The Alpha Masters: Unlocking the Genius of the World's Top Hedge Funds
by Maneet Ahuja, Myron Scholes and Mohamed El-Erian · 29 May 2012 · 302pp · 86,614 words
individuals who read my entire manuscript and provided very useful feedback, perspective, and comments, like Julian Robertson, Bill Ackman, Roxanne Donovan, Roy Katzovicz, Nouriel Roubini, Myron Scholes, Jeff Kaplan, Rick Sopher, Josh Friedlander, Mary Beth Grover, Jonathan Gasthalter, Parag Shah, Alexei Nabarro, Ryan Fusaro, Jim McCaughan, Jim Spellman, Mike Spence, Mario Gabelli
In Pursuit of the Perfect Portfolio: The Stories, Voices, and Key Insights of the Pioneers Who Shaped the Way We Invest
by Andrew W. Lo and Stephen R. Foerster · 16 Aug 2021 · 542pp · 145,022 words
William Sharpe and the Capital Asset Pricing Model 51 4 Eugene Fama and Efficient Markets 81 5 John Bogle and the Vanguard Portfolio 113 6 Myron Scholes and the Black-Scholes / Merton Option Pricing Model 140 7 Robert Merton, from Derivatives to Retirement 173 8 Martin Leibowitz, from Bond Guru to Investment
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’t easily replicated. However, the academic financial research by Markowitz as well as his fellow Nobel laureates such as James Tobin, Paul Samuelson, Bill Sharpe, Myron Scholes, Bob Merton, Gene Fama, and Bob Shiller and by other exceptional researchers has created a framework and repeatable process for investors that has led to
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our journey, we asked this question to ten prominent iconic figures and thought leaders in the industry—Harry Markowitz, Bill Sharpe, Gene Fama, Jack Bogle, Myron Scholes, Bob Merton, Marty Leibowitz, Bob Shiller, Charley Ellis, and Jeremy Siegel—and their answers were both expected and unexpected. Our pioneers, while admittedly not a
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helped to spark the idea for this book. We’re particularly indebted to Jack Bogle, Charley Ellis, Gene Fama, Marty Leibowitz, Harry Markowitz, Bob Merton, Myron Scholes, Bill Sharpe, Bob Shiller, and Jeremy Siegel for their research and teaching, for inspiring us throughout our careers with their intellectual leadership, and for devoting
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month, providing further support for the semistrong form of the EMH. As part of his PhD dissertation, another of Fama’s students, future Nobel laureate Myron Scholes (featured in chapter 6), found that markets reacted negatively around the announcement of secondary common share offerings, which reflected negative information related to someone selling
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, and their assurance that you will earn your fair share of the markets’ returns, is, by definition, a winning strategy.… Stay the course!”120 6 Myron Scholes and the Black-Scholes / Merton Option Pricing Model FAMOUS MATHEMATICIANS and physicists often have arcane formulas permanently associated with their names as their legacy. Pythagoras
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E = mc2. However, it’s an exceptionally rare honor for economists, who are known more for being dismal than for their mathematical precision. Myron Scholes is that rare exception. Myron Scholes is the co-originator of the Black-Scholes option-pricing formula, a mathematical expression that produces the price of complex securities such as
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gave him a deep understanding of market practicalities. As such, Scholes is ideally suited to help us formulate the Perfect Portfolio. The Great White North Myron Scholes was born in Timmins, Ontario, on Canada Day, July 1, 1941.1 Timmins is a small gold mining town in northern Ontario with a population
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.” As described in chapter 6, Robert C. Merton was working on an option pricing formula at the same time and along the same lines as Myron Scholes and Fischer Black. Black would reflect on the “long discussions” with Merton, his numerous suggestions that improved their famous option pricing paper, and the “mixture
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move from such a productive environment? I was perfectly comfortable, so I happily accepted the offer.”32 During the Sloan interview process Merton first met Myron Scholes, who had recently arrived from the University of Chicago. Merton’s Options Insight What was trading options like prior to Black, Merton, and Scholes? According
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much to other people’s papers as he has to his own. For example, a key part of the option paper that I wrote with Myron Scholes was the arbitrage argument for deriving the formula. Bob gave us that argument. It should probably be called ‘The Black-Merton-Scholes’ paper.”41 After
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do something, just stand there!” Scholes’s Perfect Portfolio Unlike the previous experts, who stressed the importance of the market portfolio as a starting point, Myron Scholes stands out. For Scholes, the Perfect Portfolio is all about risk management. He starts from the assumption that what matters to you the most is
