Fischer Black

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Fischer Black
University of Chicago Booth School of Business

MIT Sloan School of Management

Patrick Carl Fischer

Fischer Sheffey Black (January 11, 1938 – August 30, 1995) was an American economist, best known as one of the authors of the Black–Scholes equation.

Background

Fischer Sheffey Black was born on January 11, 1938. He graduated from

RAND corporation. He became a student of MIT professor Marvin Minsky,[3][4]
and was later able to submit his research for completion of the Harvard PhD.

Black joined

Jack Treynor. In 1971, he began to work at the University of Chicago. He later left the University of Chicago in 1975 to work at the MIT Sloan School of Management. In 1984, he joined Goldman Sachs
where he worked until death.

Economic career

Black began thinking seriously about

sustainable growth. In the Keynesian view, central bankers have to have discretionary powers to fulfill their role properly. Monetarists, under the leadership of Milton 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 the capital 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' in 'The 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 to

real business cycle theory
.

Economist Tyler Cowen has argued that Black's work on monetary economics and business cycles can be used to explain the Great 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]

Business Cycles and Equilibrium (1987)

Fischer Black has published many academic articles, including his most 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 the quantity 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.

Illness and death

In early 1994, Black was diagnosed with

International 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]

Posthumous recognition

The Nobel Prize is not given posthumously, so it was not awarded to Black in 1997 when his co-author Myron Scholes received the honor for their landmark work on option pricing along with Robert 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 the Black–Derman–Toy interest rate derivatives model, which was developed for in-house use by Goldman Sachs in the 1980s but eventually published. He also co-authored the Black–Litterman model on global asset allocation while at Goldman Sachs.

The advisory board of The 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]

Fischer Black Prize

In 2002, the American Finance Association established the biennially awarded Fischer 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]

See also

  • Shadow rate - A concept created by Fischer Black in "Interest Rates as Options"

Selected bibliography

References

  1. ^ "IAFE Events Archive, Awards". Archived from the original on May 27, 2007. Retrieved June 20, 2007.
  2. ^ Finnegan, Jim. "IAFE Holds Annual Award Dinner". Financial Engineering News. Retrieved June 20, 2007.
  3. ^ Marvin Minsky's Home Page
  4. ^
  5. .
  6. . 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.
  7. ^ Chen, Jing. The Unity of Science and Economics: A New Foundation of Economic Theory. Springer (2015).
  8. ^ Henriques, Diana B. (August 31, 1995). "Fischer Black, 57, Wall Street Theorist, Dies". The New York Times. Retrieved November 29, 2018.
  9. ^ Journal of Performance Measurement. Winter, 2016/2017
  10. ^ "American Finance Association, Fischer Black Prize". Archived from the original on September 28, 2007. Retrieved June 20, 2007.

External links