Black, Fischer Sheffey

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Black, Fischer Sheffey

(b. 11 January 1938 in Washington, D.C.; d. 30 August 1995 in New Canaan, Connecticut), investment adviser and finance professor who helped lay down the theoretical foundations of stock-option pricing.

Black was the son of Fischer Sheffey Black and Elizabeth Zemp; he had two siblings. While attending Harvard College, Black switched majors several times before graduating with a bachelor’s degree in physics in 1959. Five years later Harvard conferred on him a doctorate in applied mathematics.

With strong academic training in quantitative analysis and computer technology, Black easily found employment in 1965 with the management-consulting firm of Arthur D. Little, Inc., in Cambridge, Massachusetts. With the advent of complex quantitative methods in business management and the introduction of computers into the decision-making process in the early 1960s, Black’s expertise was in high demand.

While working with computers and processing information at Arthur D. Little, Black became good friends with Jack Treynor. A Harvard Business School alumnus, Trey-nor was deeply involved in stock market research. He was trying to formulate a relationship between a stock’s rate of return and the stock market risk. This idea of analyzing the seemingly chaotic world of the stock market caught the interest of the mathematically minded Black. The friends soon became colleagues in pursuit of a workable scientific model of the market.

Black stayed with Arthur D. Little until 1969. By this time he had learned enough about the financial market to start his own financial consulting business: Associates in Finance of Belmont, Massachusetts. Making money depended on providing sound financial advice, which, in turn, was dependent on a thorough knowledge of the complex relationships among the underlying economic variables. Because Treynor had already moved on to a more lucrative position with Merrill Lynch in New York City, Black looked to the finance faculty at the nearby Massachusetts Institute of Technology (MIT) for academic support. As the field of finance was increasingly becoming quantitative, Black’s overture of cooperation was readily accepted by an MIT faculty in need of mathematicians to help with the formulation and testing of their theories. Additionally, Black had the advantage of providing the practical expertise necessary to bridge the academic and business worlds.

Black developed a special friendship with two MIT finance scholars: Myron Scholes and Robert Merton. What brought these three men together was the search for a valuation formula for “options.” Options are a type of financial instrument that gives their holders the right to buy (calls) or the right to sell (puts) another financial instrument (usually corporate stock) at a predetermined price (strike price) within a specified time period. Options had been around for quite a long time. However, interest in them surged during the 1960s. Black and his MIT colleagues were fascinated by the complex relationship that seemed to exist between the value of an option and the movements in the price of its underlying financial instrument. Figuring out a price formula for options was not only an academic exercise; it would also help the practitioners to predict the future option prices.

In 1971 Black accepted a visiting professorship at the University of Chicago. A year later he was appointed head of the university’s Center for Research in Security Prices. In 1973 he and Scholes published “The Pricing of Options and Corporate Liabilities” in the Journal of Political Economy. They had figured out the formula just in time. By coincidence, the Chicago Board of Options Exchange had commenced operations exactly one month before the paper was published. The “Black-Scholes Formula” was received enthusiastically by both the practitioners and the academicians. Within a brief period of time Fischer Black became a familiar name in all academic and business circles dealing with options.

In 1975 Black took a teaching position at MIT. His third wife (his previous two marriages had ended in divorce), Catherine Tawes, had never liked living in Chicago. While at MIT, Black continued to work on his research agenda. Some of his publications were, of course, related to his favorite topic of the options market. Others, such as “The Ins and Outs of Foreign Investment” (Financial Analysts Journal, May—June 1978), were on quite different subjects. In addition to teaching and research, Black also managed to run a lucrative consulting business.

In 1984 Black accepted a partnership at the prestigious Goldman Sachs investment banking firm in New York City. The business world always appealed to him. He was designated vice president for trading and arbitrage and was expected to be the expert in residence on all aspects of the company’s business. Despite his busy schedule at the firm, Black made sure he had time for academic endeavors. For example, in 1985 he became the president of the American Finance Association. Later, he wrote “How We Came Up with the Option Formula” (Journal of Portfolio Management, winter 1989) and coauthored “Asset Allocation: Combining Investor Views with Market Equilibrium” (Journal of Fixed Income, September 1991).

At the age of fifty-six, this fair, blue-eyed, tall, softspoken, quiet and polite man was at the peak of his career. He and his wife Catherine, together with their daughters Alethea, Melissa, Ashley, and Paige, a stepdaughter (Kristen Tawes), a stepson (Kevin Tawes), and his son, Terry Linton, seemed to have it all. Then suddenly, Black was afflicted with cancer of the throat. He died at home after one year of battling the disease.

The discovery of a valuation formula by Fischer Black and his colleagues proved to be an important breakthrough in the field of finance. The Black-Scholes Formula, as it later came to be known, paved the way for finance theoreticians to develop new models to meet the needs of an ever expanding options market. Without his seminal work, the financial markets would be a much riskier environment for investors in general and options speculators in particular.

The most extensive coverage of Fischer Black is in Peter L. Bernstein’s Capital Ideas: The Improbable Origins of Modern Wall Street (1992). Good biographical summaries are “Fischer Black,” Economist (9 Sept. 1995); Elizabeth Corcoran, “Fischer Black: Calculated Risks Enable Mathematician to Turn a Profit,” Scientific American (Mar. 1990); and Jeffrey M. Laderman, “Fischer Black Is Practicing What He Teaches,” Business Week (6 Aug. 1984). For an excellent account and analysis of his academic contributions, see G. L. Gastineau, “Fischer Black: Describing an Elephant,” Journal of Portfolio Management (Dec. 1996): 25-28. Obituaries are in the New York Times (31 Aug. 1995).

Mojtaba Seyedian