Fischer Black and the Revolutionary Idea of Finance

Fischer Black and the Revolutionary Idea of Finance

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by Perry Mehrling
     
 

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In December of 1997, Robert Merton and Myron Scholes took the stage in Stockholm to accept the Nobel Prize in Economics. Absent from the podium was Fischer Black, the "Black" of the famous Black-Scholes options pricing formula, the formula that was to the derivatives revolution in finance what the discovery of the structure of DNA was to biotechnology. Black had

Overview

In December of 1997, Robert Merton and Myron Scholes took the stage in Stockholm to accept the Nobel Prize in Economics. Absent from the podium was Fischer Black, the "Black" of the famous Black-Scholes options pricing formula, the formula that was to the derivatives revolution in finance what the discovery of the structure of DNA was to biotechnology. Black had died in 1995, two years short of the ultimate accolade.

Although the options formula made him famous, it was only one of Black's numerous contributions to finance, including portfolio insurance, commodity futures pricing, bond swaps and interest rate futures, and global asset allocation models that have become standard in the world of finance. Amazingly, he did it all despite having no formal training in finance or economics, and despite spending the bulk of his career in business settings. Certainly the most notable non-academic theoretician of modern finance, Fischer Black was one of a kind.

Black's fertile intellect also honed in on the theory of money and business cycles, where he mounted a searching critique of macroeconomic orthodoxy, and sketched the beginning of an alternative. Although largely ignored during his lifetime, Black's views anticipated later developments in macroeconomics, including the rational expectations revolution that would win the Nobel for Robert Lucas in 1995, and the real business cycle theory that would win the Nobel for Edward Prescott and Finn Kydland in 2004.

How did he do it all, and in a career dramatically shortened by a late start and a premature end? Fischer Black and the Revolutionary Idea of Finance explores Fischer Black's intellectual journey from Harvard to the offices of ADL, from the University of Chicago to MIT, and then to Goldman Sachs. Years of research and interviews with Black's business and academic associates, as well as family and friends, is distilled by author Perry Mehrling into a scholarly yet personal story of the formation and development of the extraordinary mind and unique character of this unassuming renegade.

The story of Fischer Black intertwines with the larger story of the development of finance and economicsin the last decades of the twentieth century. The giants of that story—Paul Samuelson, Franco Modigliani, William Sharpe, Merton Miller, Milton Friedman, Richard Posner—were all sparring partners of Fischer Black. And at the same time, every significant advance in practical finance—from index mutual funds and bank deregulation, to financial futures and electronic trading, to globalization and financial engineering—was just more grist for Fischer Black's mill. He was, more than anyone else, the high priest of modern finance, who saw the big picture that linked up all the smaller developments, both theoretical and practical.

That big picture was all about risk, and about a sea change in our understanding of the place of risk in modern society. Fischer Black learned the capital asset pricing model (CAPM) that teaches a scientific approach to risk, telling when and how to avoid it, but also when and how to embrace it. He lived his life by the dictates of that model, treating risk as nothing more than the price of reward.

Fischer Black and the Revolutionary Idea of Finance tells the story of one man's intellectual adventure at the very center of modern finance. It is a story about the birth of quantitative finance and financial engineering. It is also the story about the continuing human quest to defeat the "dark forces of time and ignorance," as John Maynard Keynes famously put it. In 1995, the dark forces caught up with Fischer himself, but his quest lives on.

Editorial Reviews

From the Publisher
“…excellent…” (getAbstract.com, 7th November 2005)

“a rigorous but rewarding biography” (CFO Europe, October 2005)

“highly readable” (Benefits & Compensation International, October 2005)

"...well-researched...recommended..." (Accounting Technician, September 2005)

"The story of Fischer Black...is remarkable both because of the creativity of the man and because of the revolution he brought to wall Street.… Mehrling's book is fascinating..." (Financial Times, 12th September 2005)

“…recommended as readable to those with the intellectual curiosity to pursue financial theory…” (The Independent, 30 July 2005)

“… a vignette-based business biography that captures the essence of this extraordinary man…engaging and entertaining…” (Credit Control Journal, July 2005)