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. “Universal Hedging: Optimizing Currency Risk and Reward in International Equity Portfolios.” Financial Analysts Journal 45, no. 4: 16–22. Black, Fischer, Michael C. Jensen, and Myron Scholes. 1972. “The Capital Asset Pricing Model: Some Empirical Tests.” In Studies in the Theory of Capital Markets, ed. Michael C. Jensen, 79–121. New York
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: Praeger. Black, Fischer, and Myron Scholes. 1972. “The Valuation of Option Contracts and a Test of Market Efficiency.” Journal of Finance 27, no. 2: 399–417. ________. 1973. “The Pricing of Options
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Prophet.” Risk Magazine, July, 40–42, http://rmerton.scripts.mit.edu/rmerton/wp-content/uploads/2015/11/model-prophet.pdf. Peltz, Michael. 2007. “Robert Merton & Myron Scholes, Theory and Practice.” Institutional Investor, May, http://rmerton.scripts.mit.edu/rmerton/wp-content/uploads/2015/11/Power-Influence.pdf. Philips, Christopher B. 2014. “Global
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of the Asset Pricing Theory’s Tests, Part 1: On Past and Potential Testability of the Theory.” Journal of Financial Economics 4: 129–76. ________. 2006. “Myron Scholes Interview.” American Finance Association History of Finance Videos, https://afajof.org/masters-of-finance-videos/. Rosenberg, Barr, Kenneth Reid, and Ronald Lanstein. 1985. “Persuasive Evidence
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. 1970. “A Test of the Competitive Market Hypothesis: The Market for New Issues and Secondary Offerings.” PhD diss., University of Chicago. ________. 1997. “Myron Scholes—Biographical.” The Nobel Foundation, https://www.nobelprize.org/prizes/economic-sciences/1997/scholes/biographical/. ________. 1998. “Derivatives in a Dynamic Environment.” American Economic Review 88, no.
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3: 350–70. Scholes, Myron, and Joseph Williams. 1977. “Estimating Betas from Nonsynchronous Data.” Journal of Financial Economics 5, no. 3: 309–27. Scholes, Myron, Mark Wolfson, Merle Erickson, Michelle Hanlon, Edward Maydew, and Terry Shevlin. 2014. Taxes and Business Strategy
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Involving Risk,” 20 Savage, Sam, 44, 339n57 savings: achieving financial goals and, 332; Ellis on, 276, 278–79; Malkiel on, 226 Schkolnick, Meyer R., 174 Scholes, Myron, 95, 109, 140–72; academic career of, 145–46, 157–58; on active management, 170–71, 314; on Buffett’s view of derivatives, 164–65
The Rise of the Quants: Marschak, Sharpe, Black, Scholes and Merton
by Colin Read · 16 Jul 2012 · 206pp · 70,924 words
The Early Years 43 9 The Times 55 10 The Theory 61 11 Applications 69 12 Life and Legacy 75 Part III Fischer Black and Myron Scholes 13 The Early Years 83 14 The Times 96 15 The Black-Scholes Options Pricing Theory 109 16 Applications 117 17 The Nobel Prize, Life
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and bond futures than in the traditional market for corporate securities. Yet, before the publication of the theory from the great minds Fischer Black and Myron Scholes, we knew little about how to price such financial derivatives. Meanwhile, Robert Merton, a disciple of the great mind Paul Samuelson, was rapidly extending the
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The Rise of the Quants of dollars of financial investment each year, now rely on the pricing tools provided by William Sharpe, Fischer Black and Myron Scholes, and Robert Merton, based on the earlier foundational work of Jacob Marschak and a then obscure but brilliant French PhD student at the turn of
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made discoveries that were subtle and humble but were so timely and related to the essence of the work of William Sharpe, Fischer Black, and Myron Scholes, we must conclude that he was more than a mentor of other great minds – he was a great mind himself. We will begin with his
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Modern Portfolio Theory was the inspiration for CAPM, CAPM motivated the more powerful Black-Scholes options pricing theory. In a fateful collaboration, Fischer Black and Myron Scholes, described later in this book, and Michael Jensen noted that variations in securities returns do not seem to follow the CAPM model. In particular, low
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future great mind, Fischer Black. This work, in which Black also involved Michael Jensen of Chicago for an early project, and then his future collaborator Myron Scholes, helped to inspire Black to see yet another extension of the CAPM into options pricing theory. In 1973 Sharpe was named the Timken Professor of
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Statistical Association, the American Association for the Advancement of Science, and the Econometrics Society. Like William Sharpe and many other great minds like Fischer Black, Myron Scholes, and Robert Merton (who followed him), and Franco Modigliani and William Sharpe (who preceded him), he presided over the American Finance Association (in 1974) and
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Black, Treynor’s young collaborator, and his co-consultant William Sharpe at Arthur D. Little to which we now turn. Part III Fischer Black and Myron Scholes The progression of finance has been remarkable. From the description by Irving Fischer as to why people save to the determination by John Maynard Keynes
