PT  - JOURNAL ARTICLE
AU  - Bradford Cornell
TI  - Warren Buffett, Black–Scholes, and the Valuation of Long-Dated Options
AID  - 10.3905/jpm.2010.36.4.107
DP  - 2010 Jul 31
TA  - The Journal of Portfolio Management
PG  - 107--111
VI  - 36
IP  - 4
4099  - https://pm-research.com/content/36/4/107.short
4100  - https://pm-research.com/content/36/4/107.full
AB  - In his 2008 letter to Berkshire shareholders, Warren Buffett presented a critique of the Black–Scholes option pricing model as a tool for valuing long-dated options, including options that Berkshire had written. Given Mr. Buffett’s track record, it is worth investigating precisely why he thinks the Black–Scholes model fails to provide a fair value for long-dated options. The alleged deficiencies in the model are, unfortunately, not transparent, because Mr. Buffett’s letter does not develop his viewpoint in terms of option pricing theory. In this article, Cornell fills the gap by interpreting Mr. Buffett’s argument in the context of option pricing theory and reveals that Mr. Buffett is really making a statement about political economics more than about option pricing.TOPIC: Legal/regulatory/public policy