In a 30-year career equally divided between academics (University of Chicago) and Wall Street, Black contributed seminal papers in almost every area of finance and many areas of economics, but few were published in major peer-reviewed journals and many were never published at all. He spent most of his time alone in a room thinking and writing, was uncomfortable in large groups, an undistinguished lecturer and famously eccentric in ways more irritating than amusing or dramatic. All of this gives Barnard economist Mehrling (The Money Interest and the Public Interest) his work cut out for him. He has responded with a book that, beyond providing the facts of Black's life, serves as the best currently available general history of the revolution in finance that took place between 1960 and 1990: the essential ideas and disputes are explained clearly, with a minimum of mathematics and jargon, and the relationships among the leading innovators are explored concisely but in depth. As far as Black goes, Mehrling gives a clear picture of his working life and reveals the strong family ties and close personal friendships of a man often thought to have been emotionless. On the whole, Mehrling's book is essential reading for anyone interested in the development of modern finance or the life of an idiosyncratic creative genius. (July) (Publishers Weekly, June 6, 2005)

"A fascinating history of things we take for granted in our everyday financial lives." (The New York Times)

"[Fischer Black and the Revolutionary Idea of Finance] does an exceptional job of capturing Black’s spirit and gives an insightful inside account of the academic financial revolution." (Global Association of Risk Professionals magazine)

"Mehrling skillfully interweaves the stories of Black's career, his sometimes-difficult personal life, and his contributions to finance and to economics . . . In telling the story of Black's life, Mehrling casts light on a crucial, underappreciated aspect of the making of our current world."-Science magazine

"Excellent new biography of Fischer Black, one of the great innovators of modern finance theory. . . Mehrling also provides an engaging history of the development of quantitative finance and a solid introduction to some of its central concepts."—Region Focus, Fall 2005

"By unearthing Black's personal story, Mehrling conjures a unique glimpse into the context in which "the Einstein of finance" viewed liquidity, risk, capital, business cycles — the world's entire economic equilibrium. Once inside the mind of Black, you may never look at the market the same way again." —Trader Monthly magazine

"Besides being a splendid account of the early and great years of the development of Finance as an academic discipline, and a fascinating biography of an extraordinary but difficult genius, this book made me think and reflect more than almost any other book."—Journal of the History of Economic Thought

"...Wit and insight" ( Financial Management, December 2006)

Publishers Weekly
In a 30-year career equally divided between academics (University of Chicago) and Wall Street, Black contributed seminal papers in almost every area of finance and many areas of economics, but few were published in major peer-reviewed journals and many were never published at all. He spent most of his time alone in a room thinking and writing, was uncomfortable in large groups, an undistinguished lecturer and famously eccentric in ways more irritating than amusing or dramatic. All of this gives Barnard economist Mehrling (The Money Interest and the Public Interest) his work cut out for him. He has responded with a book that, beyond providing the facts of Black's life, serves as the best currently available general history of the revolution in finance that took place between 1960 and 1990: the essential ideas and disputes are explained clearly, with a minimum of mathematics and jargon, and the relationships among the leading innovators are explored concisely but in depth. As far as Black goes, Mehrling gives a clear picture of his working life and reveals the strong family ties and close personal friendships of a man often thought to have been emotionless. On the whole, Mehrling's book is essential reading for anyone interested in the development of modern finance or the life of an idiosyncratic creative genius. (July) Copyright 2005 Reed Business Information.

Product Details

ISBN-13:
9780471457329
Publisher:
Wiley
Publication date:
06/28/2005
Pages:
374
Product dimensions:
6.40(w) x 8.78(h) x 1.28(d)

Meet the Author

PERRY MEHRLING is Professor of Economics at Barnard College of Columbia University. He holds a PhD from Harvard University and is the author of The Money Interest and the Public Interest: American Monetary Thought, 1920–1970. Dr. Mehrling's specialty is the study of financial theory and the history of economics.

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Fischer Black and the Revolutionary Idea of Finance 5 out of 5 based on 0 ratings. 1 reviews.
Guest More than 1 year ago
Author Perry Mehrling¿s excellent book is not merely a biography of Fischer Black, but also the story of the main threads of economic thought during the late twentieth century. More than that, it is the story of the economics profession, and of the great role that politics and personality plays in the acceptance of ideas. It is astonishing to learn how ruthlessly the profession excluded Black¿s ideas, although he was one of the most incisive economic and financial thinkers of his time, and it is inspiring to see how relentlessly and quixotically Fischer Black continued to press them. The parts of the book that are generally accessible are also fascinating. Unfortunately, far too little of the volume is accessible to the average business reader. Mehrling does a less than adequate job of explaining the great themes of Black¿s life and thought to lay readers. He notes the importance of the Capital Asset Pricing Model in Black¿s philosophy, but his account of the model will leave noneconomists scratching their heads. The same must be said of his account of other economic subjects. While we find that only readers with a fairly deep understanding of economics can reap this book¿s full harvest, that caveat should not deter the general reader from gleaning.