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it not for a skeptical but sympathetic banker, he might have been ruined. Around the time of his graduation from high school, two tragedies befell Myron Scholes and his family. His mother died of cancer just a few days after his sixteenth birthday. At about the same time, a condition called keratoconus
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versed in the market-oriented Chicago School as espoused by Milton Friedman and George Stigler. His Chicago School economic philosophy made a strong impression on Myron. Scholes graduated with an economics degree from McMaster in 1962, just before his twenty-first birthday. He had to make a choice from The Early Years
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or encouraged. Every great collaboration offers complementary skills that result in a synergy for which the whole is greater than the sum of its parts. Myron Scholes would help provide some academic legitimacy and a more conventional and robust interpretation of Black’s insights. 14 The Times The pricing of the most
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techniques to individual securities by 1964, the definitive work on the pricing of derivatives had eluded financial theorists and practitioners alike until Fischer Black and Myron Scholes teamed up in the late 1960s. Obviously, the art of options pricing is in an educated guess about how a share price will evolve in
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he had done. 108 The Rise of the Quants Together, Samuelson and Merton jointly developed the key strategy that would eventually allow Fischer Black and Myron Scholes to unlock the problem. They surmised that if an investor constructed an optimal hedging portfolio that contained just the correct weighting of an option call
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effective instrument for hedging risk. The CBOT could take care of the first precedent. The team of Fischer Black and Myron Scholes would take care of the second. The young boy wonder Myron Scholes had arrived at the Sloan School at MIT in 1968, with his freshly minted PhD from the Univesity of Chicago
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importance beyond their wildest dreams. The Chicago Board Options Exchange While it would take a couple of years for the paper by Fischer Black and Myron Scholes to be published, champions of practitioners saw what academicians could not. The equation provided the best methodology yet for analysts to price options. Some on
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the legacy of Black and Scholes and their famous equation. 17 The Nobel Prize, Life, and Legacy Each in their own way, Fischer Black and Myron Scholes redefined finance theory and application in a way that is perhaps more substantial than anyone before or since. Many others, such as Irving Fischer and
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recently as the CEO when the investment bank MF Global failed spectacularly, remembered: “Fischer Black was simply the best. Giants without arrogance are rare.”4 Myron Scholes While Fischer Black was a man of few, carefully chosen words, and had a soft-spoken nature, he nonetheless stood tall, both physically and intellectually
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, especially on the practitioner side of finance. However, while it was he who generated the differential equation which Myron Scholes would help solve, Scholes’ contribution to the equation, and especially its intuition, should not be underestimated. Scholes remained immersed in research and teaching at MIT
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profoundly, then the Black-Scholes equation is most deserving of the prize. In 1997 the Royal Swedish Academy of Sciences awarded the Economics Prize to Myron Scholes for his work in collaboration with Fischer Black, and to Robert C. Merton, who is covered in the next part of this book, for his
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economic leaders use the public purse to bail out these bastions of private enterprise. In one such exploration in the public interest in March 2009, Myron Scholes was invited to a forum at New York University that was moderated by Paul Volcker, the last director of the Federal Reserve to lead a
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Pasadena, California. Scholes has two daughters, Anne and Sara. One story left to be told There remains one significant story left to be told in Myron Scholes’ life. Before the saga of Long Term Capital Management can be told, we must first describe the life, times, and theories of one final great
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, he shares an American pioneer pedigree that is common among the great quant minds in this volume. Second, he worked closely with Fischer Black and Myron Scholes to bring their idea to fruition, and then took their ideas still further. Third, he was part of the intellectual hub that had shifted from
