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.