How interesting exchanges between Jack Treynor and Fischer Black shaped finance..

A superb piece by Perry Mehrling of INET.

He pays tribute to Jack Treynor, the forgotten man who helped shape much of finance theories as we know today. Treynor discussed  much of his ideas with Black and amidst all this the revolutionary idea of finance i.e pricing of options was taking place:

Jack has never been easy,” wrote Charles D. Ellis in 1981 as Jack stepped down from his position as editor of the Financial Analysts Journal which he had held since 1969. In Jack’s own departing words in the same issue of the FAJ, he described a “guerilla war” between black hats and white hats, whose “outcome is still in doubt”.

In retrospect, the years of Jack’s editorship more or less coincided with a most remarkable period in American history when what I have called the revolutionary idea of finance took hold and transformed financial institutions and financial practices utterly. Jack was in the middle of it all, pushing against the resistance of the Old Guard in his attempt to professionalize the job of financial analyst, but also pushing against the New Guard whose almost religious belief in market efficiency led them to disregard the importance of that very same job.

Here he is, in 1979, retrospectively characterizing the middle ground he was trying to occupy:

I believe in a third view of market efficiency, which holds that the securities market will not always be either quick or accurate in processing new information so that, contrary to the academic view of market efficiency, opportunities to trade profitably against the market consensus exist. According to this view, however, it is not easy to transform research advantage into superior portfolio performance. Unless the investor understands what really goes on in securities transactions, he can easily convert even superior research information into the kind of performance that will drive his clients to the poorhouse.

“Trading Cost and Active Investing”, eventually published in FAJ 1981 as “What Does it Take to Win the Trading Game?”

To help him keep his balance on that shifting middle ground, he brought onto the board of FAJ his friend Fischer Black, who himself would spend more or less the same crucial formative years hanging out in academia, first at the University of Chicago and then MIT. The result was a remarkably productive collaboration in which Treynor, taking advantage of his greater closeness to the world of practical experience, produced a series of “ideas in the rough” that Fischer then picked up, reworked, and smoothed out.

Useful discussion on history of financial thought which obviously is never taught. What matters more is how finance shapes society and not just trading profits:

The revolutionary idea of finance transformed the practice of finance, and in time it also transformed academic understanding of finance. Indeed, both transformations continue to this day; I tell all my students that financial globalization, and the resultant integration of money markets and capital markets, is the defining fact of our age. But I think there is another, even slower, transformation under way as well, a cultural transformation in how we think about risk and time in our own lives, both as individuals and as collectivities.

Treynor’s thoughts on how to trade profitably against the market consensus amount also to a kind of life philosophy, a way to confront what Keynes called “the dark forces of time and ignorance”. In the long run, more important than the transformation of financial institutions, or of academic theory, is the way that a changed understanding of risk and time allows people to live different kinds of lives, by freeing them from the superstition that guides action wherever science has yet to penetrate. And even more important is the way that a changed understanding of risk and time allows people to live different collective lives, by understanding better the larger society of which they are a part, and their place in it.

That cultural revolution is of course still very much unfinished business. Jack Treynor, by placing himself in the middle of the central transformational event of his generation, was a pioneer not only in the art of investment but also in the art of living.

Nice bit..

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