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intellectually generous collaborator. And while Fischer Black came from a long lineage that dated right back to the first European settlers in the USA, and Myron Scholes was the grandson of an entrepreneurial set of immigrants from Polish Russia, Robert Carhart Merton embodied both such lineages. Robert Carhart Merton In some senses
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’s checkbook. He played with made-up banks like other children played Cowboys and Indians. At a young age, he already shared a characteristic with Myron Scholes in his teenage years. Both had a fascination with the stock market and with investing. Young Robert Merton bought his first stock at the age
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the Black-Scholes options pricing formula into practice. From the late 1960s to the mid-1980s, the business and the economics school at MIT housed Myron Scholes and Fischer Black, Stewart Myers, John Cox, Chi-fu Huang, Stanley Fischer and Paul Samuelson, four of whom would win the Nobel Prize in Economics
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Economics. Merton found himself with an MIT PhD in hand and an interview for his first academic position at the esteemed Sloan School of Business. Myron Scholes had also by then settled into teaching and research as a young faculty member at the Sloan School, following the completion of his Chicago PhD
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develop a new field of mathematics, the mathematics he freshly applied to finance was novel. And it was revolutionary. In collaboration with Fischer Black and Myron Scholes, he firmly placed finance on a rigorous and quantitative foundation. However, the tools he brought over, and the intuition he developed to motivate his best
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his graduation, was almost unprecedented, but is not uncommon among the small circle of great minds. 20 The Theory Fischer Black derived the differential equation. Myron Scholes provided an interpretation and assisted in its solution. However, it was Robert Merton who sparked the revolution that transformed finance. We should recall that Black
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and spurts, through John Burr Williams and Jacob Marschak, Franco Modigliani and Kenneth Arrow, Harry Markowitz and William Sharpe, and then from Fischer Black and Myron Scholes, each represented a departure from the traditions of finance. Despite the work of these innovators, the study of investments before the 1960s could rarely be
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name that was omitted from the most important namesake equation in finance and economics. Few who know him, including his more famous colleague and collaborator Myron Scholes, underestimate his contribution. In the early days of the Black and Scholes collaboration, Merton and Scholes and their consulting colleague Fischer Black were good friends
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paper and then the Merton paper came out in rapid succession. Years later, Black remarked: “A key part of the option paper I wrote with Myron Scholes was the arbitrage argument for deriving the formula. Bob gave us that argument. It should probably be called the Black-Merton-Scholes paper.”2 In
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finance with an eye toward quantifiable methods and application. This new quantitative school of finance has not disappointed. The theories of William Sharpe, Fischer Black, Myron Scholes, and Robert Merton defined markets and motivated trillions of dollars of financial activity each year. Now, markets act as if they are motivated by the
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mentioned his work to his young new colleague, Fischer Black. Treynor passed the ball to Black, who found a natural playmate in mathematical finance in Myron Scholes, who was teaching at MIT across the Charles River at the time. It is there that Scholes, Black, and Merton came in close contact. In
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Sharpe, Merton Miller, and Franco Modigliani for their insights into the workings of high finance and financial markets. This continued with a Nobel Prize to Myron Scholes and Robert Merton a few years after the passing of the Black-Scholes equation originator Fischer Black. In fact, the legitimacy of finance arising from
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I: On Past and Potential Testability of the Theory,” Journal of Financial Economics, 4(2) (1977), 129–76. 6. Fischer Black, Michael C. Jensen, and Myron Scholes, “The Capital Asset Pricing Model: Some Empirical Tests,” in Michael C. Jensen (ed.), Studies in the Theory of Capital Markets. New York: Praeger, 1972, pp
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), 178–231. 16 Applications 1. Perry Mehrling, Fischer Black and the Revolutionary Idea of Finance. Hoboken, NJ: Wiley, 2005, p. 138. 2. Fischer Black and Myron Scholes, “The Pricing of Options and Corporate Liabilities,” Journal of Political Economy, 81(3) (1973), 637–54. 3. http://articles.chicagotribune.com/2011-01-19/business
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Revolutionary Idea of Finance, p. 288. 5. www.nobelprize.org/nobel_prizes/economics/laureates/1997/press.html, date accessed January 23, 2012. 6. Justin Fox, “Myron Scholes, Intellectual Godfather of the Credit Default Swap, Says Blow ‘em All Up,” Time Magazine, March 6, 2009: http://curiouscapitalist. 186 Notes blogs.time.com/2009
