Decision Making & Risk: A Critique of Options Pricing Models

Abstract

Existing Options theories are now the foundation for derivative products and most risk management techniques. Many researchers have analyzed options and derivative products from only the risk management and investment/speculation points of view, but not from a decision-making point of view. One key characteristic is that options can be used to make decisions (or to execute decisions) in situations that involve uncertainty, constraints and regulatory issues; and options are essentially bounded choice systems. This paper summarizes numerous problems in existing options pricing theories and models, and critiques these models from various perspectives, and suggests various areas for future research in options pricing.

Keywords: options, risk, decision-making