Customer Reviews

Fischer Black and the Revolutionary Idea of Finance

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This is an outstanding book about a finance revolutionary. This biography is as interesting as Sylvia Nazar "A Beautiful Mind" about John Nash, the pioneer of Game Theory.

Fischer Black, the human being was as interesting as Nash. As a young man, he was quite the adventurer and engaged in casual sex and taking LSD. But, after suffering a failed marriage and the death of a close friend he recognized the risk of those activities. Thus, he started to live by the CAPM motto to manage the risk in his own life. He drove safe cars, wearing seatbelts before it was mandatory and adhering to a strict diet (fish and vegetables). He married another two times to finally get it right. During his second marriage, when it was not working out, he would seek female companions by posting personal ads in the local paper. And, he would encourage his wife to do the same! Later, he met his third wife through a dating service.

Fischer Black became famous for what he cared less about: the Black Scholes option model. Options were just a passing interest. He cared more about CAPM developed by Jack Traynor. His lifelong ambition was to apply CAPM to economics.

He failed to leave a legacy in economics. Perry Mehrling explains why. Fischer Black had degrees in physics and mathematics but no formal training in economics. His General Equilibrium theory clashed with both Keynesians and monetarists. While at Chicago, his General Equilibrium theory got no respect from Milton Friedman, the leading monetarist. Later, Paul Samuelson, the leading Keynesian at MIT, treated him just as badly. He could not get his economics papers published. In academia he became recognized as cutting edge in finance, but out of his depth in economics.

Fischer was very much egoless. He took all the rebuttals from economics luminaries in stride. They never discouraged him to pursue his economics research. Also, he quickly adopted the binomial tree option model developed in 1976 by Cox-Ross-Rubinstein. He viewed it as faster and more flexible than his own Black Scholes model. Other common mortals would have hung on proudly to their own model. Not Fischer Black!

Before Fischer Black finance was a minor discipline to economics. After Fischer Black, the reverse is truer. Even though he was the original quant on Wall Street, he really did not think like one.

Fischer Black thought like no one else. While his MIT colleagues would attack problems head on with formulas and models, Fischer Black would not. He would explore a problem from as many different angles as he could think. Once he had essentially solved the problem conceptually in his head he would finally generate the formula. The formula was just the concrete representation of his solution. If you developed a formula first and a solution second, as his MIT colleagues did, you would get stuck in a thinking rut dictated by your formula.

His teaching methods were bizarre. He got bored teaching already acquired knowledge. Thus, he felt regular lectures were a waste of time. It would be better for students to spend the time studying the textbook directly. However, he developed a teaching style he and his students found engaging. He came up with a list of 50 questions explorative in nature. This helped him pick ideas from brilliant young minds. His students loved it, because it turned the class into a vibrant seminar.

Fischer Black pioneered many concepts that resulted in new financial markets. In 1969, as a consultant for Wells Fargo with Myron Scholes, they propose three passive investment strategies never thought of before. One was the equivalent of an index fund and another a hedge fund. As a result of this work, Wells Fargo introduced the first S&P 500 index fund to institutional investors in 1973. And, John Boggle of Vanguard did the same for retail investors in 1976. His work on options in the late 60s lead to the opening of the Chicago Board Options Exchange in 1973. His work on valuing futures in 1976, lead to the Merc introducing such contracts on the S&P 500 in 1983. Later, when working for Goldman Fischer developed the first computer trading system. There, he also co-developed the Black-Derman-Toy model to value any fixed income derivative product. Thereafter, the entire derivative market really took off.

If you like this book, you will like Roger Lowenstein "When Genius Failed. The Rise and Fall of Long Term Capital Management." It describes the fascinating tragedy of how Fischer Black colleagues Myron Scholes and Robert Merton tarnished their reputation by co-founding a hedge fund that needed to be bailed out. Fischer Black was prescient in figuring out they were loading on risk (time dimension) and turned down the offer to join LTCM. Thus, Fischer Black legend goes on.

Fischer Black was my brother. What amazes me about this biography is how accurately Perry has portrayed his personality and habits. I was delighted to discover that he managed to describe the person I knew. Even more surprising is the fact that Perry has done this despite the fact that he never met Fischer. It is a tribute to the remarkable depth of his research.

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.

In a remarkably well-researched biography, the author captures the inspiration, attitudes, ethos and peculiar characteristics of one of the best known financial engineers. The depth and thoroughness of the research on which the book is based upon is evident from the author's introduction where he says the book took 7 years to put together. Time well spent! Each clearly delinated and well-organized chapter provides good insights into at least one major aspect of Black's life - academic bent, inspiration sources, etc. The absence of 'traditional' biography writing style (unnecessary romantic school days stories and the like) is an additional bonus...Every chapter is chosen to provide some additional insights, and do not drone. However, the book is not for light-reading. Certainly readers interested in this book are probably well-versed with the work of Black. The book reads more like a "technical biography" - which is a good thing. Superb read.

