Fischer Black and the Revolutionary Idea of Finance

by Perry G. Mehrling, Aaron Brown (Foreword)

praise for FISCHER BLACK AND THE REVOLUTIONARY IDEA OF FINANCE

"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

"A fascinating history of things we take for granted in our everyday financial lives." -THE NEW YORK TIMES

"Mehrling's book is essential reading for anyone interested in the development of modern finance or the life of an idiosyncratic creative genius." -PUBLISHERS WEEKLY

"Fischer Black was more than a vital force in the development of finance theory. He was also a character. Perry Mehrling has captured both sides of the the evolution of thinking about the pricing of risk and time, as well as the thinkers, especially this fascinating eccentric, who worked it out." -ROBERT M. SOWLO, Nobel laureate and Institute Professor of Economics, Emeritus, Massachusetts Institute of Technology

"Although I worked closely with Fischer for nine years at Goldman Sachs and clearly recognized both his genius and the breadth and originality of his ideas, until I read this book, I had only the vaguest grasp of the source of his inspiration and no understanding at all of the source of his many idiosyncrasies." -BOB LITTERMAN, Partner, Kepos Capital

"Perry Mehrling has done a remarkable job of tracing the intellectual and personal development of one of the most original and complex thinkers of our generation. Fischer Black deserved a charming and brilliant book about a charming and brilliant man." -ROBERT E. LUCAS JR., Nobel laureate and Professor of Economics, The University of Chicago

Genres: Finance, Economics, Biography, History, Nonfiction

506 pages, Kindle Edition

First published June 24, 2005

About the author

Perry G. Mehrling (born August 14, 1959) is professor of economics at Barnard College in New York City. He specializes in the study of financial theory within the history of economics.

Reviews

[Frank Stein · Rating 4 out of 5]

This is a strange and compelling biography about a strange and compelling man. Though little known outside of the world of economists and bond traders, Fischer Black's work on the Black-Scholes options pricing model would have almost certainly garnered him the Nobel Prize had he not died in 1995, just before it was granted to his colleague Myron Scholes. More than that, his model, and many others he created, fundamentally reshaped the way stocks, bonds, and options are traded across the world.

The close connection between the world of ideas and the real world is what this book is all about. Fischer Black's options models lead to a call by Chicago economists to create the world's first options exchange, and this was opened by the Chicago Board of Trade in 1973. Black's options ideas also pushed Congress and the regulators to lift long-time bans on commodity options and thus created new opportunities for farmers and others to hedge risks. Black's early work on the Efficient Market Hypothesis, which, in its weakest and most defensible form, merely says that it is almost impossible for any individual to beat the stock market, lead him and Scholes to create the world's first exchange traded mutual fund, the Stagecoach Fund, at Wells Fargo in 1971, which tracked the broader market with minimal fees (though the idea would only really achieve success with John Bogle's Vanguard Fund in 1976). His work on the Capital Asset Pricing Model (CAP-eM, as its called) lead to a reform of the Financial Accounting Standard Board's rules, to have accountants emphasize not just a firm's earnings but its assets and value. His work at Goldman Sachs also reshaped how firms value bonds and stocks and trade in the market. Moving from financial firms to academia and back again, Black was always interested in how his ideas could change facts on the ground.

This man who was so fertile with new ideas was of course unconventional. He experimented with drugs and three different wives, but in the end many people believed he cared for little except his own thoughts. He always believed in deduction over induction, and if facts proved a theory wrong, he focused on how to extend a theory, not discard it. Instead of making him an ideologue, this made him a person continually innovating in new areas, yet always within the same CAP-eM framework of real efficient markets. His work shows how vigorous logic can trump mere observation. The author here is perhaps unduly focused on Black's heterodox monetary theories, which were and are widely disregarded in the academy. The book also rambles and seems to lack structure, yet it is a great look at how a life, ideas, and the world intertwine.

[Ali · Rating 5 out of 5]

A must read for people in, or interested in, finance!

[Robert · Rating 3 out of 5]

A difficult but admirable book. I doubt anyone who is not an expert in theoretical finance and economics will be able to fully appreciate some of the detailed discussion, but even the layman will get a good idea of what kind of man Fischer Black was and the ideas that preoccupied him.

[Monzenn · Rating 5 out of 5]

First things first, this is on the heavier side of biographies. I don't mean heavy as in dramatic; rather it is heavy as in technical. Perhaps it is only fitting to have a heavy documentary for such a heavy-minded personality as Fischer Black, a pillar in quantitative finance / financial economics and a surprise contributor in mainline economics as well. The author takes care to explain the ideas behind Black's major ideas, and does not hold punches in using medium-level jargon. One may want to experience this in smaller doses to appreciate the genius of the almost-Nobel winner.

[Jesper · Rating 5 out of 5]

This is a fine and well written account of the rise of modern finance and its transformative impact on macroeconomics seen through the story of Fischer Blacks life and intellectual development.

[Spbayer · Rating 3 out of 5]

Fischer Black (1938-1995) was the "Black" of the Black-Scholes capital asset pricing model, the model that underlies virtually all modern strategies for investing in financial derivatives. Everyone loved the model; everyone embraced the model. Unfortunately it turned out that just because the model assigned a price to something like a Credit Default Swap didn't mean there would any buyers at that price, and financial mayhem ensued. Mehrling provides a readable biography of Black and walks us through the evolution of his financial thinking, with useful instruction in the mathematical concepts involved. Published in 2005 there's much in here to explain how we got into the mess we're in. (Black himself doubted the wisdom of employing the model as widely as the financial services industry seemed eager to do. To him, gambling was still gambling, even when done with clever tools.)

[Maximus · Rating 5 out of 5]

Perry Mehrling does well describing Fischer Black's life and fascination with the Capital Asset Pricing Model (CAPM).  Fischer played in both academia and private sector finance.  He focused on the economy/finance in regards to equilibrium, but disliked econometrics and most models. Time and risk were key unknowable points to Fischer. He is considered to be the first quant.

[Ctkrohn · Rating 4 out of 5]

An excellent biography of one of the first and greatest quants.