Sunday, July 03, 2011

Airplane Reading: Perry Mehrling on Fischer Black

I suppose the most intriguing point for me in Perry Mehrling's biography of Fischer Black is the context he provides for Black's showcase achievement  Read Mehrling and you learn that Black never understood or approved of the options revolution that he did so much to create; nor did he regard his great option pricing model as the centerpiece of his lifework.  He seems to have understood his options analysis rather as one more extension of his more general project to explain and clarify the Capital Asset Pricing Model.   More: at least by the end of his life, Black appears to have become far more devoted to his analysis of general equilibrium and in particular, his effort to reconceptualize macro.

Indeed it appears to be the macro work that drew Mehrling to Black, and he treats it with patience and respect.  But Mehrling has no illusions; he understands that Black's macro project has (so far) succeeded about as well as Isaac Newton's on alchemy: I see that Black's summum bonum, Exploring General Equilibrium, garners only two Amazon reviews.  

Mehrling also corrects some of my own (mis)understanding of the history of CAPM.  Unlike so many others who concentrate on William Sharpe, Mehrling offers an "east coast" version, concentrating on Jack Treynor, and Treynor's influence on Black.  And Mehrling offers a detailed account of the work of John Lintner.  Others have suggested--I think I have wondered aloud whether--Lintner just lifted CAPM from Treynor.  On Mehrling's account (much fuller than I remember from anywhere else) this is clearly wrong.  For good or ill, Lintner did his own work and deserves his own credit.

Two more points about Black and option pricing.  One, it remains unclear to me precisely what it was Myron Scholes provided to justify his position as a co-discoverer.  Was it the "arbitrage" part (if you can mimic an option with known securities, you must know the price of the "unknown"?)?  Or the fact that he was a sounding-board for Black (a not-unworthy role?)?  Or am I missing something obvious and important.  

Two, it's intriguing to see why Black/Scholes left the math heavy lifting to their competitor/colleague Robert Merton: the simple fact is that they just weren't that good at the math.  It was left to Merton to connect the dots (just as it was left to Merton to develop and refine option theory, not always with the most heart-warming results).

Though it may not be news, Mehrling does nothing to gloss over the terminal weirdness of Black's  somewhat machine-like personality.  It's tempting to the reader (me, at least) to dislike him; yet the remarkable fact is that many of those who knew him best seem to have regarded him with great affection and to have treated his strangeness as just who he was.

Here's a classroom blog devoted to a reading of Merhling's book.

1 comment:

chrismealy said...

I read it four or five years ago. My lasting impressions were 1) as you point out, Black didn't think much of B-S, and from the start had to tweak it to be useful, and 2) he thought he could convince his wife that it was okay for him to fool around. What a nerd.

Mehrling himself is really interesting. He's a terrific bridge between the Post-Keynesian world and the financial world. I still haven't gotten around to his most recent book.