Faculty Spotlight:

Perry Merhling, Author of Fischer Black and the Revolutionary Idea of Finance

December 2005

By Karen Wells '89

Alumnae and economics majors who are interested in finance will enjoy Perry Mehrling's Fischer Black and the Revolutionary Idea of Finance (John Wiley & Sons, 2005)—a wonderful book, full of many names and personalities in finance, that illustrates how risk/reward analysis has shaped both the financial industry and the economy. Following its completion, I had the opportunity to catch up with Professor Mehrling. During our conversation, he shared some thoughts on the book, Fischer Black the person, finance and economics, and his plans for the future.

I understand that the book did not start as a reflection on Fischer Black's life. How did the focus of the book evolve from an account of the rise of modern finance to an artful description of the man behind the Black-Scholes model?

Actually, the book began as the story of how the ideas that arose in finance changed the way we think about money and business cycles. Fischer Black was ideal for that because he always had a foot in both economics and finance. But once I got into it, I realized that he was also ideal for telling the story about the rise of finance itself, since he was there at the beginning, interacted with all the major players, and moreover always had a foot in both practical business and academia. And then, as I got into that story, I realized that the story of finance was in part about how a new generation embraced risk. Fischer turned out to be perfect for that as well, since early on he embraced the capital asset pricing model as a guide for his own life.

For econ majors and alumnae working in finance, what lessons should we take away from the life of Fischer Black?

I would emphasize that finance is about big ideas, about risk and time, and about how societies as well as individuals can gain from the upside of risk while protecting themselves from the downside. I think it always helps students who are working away at some job in finance to have the bigger picture that makes sense of their own contribution. Even for non-finance majors, these ideas can help students to lift their eyes above the vicissitudes of daily life, which are largely driven by luck, and focus instead on the longer-run path where we have more control over our destiny.

Fischer's work revolutionized the financial markets. What work do you see being conducted today that you believe will have a significant influence on economic thought and/or the financial markets?

I have to pass on that one. It is nearly impossible to view one's own time objectively. Probably there is some underappreciated genius working away somewhere even now, but we won't know the importance of his or her work for a generation. What we'll recognize as important in retrospect depends on what happens in the future.

After coming to Barnard in 1987 as an assistant professor, you have become a tenured professor, chaired the economics department and published this wonderful book. What other accomplishments can you share?

The various papers that record my intellectual journey to date are on my web page. At the moment, the center of my attention is on my course Economics of Money and Banking. I hope to use the lecture notes for that course as the core of my next book. In a way that course is an attempt to respond to the challenge that Fischer Black laid down, which is how to understand the role of money and monetary policy in an economy with a highly developed financial system. I'm pleased that, unlike my other books, this one actually has grown out of my work in the classroom. I first taught the course nine years ago, and it has been my principal laboratory ever since. There are about 500 students by now who have passed through that lab, some of whom may be reading this interview. Let me say to them, thanks for your help, and your forbearance!

What are your plans for the future?

If you want to make God laugh, tell him your plans. But seriously, the lesson of finance is that you have to keep rolling the dice. Risk is the cost of reward, so the important thing is to keep taking risks. You'll get some bad rolls, maybe even a run of them, and that can make it hard to keep going. The important thing is to arrange your life so you won't get stopped out of your long-term investment before it has a chance to pay off. I'm fortunate to have a supportive family that has never given up on me.

Karen Wells '89 works as an investment consultant at Wells, Canning & Associates Inc. in New York. To contact Karen or other economics alumnae, visit the Barnard Alumnae Online Community.

[back to 2005 Economics e-newsletter]