1996 Hall of Fame

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Induction Speech for Fischer Black

Inducted December, 1996

Mr. Emanuel Derman, Director of Quantitative Strategies at Goldman, Sachs & Company, conducted the ceremonies inducting Fischer Black. Mr. Derman, a colleague and co-author with Fischer Black of many innovations, most notably the development of the Black-Derman-Toy option-valuation model, made the following presentation.

I'm very pleased and honored to be here and to say a few words about Fischer on this occasion. But, both for my sake and yours, I wish that weren't necessary. I miss Fischer — I had become used, over the years, to reflexively call his extension at Goldman whenever some financial issue puzzled or confused me, and I've only slowly adjusted to not being able to do that. It would have been so much better for all of us if he could be here in person to accept his award and make a speech.

I first met Fischer in 1986, several months after I came to work in Fixed Income Research at Goldman Sachs & Co., when he and I and Bill Toy worked together on a stochastic no-arbitrage model of interest rates. When you knocked on Fischer's door and entered his office, it was quiet and unfrenzied. Fischer didn't seem to allow his work-life to be dominated by the multiplexing, interrupt-driven set of precedences that became a way of life for anyone who'd been at an investment bank for more than a few months. He made time for everyone, and was never in the prototypical frantic rush. Most often you'd find him reading or on the telephone, or sitting with his PC keyboard entering notes into Thinktank, an organizer program he loved to use. Fischer was highly organized! If you said something he found useful, he'd write it carefully on a fresh sheet of lined paper and insert it into a newly labeled manila folder which eventually went into one of his many file drawers.

Fischer had many remarkable qualities that became apparent almost as soon as you met him. If you knew about the Black-Scholes breakthrough that allowed the somehow miraculous determination of the fair price of an option independent of what you thought about the stock, and appreciated what a giant leap forward that was in the world of financial economics, then you expected him to be deep and brilliant. But what struck you even more forcefully was how meticulous was his devotion to clarity and simplicity in presentation and speaking. He put weight on both content and style. He was especially insistent and principled about writing
clearly yet informally on technical subjects. When we wrote the first draft of our one-factor model of interest rates, Fischer wanted no equations in it, and I had to struggle long and hard to satisfy his standards. He wanted accuracy and honesty without the technical details, which meant you had to understand the model viscerally, and then explain that understanding. I think the reason that the model became popular in trading circles was because it demystified interest rate dynamics at a time when people who built and used these models were not yet comfortable with stochastic differential equations. Fischer understood his audience.

Fischer had great physical and financial intuition that transcended mere mathematics. His mathematical skills were good. But his insight and his instinctive sense of what ought to happen in a theory was very strong, and he kept persevering in trying to attain insight before he resorted to mathematics. To me, this is the hallmark of great scientists.

Last week's New Yorker contained an article called "The Decline of Economics", lamenting the excessive formalization and mathematization of economics. To me, Fischer's method was the living antithesis. His approach to modeling seemed to consist of unafraid hard thinking, intuition, and no great reliance on advanced mathematics. This was inspiring to lesser mortals. He attacked problems directly, with whatever skills he had at his command, and it often worked. He gave you the sense (perhaps misguided if you weren't him) that you could discover deep things with whatever skills you had, if you were willing to think hard. He had a physical taste in models: he liked to describe the financial world with variables that represented observable phenomena as opposed to hidden statistical factors. He was a rationalist. In finance, he had a strong pragmatic streak. He thought practical usefulness and accuracy were more important than elegance, despite the unquestionable elegance that lends so much appeal to the Black-Scholes-Merton options pricing framework he founded.

On a professional and personal level, Fischer always seemed more free of artifice than anyone I knew, though this sometimes made him less easy to deal with. He once said to me that one of the things that limited his influence was the fact that he always told people the truth, even if they didn't want to hear it. This was true: he didn't soft-pedal in giving his opinion of work you had done or actions you had taken, but just told you what he thought was important in the relevant arena. He had a strong sense of what was important, and he always took the long view in judging importance. History has obviously vindicated him.

Fischer had many unorthodox but well-thought-out ideas. He preferred applied research to pure research. He thought university professors should be paid and hired for the teaching they did, not for their research. His sense of the important made him more interested in new content rather than new methods for solving models whose content he already knew. He wasn't overwhelmed by elegant analysis: he was quite happy even if a model could be solved only numerically, and didn't care if it had no formulaic solution. He was a rationalist and a believer in human imagination: he suggested traders at banks should be paid for the
plausibility story they told behind the strategy they used, rather than for the results they obtained, thus rewarding intelligence and thinking rather than possible luck. He also had a good and early grasp of the importance of computing systems and environments in making practical use of models.

Fischer had an unbiased view of his contributions. Once, when I was going to give a talk at a conference where Bob Merton was the keynote speaker, I called Fischer (already ill but more than a year before his death) and left him voicemail asking the appropriate way to refer to "his model" — should I call it "Black-Scholes" or "Black-Scholes-Merton?" Fischer responded by saying it was OK to call it the Black-Scholes-Merton model, and then adding that Merton had come up with the replication argument for valuing an option, noting quite unperturbedly that "that's the part that many people think is the most important." There was really no need for him to be that modest, but he wasn't being falsely modest either.

Fischer was an inspiring role model, for people interested in financial modeling, though he was a little too exceptional in his historical contribution and reputation to fit that role perfectly. But he was an inspiration to people who were struggling to define a place for quantitative groups in investment banking firms. Fischer always encouraged you to refuse to be swayed by politics, and reinvigorated your sense that it was important to do the right thing, which was to produce the best quality work you could. 

It's sad that he's gone, but he didn't seem to be afraid of dying. He always seemed to me to be a consummate realist. At his memorial service in Cambridge, I heard a moving speech by Jack Treynor, who concluded by saying that as regards death, "Fischer wasn't afraid at all." That's the way I saw it too. He rarely seemed to delude himself about the way of the world or its standards.

To the end, Fischer remained interested in work. Sick at home, he communicated with anyone who wrote to him by e-mail. The last letter I got from him, in reply to the question of whether my occasional questions were bothering him, stressed that he enjoyed advising us on financial issues we sent him.

Fischer would have been very pleased to be honored by practitioners of the art and science of financial analysis. I'm very pleased and touched to be able to continue to be connected with him in some small way by talking about him here. Thank you.

In honor of Fischer Black's induction, the Fixed Income Analysts Society’s annual $1,000 award for the best academic paper presented at the Financial Management Association was made in his name.

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