What I’ve been reading

Fischer Black and the Revolutionary Idea of Finance, by Perry Mehrling. I was surprsed at how much I enjoyed this book. Black was a unique guy, so I suppose I shouldn’t be surprised I liked this book as much as I did. Indeed, in many ways it’s the perfect book for me: an intellectual history about someone who believed that the world suffered from too little theory, rather than too much (he used to say that if the evidence contradicted the theory you don’t simply throw the theory out, you get back to work and think about why the evidence didn’t support the theory); who was willing to take wildly idiosyncratic views to see where they led (his options pricing formula was based on his firm belief in the Capital Asset Pricing Model, but it succeeded because once you went down that route you didn’t need CAPM’s assumptions for it to work because they canceled each other out, and he had strange views on the Business Cycle which remain both largely ignored yet fertile ground for provoking thought); and who managed to straddle both the academy and the real world (Black bookended his career by working first for the consulting firm Arthur D. Little and later Goldman Sachs, with stints as a professor at the University of Chicago and MIT inbetween).

Black also is a surprisingly interesting enough guy for someone who enjoyed quietly sitting at his desk for extended periods of time, as evidenced by his four marriages and occasional professional quarrels, though the book takes off after Black leaves graduate school (where he studied under Quine) and enters the real world. And while this book doesn’t immediately appear to offer any lessons for football, I think that depends on how you look at it. In any event, this paper attempts to apply some of Black’s macroeconomic theories to the recent financial crisis, and these blog posts here and here summarize his claims. In the words of Tyler Cowen: “[W]hy did both Milton Friedman and Bob Solow scorn him as a macroeconomist? Well, Fischer pushed two (actually more) controversial claims. First, the Fed cannot influence real or nominal variables, unless traders allow it to. Second, business cycles are caused by mismatches of tastes and production plans. If both of these were correct, Black would be the greatest macroeconomist of the century.”

On finance, the Nobel Press release (which Fischer Black was ineligible for, as he died before the award was given to Myron Scholes and Robert Merton) is informative. It’s worth pointing out, for those into this sort of thing, that Black didn’t look at the Black-Scholes formula as perfect; he wrote a paper in 1989 (which updated findings he’d published over a decade earlier) called “How to Use the Holes in Black-Scholes,” and when his collaborator Myron Scholes asked Black to join his hedge fund, Long-Term Capital Management (which infamously blew up after years of never having a losing day, as recounted in Roger Lowenstein’s great book When Genius Failed: The Rise and Fall of Long-Term Capital Management“>When Genius Failed), Black declined, saying their strategies were too risky and that they were borrowing too much money to finance their supposedly surefire bets. Black died before his prophecy could come true.

Farnsworth’s Classical English Rhetoric, by Ward Farnsworth. Although completely different than the book above, I also highly recommend this new tome. It’s essentially a textbook — and even further, a book of examples — but the examples are carefully chosen, and the commentary is both very interesting and appropriately limited. “Rhetoric” in the title is used in the older sense (hence “Classical” in the title), and the book consists of rhetorical devices used by masters of the English language to enhance their prose and communication. One great feature of the book is it is not limited to writers: Farnsworth makes extensive use of the greatest speakers of the English language, from Churchill to Lincoln to Daniel Webster and to Edmund Burke. Here is a (very positive) Wall Street Journal review of the book.

The Myth of the Rational Voter: Why Democracies Choose Bad Policies (New Edition), by Bryan Caplan, and Political Parties, by Robert Michels. I’m trying to get up to speed on Public Choice theory, and these both came highly recommended. So far I’m enjoying the Caplan book more, though that may be due to his provocative and idiosyncratic views.

– Not a book — and still, not truly football (apologies) — but the internet is buzzing about A.J. Daulerio’s GQ Profile. I don’t have much to add, though I found this excerpt interesting:

I ask if his persona on Deadspin is who he is in real life.

“I think it’s very close,” he says. “I think that’s part of the problem, too.”

