Review of the book Fischer and the Revolutionary Idea of Finance

Aditya Govindaraj

The world of finance is a mysterious and a fascinating place to be in, peopled by Nobel Laureates such as Paul Samuelson, Franco Modigliani, Eugene Fama, William Sharpe and so on. But nothing is more fascinating than the story of Fischer Black, the late economist behind the Black-Scholes pricing model—the most famous and, perhaps, the most misunderstood financial equation in the world. It was one of the first equations to ‘accurately’ price options using tangible, real-world variables such as stock price, options price and its expiration date. The equation also explicitly took volatility and risk into its framework. It was never designed to offer precision. Indeed, an unthinking application of the formula is seen to be one of the major causes of the financial crisis of 2008. Fischer Black, you could say, created an entirely new branch of finance—now known as financial engineering, where most of the arcane financial models are created and used by hedge funds and the banks the world over, to price risks and investments. Fischer left academics to work with the consulting company Arthur D Little and, for the last 10 years of his life until he died of throat cancer, he worked for Goldman Sachs. 

In Perry Mehrling’s biography, Fischer and the Revolutionary Idea of Finance (John Wiley & Sons; Pages:374; Price: $19.95), we learn that unlike John Maynard Keynes or Von Mises, Fischer was little known outside the financial circles; thus, there is an aura of mystery that is likely to surprise the reader at every turn. Fischer was an eccentric with bizarre habits. He would stop in the middle of a speech and scribble some idea claiming that he had a ‘bad memory’. He was initially expelled from the Harvard PhD programme for frequently changing his thesis topic—from physics to mathematics, to computers and artificial intelligence. While this book isn’t exactly easy to read, it does offer some insights into the shaping of theories that are the basis for risk management tools today. If Black were alive, he would have been awarded the Nobel Prize in 1997, when his co-author Myron Scholes received it with Robert Merton, another pioneer in the development of valuation of options. Nobel Prize is not awarded posthumously. But Fischer Black has been recognised as one of the pioneers of modern finance.