1987) financial practices.

Suggested Citation

  • Millo, Yuval & Schinckus, Christophe, 2016. "A nuanced perspective on episteme and techne in finance," International Review of Financial Analysis, Elsevier, vol. 46(C), pages 124-130.
    • Handle: RePEc:eee:finana:v:46:y:2016:i:c:p:124-130
    DOI: 10.1016/j.irfa.2016.04.001
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    References listed on IDEAS

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    1. Emanuel Derman & Nassim Nicholas Taleb, 2005. "The illusions of dynamic replication," Quantitative Finance, Taylor & Francis Journals, vol. 5(4), pages 323-326.
    2. Darrell Duffie, 1998. "Black, Merton and Scholes — Their Central Contributions to Economics," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(2), pages 411-424, June.
    3. Millo, Yuval & MacKenzie, Donald, 2009. "The usefulness of inaccurate models: Towards an understanding of the emergence of financial risk management," Accounting, Organizations and Society, Elsevier, vol. 34(5), pages 638-653, July.
    4. Donald MacKenzie, 2006. "An Engine, Not a Camera: How Financial Models Shape Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262134608, December.
    5. Black, Fischer & Scholes, Myron S, 1972. "The Valuation of Option Contracts and a Test of Market Efficiency," Journal of Finance, American Finance Association, vol. 27(2), pages 399-417, May.
    6. Haug, Espen Gaarder & Taleb, Nassim Nicholas, 2011. "Option traders use (very) sophisticated heuristics, never the Black-Scholes-Merton formula," Journal of Economic Behavior & Organization, Elsevier, vol. 77(2), pages 97-106, February.
    7. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    8. Duffie, Darrell, 1998. " Black, Merton and Scholes--Their Central Contributions to Economics," Scandinavian Journal of Economics, Wiley Blackwell, vol. 100(2), pages 411-423, June.
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    Cited by:

    1. Lagoarde-Segot, Thomas & Paranque, Bernard, 2018. "Finance and sustainability: From ideology to utopia," International Review of Financial Analysis, Elsevier, vol. 55(C), pages 80-92.
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    3. Jovanovic, Franck & Schinckus, Christophe, 2017. "Econophysics and Financial Economics: An Emerging Dialogue," OUP Catalogue, Oxford University Press, number 9780190205034.

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    More about this item

    Keywords

    Episteme; Techne; Options; Chicago board options exchange; Market makers;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • Z1 - Other Special Topics - - Cultural Economics

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