Fischer Black: “a vision of the future that came true”

Written by: Stephen Hsu

Primary Source: Information Processing

This is Barnard professor Perry Mehrling on the origin of interest rate and credit derivatives in the mind of Fischer Black. I highly recommend Mehrling’s biography of Black, which I discussed previously here:

Black was both an undergrad and grad student at Harvard in physics. He didn’t really complete his PhD in physics, but sort of drifted into AI-related stuff(!) at MIT, under cover of math or applied math.

The bio says the only course he ever had trouble with was Schwinger’s course on advanced quantum. The biographer suggests Black did poorly due to lack of interest, but I find that hard to believe given the subject matter, the lecturer, and the times ;-)

Black’s point of view was clearly that of a physicist or applied mathematician. He really was a fascinating guy, and the biographer, an academic economist, can appreciate a lot of Black’s thinking — it’s not an entirely superficial book despite being non-technical.

After reading the book, I don’t feel so bad about questioning some of the fundamental assumptions made by academic economists. Black was asking some of the very same questions during his career.

From the book jacket:

… Although the options formula made him famous, it was only one of Black’s numerous contributions to finance, including portfolio insurance, commodity futures pricing, bond swaps and interest rate futures, and global asset allocation models that have become standard in the world of finance. Amazingly, he did it all despite having no formal training in finance or economics, and despite spending the bulk of his career in business settings. Certainly the most notable non-academic theoretician of modern finance, Fischer Black was one of a kind…

For more on derivatives history, see Pricing the Future and The World is our Laboratory.

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Stephen Hsu
Stephen Hsu is vice president for Research and Graduate Studies at Michigan State University. He also serves as scientific adviser to BGI (formerly Beijing Genomics Institute) and as a member of its Cognitive Genomics Lab. Hsu’s primary work has been in applications of quantum field theory, particularly to problems in quantum chromodynamics, dark energy, black holes, entropy bounds, and particle physics beyond the standard model. He has also made contributions to genomics and bioinformatics, the theory of modern finance, and in encryption and information security. Founder of two Silicon Valley companies—SafeWeb, a pioneer in SSL VPN (Secure Sockets Layer Virtual Private Networks) appliances, which was acquired by Symantec in 2003, and Robot Genius Inc., which developed anti-malware technologies—Hsu has given invited research seminars and colloquia at leading research universities and laboratories around the world.
Stephen Hsu

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