Here was my response yesterday to Landsburg’s discussion of option pricing. From the conclusion:
Landsburg’s discussion of option pricing is fine, interpreted correctly. But whether he realizes it or not, his “lesson” is very misleading. All he has done is show that certain prices must bear a particular relationship to each other, lest arbitrageurs exploit a pure-profit opportunity.
The problem arises when people read too deeply into the significance of these results. For example, one could use an analogous argument to show that “all we need” to price stocks is to look up the interest rate and the price of a call option. We might erroneously conclude that no investor ever needs to worry about what the stock will actually do in the future.
Yet that is absurd; of course investors and speculators in the real world need to form expectations about the future levels of stock prices. It is the seductive elegance of the entire “Efficient Markets” approach that led Landsburg to suggest otherwise.
The nicest compliment I got was this:
This is of course exactly right, and (as I’d expect from you) exceptionally well put….Thanks for posting this. Your penultimate paragraph is perfect.
And the author of that comment was…Steve Landsburg. Which made it all the more ironic, when others in the discussion thread told me I had misunderstood Landsburg’s argument.
(Something similar happened at EconLog when David R. Henderson agreed that my criticism of one of his posts had been right, and so he retracted his claim. I really am nonplussed when this type of thing happens. I didn’t realize it was possible to resolve an internet argument. Most of the people I debate with are like soldiers on Bataan.)