Good Reading Recommendation from Tyler Cowen
By Arnold Kling
I strongly endorse Tyler’s recommendation.
Black co-developed a formula for option pricing which garnered a Nobel Prize, for which he was no longer eligible, having died before it was awarded. But he was much more prolific than Myron Scholes, his co-author on the option pricing paper. And he had a very strong point of view about economics and finance, which Mehrling brings out quite well.
Merhling also discusses Black’s traits and quirks. While certainly not as dramatic as Skidelsky’s biography of Keynes, Merhling’s work does deserve mention in the same breath.
I plan to write more about Black in the future.
UPDATE: One of many issues on which Black has strong, nonconformist views is accounting. If the market value of the firm is P, and the price-earnings ratio is P/E, then Black says that we want accountants to come up with a value of E that gives the right P. Mehrling writes,
he proposed that the goal of accounting should be to come up with a number that the analyst needs only to multiply by a constant, say 10, in order to arrive at an estimate of value. In effect, the goal is to internalize within the firm all the various adjustments that the analyst sitting outside the firm would do himself if he had access to the detailed information available to the accountant.
This would seem to support accounting that includes a lot of judgment, and even earnings “smoothing.” For another viewpoint in support of judgment, Nick Schulz pointed to this piece by Alex J. Pollock.