Option pricing with informed judgment

The Black-Scholes formula is one of the most successful mathematical models in finance, generating a global industry and resulting in two Nobel prizes. And yet, some speculate about its contribution to the last global financial crisis due to the abuse of a model that wasn´t quite perfect. Some of the automation may have led to deficiencies in estimation. An adjustment to the model could be made through the input of expert opinion, as a way to calibrate and estimate better. The use of informed judgment has been prevalent in the statistical literature. It allows for the incorporation of expert opinion into a statistical analysis through a prior distribution. We introduce a method for the elicitation of the expert´s prior distribution of the volatility in the Black-Scholes option pricing model. This work complements a Bayesian analysis to derive the prior and posterior densities of a European call option.