Abstract

The so-called “risk-neutral probability” is a technical tool that has received considerable attention in financial practices over the past thirty years, to the point that risk-neutral pricing techniques are now a routine part of the day-to-day business in the finance industry. I present an extremely simplified toy model of risk-neutral pricing to allow the black box to be opened to philosophical investigation by displaying without any mathematics the fair value pricing mechanism in a complete arbitraged free market. I argue that the difficulties of the puzzling methods used to value financial assets using risk-neutral valuation techniques are more conceptual than mathematical, and discuss the epistemological issues enlightened by this toy model, particularly in terms of narratives. The toy model reveals how the Efficient Markets Hypothesis (EMH) is a narrative imposed on the real finance, and how the EMH narratives correspond to each other as quantification conventions which draws a “representation format” of EMH. It raises the ethical question of choosing the EMH narrative for financial practices.