Black Fischer - Fischer Black and the Revolutionary Idea of Finance

Contents

Copyright 2005, 2012 by Perry Mehrling. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

Published simultaneously in Canada.

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Fischer Blacks published and unpublished work is quoted with permission of the estate of Fischer Black. Courtesy Alethea Black.

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Library of Congress Cataloging-in-Publication Data:

Mehrling, Perry.

Fischer Black and the revolutionary idea of finance / by Perry Mehrling.

p. cm.

ISBN 978-0-471-45732-9 (cloth); ISBN 978-1-118-20356-9 (pbk);

ISBN 978-1-118-28761-3 (ebk); ISBN 978-1-118-28762-0 (ebk);

ISBN 978-1-118-28763-7 (ebk)

1. Black, Fischer, 1938 2. FinanceUnited StatesHistory20th century.

3. EconomistsUnited StatesBiography. 4. FinanceMathematical models.

5. InvestmentsMathematical models. I. Title.

HG172.F53M44 2005

332.092dc22

2005007460

To Judy

The true search for knowledge is not like the voyage of Columbus but like that of Ulysses. Man is born abroad, living means seeking your home, and thinking means living....

A cowardly fear of thinking curbs us all; the censorship of public opinion is more oppressive than that of governments. Most writers are no better than they are because they have ideas but no character....

To be original you must listen to the voice of your heart rather than the clamor of the worldand have the courage to teach publicly what you have learned. The source of all genius is sincerity; men would be wiser if they were more moral.

Ludwig Borne (1823), quoted in Rudolf Flesch , How to Make Sense (1954)

Acknowledgments

This book has been seven years in the making. Along the way I have received help from very many people, in very many forms. My largest debt is to Fischers family, especially to Cathy Tawes Black, who provided access to Fischers extensive professional files at MIT as well as student records at Harvard, and to Fischers parents (now deceased), who welcomed me to their Tampa home and opened the family archives to me. Fischers siblings Blakeney and Lee, his daughters (especially Alethea), his ex-wife Cynthia Linton and his cousin Stanley Black and aunt Corinne Black all provided invaluable help in understanding issues of character. I am also indebted to Fischers high school buddies, college and graduate school roommates, friends and housemates, for their insights.

The most important intellectual influences on Fischer were Jack Treynor and Merton Miller, whose help and support were therefore especially valuable and appreciated, especially that of Merton Miller, who took the time to meet with me despite his own failing health. Thanks also to Franco Modigliani, whose passionate advocacy of neo-Keynesian orthodoxy gave Fischer something to respond to, and to Serena Modigliani for access to her husbands papers, which allowed me to trace the origin of Fischers interest in macroeconomics and monetary theory. Special thanks also to Robert Merton and Myron Scholes, whose lives were from the beginning inextricably intertwined with Fischers on account of the options formula.

My interest in writing about Fischer Black stemmed originally from an interest in understanding the evolution of twentieth-century American monetary thought, and initially I conceived of the book as providing a window on certain ideas and institutional developments in finance that have transformed both the way banking is done and the way we think about it. The book was supposed to carry into the present the story I had begun to tell in my previous book The Money Interest and the Public Interest, American Monetary Thought, 19201970 . Fischer Black was clearly the best subject on whom to hang such a story since he, more than anyone else of his generation of financial economists, maintained a lifelong engagement with the problems of macroeconomics and monetary theory. In my original conception, the research for the project was to be almost entirely archival. I owe thanks especially to Nora Murphy and Jeffrey Mifflin for their help during a summer spent at the MIT Institute Archives and Special Collections.

My original project survives as Chapters 6 through 8 in the present volume, but the initial research revealed that there was an even larger story that needed to be told, namely the story of the rise of modern finance itself. For this story also, the career of Fischer Black seemed to provide an almost perfect narrative frame, since he spent his life straddling the world of academia and the world of practical business. As I was expanding my sense of the project, Pamela van Giessen at John Wiley & Sons approached me with the suggestion to expand my horizons even more. She urged me to write a book that would not only straddle the worlds in which Fischer lived, both academia and business, but also the personal life that supported the intellectual venture of this unusual mind. I was intrigued by the challenge, but also more than a little intimidated. I thank my agent Susan Rabiner for helping me to discover how concretely to proceed.

In the end, I interviewed more than a hundred people, some several times. It soon became clear to me that Fischer had the habitI would go so far as to call it an intellectual strategyof gravitating to people he thought he could learn from. The key to understanding the evolution of his ideas was therefore to find the people he was interacting with at each stage in his life. In each settingArthur D. Little (ADL), Wells Fargo Bank, the University of Chicago, the Massachusetts Institute of Technology, and Goldman Sachsthere was a different group, but in every case I found that group more than willing to share with me their remembrances of interactions with Fischer. The overall intellectual arc of the book would have been largely the same without these interviews, but it would have lacked the texture and detail that make the story of ideas into a human drama. I owe a great debt to all who made time to talk with me, in person or by phone, over the years.