Perry Mehrling, professor of economics at Barnard College and Columbia University, spoke on the workings of genius Monday in a presentation about the late economist Fischer Black. Mehrling tried to recreate Black's evolution of economic thought, which would eventually give birth to the Black-Scholes option pricing formula and revolutionize modern finance theory and practice.
Mehrling stressed that although Black never received a formal education in economics, the theories for which he would become most famous were already in nascent form when he first started speculating into what he viewed to be a Capital Asset Pricing Model world--a simplified model that introduced the concepts of systematic and specific risk.
"This was a wild idea that he had as a kid," Mehrling said. "The world he's imagining is not very much like the world that exists, but it's the world that's coming to be. This is about breaking down the walls of stodgy old finance."
When he first ventured into economic academia, Black felt that people held an inaccurate understanding of monetary theory, Mehrling said. Black therefore took a stance against speculation and held that corporate debt could be risk-free once people understood the implications of CAPM.
In addition, Mehrling said Black's work on time diversification, in which he treated a market portfolio at each point in a person's life as a different stock, also separated him from most of his contemporaries. Together, Black's speculations pointed to a model in which all borrowing would be short-term and in which interest rates would change with the market, as opposed to changing through an active monetary policy.
Mehrling stressed Black's lack of a formal economics education as one of the factors that allowed his genius to flourish.
"As an undergraduate, he studied psychology and anthropology and philosophy," he said. "When I ask the question of how genius works, I want you to remember that. He came out of a liberal arts education, and he used it all."
Mehrling said that in addition to a natural genius--the sine qua non--three other factors made Black's theories practical for the greater financial world: his organized industriousness, his mastery of the creative process and his ability to make sense.
Mehrling said that organized industriousness and the process of creativity were especially consequential in turning speculations into useful theories and models.
"That's [one] way genius works. You don't lose ideas once you get them. You keep them around... until you solve them," he said. He added that an important part of this process involves the discipline to sort through recalcitrant data points, naive questions and simple theories.
The third factor--an ability to make sense--made Black's theories accessible to the rest of society, Mehrling said. This ability included a grasp on the "art of readable writing" and the "art of plain talk"--both skills in which Black showed interest throughout his education and career.
Mehrling's speech is part of the Johnson Distinguished Lecturers Series, funded by the Allen Starling Johnson, Jr. Endowment Fund, which was set up to help undergraduate economics majors understand the career opportunities and challenges of the business world.
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