What Are the Major Variables in the Black-Scholes Option Pricing

question 39

Essay

What are the major variables in the Black-Scholes option pricing model and in what direction do they influence the price of call options?

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Definitions:

Cognitive Shortcuts

Mental strategies or heuristics that simplify decision making by reducing the amount of processing required to come to conclusions.

Heuristics

Mental shortcuts or "rules of thumb" that simplify decision-making processes, often used unconsciously.

System I

A term from cognitive science referring to the fast, automatic, and often unconscious way of thinking, contrasted with slower, more deliberate thought.

Dual-Process Theory

The proposal that judgment involves two types of thinking: a fast, efficient, but sometimes faulty set of strategies, and a slower, more laborious, but less risky set of strategies.