Fischer Black | |
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| Born | Fischer Sheffey Black (1938-01-11)January 11, 1938 Washington, D.C., U.S. |
| Died | August 30, 1995(1995-08-30) (aged 57) New Canaan, Connecticut, U.S. |
| Alma mater | Harvard University (BA,PhD) |
| Known for | Black–Scholes equation Black-76 model Black–Derman–Toy model Black–Karasinski model Black–Litterman model Black's approximation Treynor–Black model |
| Awards | 1994,IAFE Financial Engineer of the Year[1][2] |
| Scientific career | |
| Fields | Economics Mathematical finance |
| Institutions | University of Chicago Booth School of Business MIT Sloan School of Management Goldman Sachs |
| Doctoral advisor | Patrick Carl Fischer |
Fischer Sheffey Black (January 11, 1938 – August 30, 1995) was anAmericaneconomist, best known as one of the authors of theBlack–Scholes equation. Working variously at theUniversity of Chicago, theMassachusetts Institute of Technology, and atGoldman Sachs, Black died two years before theNobel Memorial Prize in Economic Sciences (which is not given posthumously) was awarded to his collaboratorMyron Scholes and former colleagueRobert C. Merton for the Black-Scholes model and Merton's application of the model to a continuous-time framework. Black also made significant contributions to thecapital asset pricing model and the theory ofaccounting, as well as more controversial contributions inmonetary economics and the theory ofbusiness cycles.
Fischer Sheffey Black was born on January 11, 1938. He graduated fromHarvard College with a major in physics in 1959 and received aPhD inapplied mathematics fromHarvard University in 1964. He was initially expelled from the PhD program due to his inability to settle on a thesis topic, having switched from physics to mathematics, then to computers andartificial intelligence. Black joined the consultancyBolt, Beranek and Newman, working on a system for artificial intelligence. He spent a summer developing his ideas at theRAND corporation. He became a student of MIT professorMarvin Minsky,[3][4] and was later able to submit his research for completion of the Harvard PhD.
Black joinedArthur D. Little, where he was first exposed to economic and financial consulting and where he met his future collaboratorJack Treynor. In 1971, he began to work at the University of Chicago. He later left the University of Chicago in 1975 to work at theMIT Sloan School of Management. In 1984, he joined Goldman Sachs where he worked until death.
Black began thinking seriously aboutmonetary policy around 1970 and found, at this time, that the big debate in this field was betweenKeynesians andmonetarists. The Keynesians (under the leadership ofFranco Modigliani) believe there is a natural tendency of the credit markets toward instability, toward boom and bust, and they assign to both monetary andfiscal policy roles in damping down this cycle, working toward the goal of smoothsustainable growth. In the Keynesian view, central bankers have to have discretionary powers to fulfill their role properly. Monetarists, under the leadership ofMilton Friedman, believe that discretionary central banking is the problem, not the solution. Friedman believed that the growth of the money supply could and should be set at a constant rate, say 3% a year, to accommodate predictable growth in real GDP.
On the basis of thecapital asset pricing model, Black concluded that discretionary monetary policy could not do the good that Keynesians wanted it to do. He concluded that monetary policy should be passive within an economy. But he also concluded that it could not do the harm monetarists feared it would do. Black said in a letter to Friedman, in January 1972:
In the U.S. economy, much of the public debt is in the form of Treasury bills. Each week, some of these bills mature, and new bills are sold. If the Federal Reserve System tries to inject money into the private sector, the private sector will simply turn around and exchange its money for Treasury bills at the next auction. If the Federal Reserve withdraws money, the private sector will allow some of its Treasury bills to mature without replacing them.
In 1973, Black, along with Myron Scholes, published the paper 'The Pricing of Options and Corporate Liabilities' inThe Journal of Political Economy.[5] This was his most famous work and included the Black–Scholes equation.
In March 1976, Black proposed that human capital and business have "ups and downs that are largely unpredictable [...] because of basic uncertainty about what people will want in the future and about what the economy will be able to produce in the future. If future tastes and technology were known, profits and wages would grow smoothly and surely over time." A boom is a period when technology matches well with demand. A bust is a period of mismatch. This view made Black an early contributor toreal business cycle theory.
EconomistTyler Cowen has argued that Black's work on monetary economics and business cycles can be used to explain theGreat Recession.[6]
Black's works on monetary theory, business cycles and options are parts of his vision of a unified framework. He once stated:
I like the beauty and symmetry in Mr. Treynor's equilibrium models so much that I started designing them myself. I worked on models in several areas:
Monetary theory, Business cycles, Options and warrants
For 20 years, I have been struggling to show people the beauty in these models to pass on knowledge I received from Mr. Treynor.
In monetary theory --- the theory of how money is related to economic activity --- I am still struggling. In business cycle theory --- the theory of fluctuation in the economy --- I am still struggling. In options and warrants, though, people see the beauty.[4]
It can be shown that the mathematical techniques developed in the option theory can be extended to provide a mathematical analysis of monetary theory and business cycles as well.[7]
Fischer Black has published many academic articles, including his best-known book,Business Cycles and Equilibrium. In this book, Black proposes at the beginning of the book to imagine a world where money does not exist. With its theory that economic and financial markets are in a continual equilibrium-is one of his books that still rings true today[when?], given the current[clarification needed] economic crisis. Building upon these statements, Black creates models as well as challenges monetary theorists, especially those who subscribe to the ideas of thequantity theory of money and liquidity of money. Banks are the main institutions of monetary transactions in Black's book, to which he also states that money is an endogenous resource (contrary to monetarists who believe money to be an exogenous resource), provided by banks due to profit maximization. Controversial statements such as "Monetary and exchange rate policies accomplish almost nothing, and fiscal policies are unimportant in causing or changing business cycles" have made Black enemies with Keynesians and Monetarists alike.
In early 1994, Black was diagnosed withthroat cancer. Surgery at first appeared successful, and Black was well enough to attend the annual meeting of theInternational Association of Financial Engineers that October, where he received their award as Financial Engineer of the Year. However, the cancer returned, and Black died in August 1995.[8]
TheNobel Prize is not given posthumously, so it was not awarded to Black in 1997 when his co-author Scholes received the honor for their landmark work on option pricing along withRobert C. Merton, another pioneer in the development of valuation of stock options. However, when announcing the award that year, the Nobel committee did prominently mention Black's key role.
Black has also received recognition as the co-author of theBlack–Derman–Toyinterest rate derivatives model, which was developed for in-house use by Goldman Sachs in the 1980s but eventually published. He also co-authored theBlack–Litterman model on global asset allocation while at Goldman Sachs.
The advisory board ofThe Journal of Performance Measurement inducted Black into the Performance & Risk Measurement Hall of Fame in 2017. The announcement appears in the Winter 2016/2017 issue of the journal. The Hall of Fame recognizes individuals who have made significant contributions to investment performance and risk measurement.[9]
In 2002, theAmerican Finance Association established thebiennially awardedFischer Black Prize in memory of Fischer Black. The award is given to a young researcher whose body of work "best exemplifies the Fischer Black hallmark of developing original research that is relevant to finance practice".[10]
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Most business cycle analysts offer detailed scenarios for how things go wrong, but Black's revolutionary idea was simply that we are not as shielded from a sudden dose of bad luck as we would like to think.
Excerpt of Chapter Three: Some Kind of an Education
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