Fischer Sheffey Black, Jr. (January 11, 1938 – August 30, 1995) was an American economist, best known as one of the co-authors of the Black–Scholes option pricing model. He held academic positions at the University of Chicago and the Massachusetts Institute of Technology, later working at Goldman Sachs. In addition to his work on option pricing, Black made important contributions to the development of the capital asset pricing model (CAPM). He also proposed ideas in monetary economics and in theories of the business cycle.
Black died in 1995, at the age of 57. Two years after his death, the 1997 Nobel Memorial Prize in Economic Sciences was awarded to his collaborator Myron Scholes and colleague Robert C. Merton for the development of the Black–Scholes model and its extension to a continuous-time framework. Because the prize is not awarded posthumously, Black was ineligible for the award.
Biography
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. 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. 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 1973, Black, along with Myron Scholes, published the paper 'The Pricing of Options and Corporate Liabilities' in The Journal of Political Economy. 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.
Black's works on monetary theory, business cycles and options are parts of his vision of a unified framework. He once stated: