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<p>I keep pushing back on this point, because Black-Scholes did not come from scientific thinking, strictly speaking. We have to be careful to define what we really mean by scientific. To be scientific means to apply the scientific method, that is, to use real-world results to create theories and then to use those theories to generate testable predictions which are then experimentally proven or disproven. </p>
<p>But, as I’ve been saying, that didn’t happen with Black-Scholes. If you actually read the original 1973 JPE article where Black-Scholes first appeared, the authors never actually demonstrated that empirical evidence conformed to the Black-Scholes model. Quite the opposite, in fact. The paper actually states “We have done empirical tests of the valuation formula on a large body of call-option data. These tests indicate that the actual process at which options are bought and sold deviate in certain systematic ways from the values predicted by the formula.” In other words, Black-Scholes states what the authors believe should happen, but not what actually happens in the real world. That is not scientific, for true scientists attempt to describe real-world phenomenon as they actually are, not what they believe should be. </p>
<p>Look, I agree that the derivation of Black-Scholes is deductive. It’s logical. It’s rigorous. Of those adjectives, I would agree with you. But that’s not the same thing as being scientific.</p>