Building a Boundary Object: The Evolution of Financial Risk Management

Abstract:     
The paper traces the intertwined evolution of financial risk management and the financial derivatives markets. Spanning from the late 1960s to the early 1990s, this paper reveals the social, political and organizational factors that underpinned the exponential success of one of today's leading risk management methodologies, the applications based on the Black-Scholes options pricing model. Using empirical data collected from primary documents and interviews, the paper argues that the remarkable success of today's financial risk management should be attributed primarily to the communicative and organizational aspects of the methods rather than to their accuracy or validity. The analysis claims that financial risk management became a boundary object - a set of instructions and practices that served as a common ground and as a basis for discussion and operation despite having quite different meanings to the different communities of practice involved. As risk management became an integral part of common organizational market practices (e.g. margin calculation and intra-portfolio coordination) the actual content of the predictions that risk management systems produced became less relevant. In fact, a seemingly paradoxical shift took place: as the consensus around risk management systems was established, the accuracy and validity of the predictions produced by them became less important.

Keywords: accounting, Black-Scholes, derivatives, options, risk management, social studies of finance

JEL Classifications: B25, G12, K22, N20

Working Paper Series