Revolutions spring from unlikely sources.

Fischer Black was an unlikely revolutionary. He thought like no one else. While teaching, his colleagues attacked problems with formulas and models. Fischer Black did not. He opted to explore them from as many different angles as he could conceive. Once solved, he generated a formula. Solving problems this way, Black found he avoided formula-dictated thinking ruts.

His teaching style was bizarre. He got bored teaching regurgitated knowledge. In his view regular lectures were a waste of time. He developed an engaging teaching style by asking 50 open-ended questions. Combined with his insistence that students learn the language of finance, this interaction gave air to brilliant minds. Black cherry-picked great ideas. His students loved the vibrant seminars.

Fischer Black became famous for what he cared less about: the Black-Scholes option model. Options were just a passing interest. He cared more about Capital Asset Pricing Model (CAPM) developed by Jack Traynor. He sought to apply it to economics.

He failed to leave a legacy in traditional economics. Fischer Black had degrees in physics and mathematics but no formal training in economics. In academia, he became recognized as forward-thinking in finance, but out of his depth in economics.

Robert Rubin, then the managing partner of Goldman Sachs, said it best when he sold his partners on the idea of hiring the academic Black.

"We will learn from Fischer," he is quoted by the author as saying, "and he will learn from us."

Fischer was egoless. He took rebuttals in stride. Open to change, he was an unapologetic believer in free markets. His unorthodox style sparked a revolution in the business of finance. His innovative thinking drove finance to the forefront of the science of economics.

Perry Mehrling has written a brilliant biography about a brilliant man.

Perry Mehrling has done a superb job of illuminating the life of Fischer Black, one of the most original and creative financial economists ever. To me the most fascinating aspect of this work is the revelation about the interplay of ideas between Fischer Black and Jack Treynor. The book's subtitle, "the Revolutionary Idea of Finance", refers to the Capital Asset Pricing Model (CAPM), for which another great economist, William Sharpe, won the Bank of Sweden prize in economics. Whereas Sharpe's original CAPM was a partial equilibrium model, Fischer Black was the protege of Jack Treynor, who had developed the general equilibrium CAPM independently of Sharpe several years earlier. Black learned full-equilibrium CAPM from Treynor and used it to derive the famous Black-Scholes options pricing formula, for which his co-developers, Myron Scholes and Robert Merton, later won the Bank of Sweden Prize. Mehrling shares with us fascinating evidence of how Black actually led his personal life by the tenets of CAPM and economic equilibrium. I am currently teaching a course in financial engineering at Columbia University, and the single most important supplemental reading I assigned was Mehrling's "Fischer Black and the Revolutionary Idea of Finance". Anyone interested in financial economics, macroeconomics, or creative thinking should own a copy of Mehrling's wonderful treatise.

Fischer Black was one of a kind. Those of us in his academic years saw a brilliant scholar who was strikingly origional in his approach to problems, and a fount of ideas, many of which were viewed, at the time, as "off the wall." This book not only covers his professional contributions, but also presents enough of his personal life to help somone like me, who knew him but not all that well, to appreciate where his thought came from. Another good thing about this book is the recognition the author gives to Jack Treynor, a man who did not get the recognition he deserved as the developer of some of the seminal ideas of finance. Fischer's research, and teaching style, was unlike that of anyone else in our profession, and now I have better understanding of why.

Fischer Black was a rare thinker. It can be said that only death kept him from the Nobel Prize. This book is an account of his work and his life. It portrays his character, as biographies do, and also does a good job of tracing the development of his main work and how they fit into the edifice that is modern financial thought.

Highly recommended.

An original thinker, not just about finance, but about nearly every aspect of his life.

I particularly like his comments on teaching. His view was that students could read the text and he didn't need to go tell them what the text said, that's what the book is for. Instead, the teacher should go beyond the book. Answer questions, propose questions that would generate discussions on what the text talked about.

As a physicist/mathematician he viewed the world just a bit differently. Most of his work was oriented around economic theory viewed from a mathematical perspective. The basic nature of his work set up the foundation from which at least three Nobel's were awarded.

This book is not a detailed mathematical explanation of the economics, it is the story of a man's life, a most interesting man, told through an explanation of the economic theories.

It's a biography, but it's not a 'born of humble parents' story of a life. It's what he did, it's what he lived. Well researched, well written, it's a nice book to read.

Amazing that it's taken 10 years to tell Fischer Black's story except that it has been well worth the wait. Rare is the person in finance who pursues ideas for the sake of exploration; rarer still is the person who doesn't heed popular consensus, whether right or wrong. Mehrling has done a fabulous job of providing the kind of biographical detail that makes a biography interesting reading. He takes his biography of this quirky finance great one step further by giving readers insight to the rise of modern finance from the 1960s to the present. History in a void is largely only of interest to academics. Mehrling's history of Black and his contemporaries should be of interest to everyone in finance in any capacity as it brightly illuminates the present. A thoroughly enjoyable and completely interesting read.