I think that’s all you can really ask of any writer or blogger — is your product true to you? I also think it’s worth comparing the GQ piece with the New Yorker’s bit this week on Aol (yes that is how the company capitalizes it now), which is trying to evolve from a fee-based internet provider to a content generator. An excerpt:

[M]ost of [Aol CEO Tim] Armstrong’s turnaround strategy — make the site cleaner, add local news, create unique content, make AOL a destination portal — is based on ideas from the Internet’s past . . . . But Web advertising rates have decreased in recent years, since demand (the number of Web pages) vastly outpaces supply (the number of advertisers). . . . Other portals offer an array of content. All vie for advertising, talent, and the attention of consumers. While AOL — like Yahoo and the Huffington Post — boasts of the original journalism it produces, it doesn’t employ a single overseas correspondent. . . . Perhaps Tim Armstrong will manage to make AOL rise again, but there’s a much more common path followed by digital companies — like Wang, DEC, Starwave, Excite, and Lycos. They rise, then they sputter, and then they crash.

I’m certain that there is a relationship between the New Yorker and GQ pieces and the Public Choice books above.

  • Re: Public Choice. You have to read Buchanan’s “The Calculus of Consent,” of course. There’s also “Beyond Politics” by Mitchell and Simmons, and a cool book that puts a twist on traditional public choice theory is McChesney’s “Money for Nothing.” Cato also has a great Public Choice primer called “Government Failure” by Tullock/Seldon/Brady.

  • Greg: Thanks for the tip. I’ll have to check those out.

  • BC

    Interesting books. Honestly, I became pretty interested by some of Fischer Black’s critics like the person who pens the blog “naked capitalism”, Yves Smith. She wrote a book detailing why certain assumptions are… horse manure. A blog to check out or possibly a book to read is Econned.

    I’m reading Rising Tide: The Great Mississippi Flood of 1927 and How It Changed America

  • BC: I like Naked Capitalism and Yves’s work. I think one reason I liked the Mehrling book on Black so much was that — as is often the case — Fischer Black the guy is a lot more complicated (and commendable) than Fischer Black “the idea,” i.e. committed to reducing all financial theory to models in the Paul Samuelson tradition and maintaining a belief in perfect equilibrium at all times. Both are true but his “equilibrium” often didn’t look much like the caricature of equilibrium (which begs the question why it must be considered equilibrium) and you see how he (at least usually) fully understood that his proposed solutions were just proposals. Indeed, his time in the real world showed that he didn’t actively believe there weren’t inefficiencies. But, obviously (and as I’ve written), the experience of the last decade or so shows that the finance gurus’ apparent rigor managed to assume away a great of risk — and reality itself. But Black understood that better than most of his contemporaries and that’s one reason he was so interesting. He also was a product of his time; this stuff was so knew all the smart people were pursuing it to where it led them, which is all anyone can be expected to do. Definitely an interesting book, though I agree with Yves’s and many others’ criticisms of being a full-time CAPM ideologue.

  • Brad

    Chris you might enjoy Emanuel Derman’s blog.


    He worked with Black at Goldman and has very interesting views on how you should view models in finance (and all social science).

  • Felton


    I am wondering how this fits with an idea I have that people have a very poor understanding of how to value extremely low-probability events with astronomical damage costs. Hurricane Katrina and the BP oil spill come to mind – yes, I did enjoy last year’s Super Bowl.

  • Chris: Further on Public Choice: http://tinyurl.com/64g6853

    …and why waste time on competing nonsensical business cycle theories when you can see the truth tested in one sitting?



  • Veritas

    @Felton- prob fits right where Nicholas Taleb’s “The Black Swan” starts.

    Public Choice theory is interesting stuff, but I always thought it was pretty funny…I mean one of the first tenets of game theory is defining what a win and a loss are…and while some like James Buchannan admit that their models are very flawed, others do not and try to impose economic (when did econ become a hard science?) models on political science, the result of which is little predictive power.

  • Nate

    “I think that’s all you can really ask of any writer or blogger — is your product true to you?”

    I could create a blog that documented what I had for breakfast every morning. It would be true to me, but it would still suck unless I had something interesting to say on the subject.

    I see writing and blogs less as a reflection of the author and more as a construct or performance. So the benchmarks are, is it interesting? Is it new? Does it have something to say?

  • Homyrrh

    Chris – take a look at Mike Konczal’s site. Always imperative: http://rortybomb.wordpress.com/.