Stigler’s Law and Option Pricing
Stigler’s law states that no discovery is named after its original discoverer. Some notable examples from science are:
- Halley’s comet, known since at least 240 B.C.
- · Venn diagrams, invented by Leonard Euler.
- Pythagorean theorem, probably discovered by the Babylonians.
- Avagadro’s number, discovered by Jean Baptiste Perrin.
Stephen Stigler came up with his law at a conference to honor Robert K. Merton, the sociologist and father of the Robert Merton of option pricing theory. Merton lamented that original discoverers seldom get the credit they deserve. In a piece of nerd humor, Stigler appropriated the comment, assuring that Stigler’s Law would be an example of Stigler’s law.
The obvious interpretation of Stigler’s law is that the wrong people often get the credit for the work of others and that life is unfair. This is true but isn’t the important point.
The important point is that being first often isn’t the most vital contribution. Halley’s breakthrough wasn’t seeing the comet. It was recognizing that previous observations were of the same comet. This observation was unlikely to be made, and even more unlikely to have gained traction, before Newton developed his theory of gravitation. There is a lot to be said for being in the right place ,or at least at the right time.
This brings us back to option pricing. The Black-Scholes-Merton equation for pricing options wasn’t a breakthrough. The equation had previously been almost derived by Samuelson, Boness, Thorpe and Bachelier. The BSM breakthrough was the idea of dynamic hedging, that it was possible to construct a riskless portfolio from stock, and option and bonds. I don’t actually think this made much of a difference to positional option traders. Even hedged positional traders still take the underlying drift into account. It is far too expensive for position traders to continuously hedge.
But the hedging idea made it possible to large market making firms to form, evolve and thrive. This gave the option markets massive liquidity, which gives position traders their opportunities.
Black, Scholes and Merton weren’t the first but they were the most important and fully deserve their naming rights.