Fischer Black
Co-author of the Black–Scholes model, CAPM contributor, and monetary theorist.
Fischer Sheffey Black, Jr. lived from January 11, 1938, to August 30, 1995. An American economist, he is most famous for co-creating the Black–Scholes model for pricing options. He taught at the University of Chicago and MIT before moving to Goldman Sachs. Beyond options, he helped shape the capital asset pricing model (CAPM) and put forward theories on monetary economics and business cycles. Black died at 57. Two years later, the 1997 Nobel Prize in Economics went to his collaborator Myron Scholes and colleague Robert C. Merton for the Black–Scholes model and its extension to continuous-time finance. Since the Nobel is not awarded posthumously, Black could not receive it.
Born in Washington, D.C.’s Georgetown neighborhood, Black graduated from Harvard College in 1959 with a physics degree. He struggled to settle on a PhD thesis topic, moving from physics to mathematics, then to computers and artificial intelligence. One summer, he developed his ideas at the RAND Corporation. He studied under MIT’s Marvin Minsky and submitted his research to earn a PhD in applied mathematics from Harvard in 1964.
After Harvard, Black worked at the consultancy Bolt, Beranek and Newman on an artificial intelligence system. He left in late 1965 for the accounting firm Arthur D. Little, where he first encountered economic and financial consulting and met his future collaborator Jack Treynor. In 1971, he became a visiting professor at the University of Chicago’s Graduate School of Business, then a full professor from 1972 to 1975. He moved to MIT’s Sloan School of Management in 1975. In 1984, he joined Goldman Sachs, becoming a partner by 1986 and later directing the Quantitative Strategies Group until his death.
At Arthur D. Little, Black began thinking about monetary policy. The key debate then was between Keynesians, led by Franco Modigliani, who saw credit markets as naturally prone to boom and bust and favored discretionary central banking, and monetarists, led by Milton Friedman, who argued that such discretion caused problems and that money supply growth should be fixed. Black concluded that discretionary policy could not achieve the good Keynesians hoped for, nor could it cause the harm monetarists feared. He wrote to Friedman about this in January 1972.
Treynor, along with William F. Sharpe, developed the Capital Asset Pricing Model (CAPM). Black worked on the CAPM with Treynor in the late 1960s at Arthur D. Little. A classic 1972 paper by Black, Jensen, and Scholes tested the model. The CAPM’s core idea was that a stock’s excess return over the risk-free rate is proportional to its beta, or its link to the stock market’s excess return. Black saw this excess return as tied to the stock’s risk. He extended this logic to options pricing.
In 1973, Black and Myron Scholes published “The Pricing of Options and Corporate Liabilities” in the Journal of Political Economy, their most famous work, which introduced the Black–Scholes equation.
In March 1976, Black argued that human capital and business experience largely unpredictable ups and downs due to fundamental uncertainty about future wants and production. If future tastes and technology were known, profits and wages would grow smoothly. A boom occurs when technology matches demand; a bust is a mismatch. This made Black an early contributor to real business cycle theory. Economist Tyler Cowen later suggested that Black’s work on monetary economics and business cycles could explain the Great Recession.
Black saw his work on monetary theory, business cycles, and options as part of a unified framework. He noted that mathematical techniques from option theory could be extended to analyze monetary theory and business cycles.
His best-known book, *Business Cycles and Equilibrium*, was published in 1987. In it, Black imagines a world without money and develops a theory that economic and financial markets are in continual equilibrium. He builds models and challenges monetary theorists, especially those who believe in the quantity theory of money and the liquidity of money. Banks are central to this framework.
- born
- January 11, 1938
- died
- August 30, 1995
- field
- Economics, Finance
- nationality
- American
- known_for
- Black–Scholes option pricing model, contributions to CAPM
Lore & Background
Fischer Sheffey Black, Jr was born on January 11, 1938 in the Georgetown neighborhood of Washington, D.C. He graduated from Harvard College with a major in physics in 1959. He was initially indecisive about a thesis topic for a Harvard PhD, having switched from physics to mathematics, then to computers and artificial intelligence. Black spent a summer developing his ideas at the RAND corporation. He was also a student of MIT professor Marvin Minsky and was able to submit his research for completion of a PhD in applied mathematics from Harvard University in 1964. After Harvard, Black joined the consultancy Bolt, Beranek and Newman, working on a system for artificial intelligence, but left in late 1965 to join the public accounting firm of Arthur D. Little. This is where he was first exposed to economic and financial consulting and met his future collaborator, Jack Treynor. In 1971, Black was appointed as a visiting professor at the University of Chicago, Graduate School of Business, then as a full professor from 1972 to 1975. He left the University of Chicago in 1975 to teach as a professor at the MIT Sloan School of Management in Cambridge, Massachusetts. In 1984, he joined Goldman Sachs, and was made a partner by 1986. Black became the Director of the Quantitative Strategies Group at Goldman, where he worked until his death.
Reader's Guide
While at Arthur D. Little, Black began thinking seriously about monetary policy. The major question at the time was between two schools of economic thought, the Keynesians and monetarists. The Keynesians (under the leadership of Franco Modigliani) believe there is a natural tendency of the credit markets toward instability, toward boom and bust, and they assign both monetary and fiscal policy roles in damping down this cycle, working toward the goal of smooth sustainable growth. In the Keynesian view, central bankers must have discretionary powers to fulfill their role. Monetarists, under the leadership of Milton Friedman, believe that discretionary central banking is the problem, not the solution. Friedman believed that growth of the money supply could, and should, be set at a constant rate, to accommodate predictable growth in real GDP. Treynor was one of the developers, along with William F. Sharpe, of the Capital Asset Pricing Model (CAPM) (for which they won the Nobel Prize in Economics in 1990). Black started working on the CAPM with Treynor in the late 1960s, while they were both at accounting firm, Arthur D. Little. One of the classic papers of Black, Jensen, and Scholes on the testing of the capital asset pricing model (CAPM) was published in 1972. The key insight of the CAPM was that the excess return of an individual stock (over the risk-free rate) is proportional (the so-called beta of the stock) to the excess return of the stock-market. Black viewed the excess return on an individual stock as being linked to the riskiness of that stock, otherwise no-one would buy the stock. He extended this idea into pricing options. 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 ma
Did You Know?
- Black was a student of MIT professor Marvin Minsky.
- Black submitted his research for completion of a PhD in applied mathematics from Harvard University in 1964.
- Black met his future collaborator Jack Treynor while at the public accounting firm Arthur D. Little.
- Black became a partner at Goldman Sachs by 1986.
- The 1997 Nobel Memorial Prize in Economic Sciences was awarded to Myron Scholes and Robert C. Merton, but Black was ineligible because the prize is not awarded posthumously.
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