Risk and Time

Beginning with a solid background in CAPM, Black was ready to consider risk as it really was. One of the first things he noticed was the incredible amount of risk that time imposes on people and investments. This risk stems from the ever changing nature of the world in which we live. With our understanding and visions as limited as they are, we need another way to consider the risk that time forces onto us.

One area in which Black noticed great opportunity for improvement was future wages. Black noted that wages are one the primary method people accrue wealth. Jobs with the highest wages require high levels of specialization. The high levels of specialization expose people to risk. One possible counter to this risk, is to diversify the skill they posses. Black followed this council as he successfully worked in both academia and business.

Another way people can safeguard their future wages is to form long term contracts. These contracts give people the stability and commitment that are necessary to endure the shifts that so frequently sweep the business world. This is similar to a reinvestment risk that investors should consider when searching for proper investments.

The final way that risk over time can be countered is through the use of simple models. Black noticed that simple models have a tendency to survive much better than complicated ones. Similarly, people who have simple marketable skills tend to fare better than people with highly technical and therefore transient skills. Nothing showed these beliefs more than Black’s adherence to the CAPM model, or his later options pricing model.