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/03/06/myron-scholes-intellectual-godfather-of-thecredit-default-swap-says-blow-em-all-up/, date accessed January 23, 2012. 18 The Early Years 1. www.nytimes.com/2003
Adaptive Markets: Financial Evolution at the Speed of Thought
by Andrew W. Lo · 3 Apr 2017 · 733pp · 179,391 words
Harry Markowitz’s optimal portfolio theory; William Sharpe’s Capital Asset Pricing Model (which we’ll come back to in chapter 8); and Fischer Black, Myron Scholes, and Robert C. Merton’s option pricing formula. These discoveries appeared within a few years of each other, and they illuminated aspects of market behavior
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market in which complicated contracts related to the outcomes of future events are traded. Economists think so highly of the Black-Scholes/Merton model that Myron Scholes and Robert C. Merton were awarded the Nobel Prize in Economics for its discovery in 1997 (Fischer Black died two years before). The explosion of
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recruit the nucleus of his old group at Salomon Brothers, but also intellectual luminaries of academic finance like future Nobel laureates Robert C. Merton and Myron Scholes. The new fund was almost immediately successful, despite a newfound nervousness in the global bond market. This early success didn’t depend as much on
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capacity. One elegant example comes from the options market. The Chicago Board Options Exchange (CBOE), the first of its kind, opened just before Fischer Black, Myron Scholes, and Robert Merton published their foundational papers on option pricing in 1973.45 However, the rapid growth of the CBOE would have been impossible had
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, Texas Instruments introduced a new programmable TI-59 with a “Securities Analysis Module” that would automatically calculate prices using the Black-Scholes/Merton formula. (When Myron Scholes himself confronted Texas Instruments about their unauthorized use of the formula, they replied that it was in the public domain. When he asked for a
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effectively without incorporating private financial information on a systemwide scale? Most of the financial industry relies on unpatentable business processes to make a living, as Myron Scholes discovered when he confronted Texas Instruments about its use of his formula. As a result, the financial industry necessarily practices “security through obscurity,” using trade
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. Black, Fischer, and André F. Pérold. 1992. “Theory of Constant Proportion Portfolio Insurance.” Journal of Economic Dynamics and Control 16: 403–426. Black, Fischer, and Myron Scholes. 1973. “Pricing of Options and Corporate Liabilities.” Journal of Political Economy 81: 637–654. Blinder, Alan S. 2009. “Six Errors on the Path to the
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, Michael J. Sheehan, and L. Daniel Glotzer. 2005. “Prefrontal White Matter Is Disproportionately Larger in Humans than in Other Primates.” Nature Neuroscience 8: 242–252. Scholes, Myron S. 2006. “Derivatives in a Dynamic Environment.” In The Derivatives Sourcebook, edited by Terence Lim, Andrew W. Lo, Robert C. Merton, Myron S. Scholes, and
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Fama, Doyne Farmer, Lars Hansen, David Hirshleifer, Blake LeBaron, Simon Levin, Rosemary Luo, Craig MacKinlay, Martin Nowak, Steve Pinker, Allen Orr, Arthur Robson, Dick Roll, Myron Scholes, and Bill Sharpe. I’m also grateful to the many MIT students I’ve had the pleasure and honor of teaching, mentoring, and collaborating. Several
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Sarao, Navinder Singh, 360 satisficing, 180, 182, 183, 185, 213, 393 Savage, Leonard Jimmie, 19–20 savings and loan crisis, 44, 321 Schlesinger, Herbert, 223 Scholes, Myron, 27, 97, 241, 356–357, 384 Schüll, Natasha Dow, 91 Schultz, Henry, 31 Schumpeter, Joseph, 219 scientific method, 313, 314 second-order false belief, 111
The Crisis of Crowding: Quant Copycats, Ugly Models, and the New Crash Normal
by Ludwig B. Chincarini · 29 Jul 2012 · 701pp · 199,010 words
on the front line of the crises, including five LTCM partners: Eric Rosenfeld, Chi-Fu Huang, Hans Hufschmid, and Nobel prize winners Robert Merton and Myron Scholes. I also spoke with numerous bank authorities, like Sir Deryck Maughan, former Vice Chairman of Citibank, Andrew Crockett, former Head of the BIS, the founders
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to 1996. Julian Robertson: Founder of the very successful hedge fund Tiger Management. Eric Rosenfeld: Principal at LTCM and JWMP. Meriwether's right-hand man. Myron Scholes: Principal at LTCM and PGAM. Winner of the 1997 Nobel prize in economics. Alan Schwartz: CEO and President of Bear Stearns during 2008. William Sharpe
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exits, LTCM found itself trapped in the fire. CHAPTER 2 Meriwether’s Magic Money Tree We’re sucking up nickels from all over the world. —Myron Scholes The Birth of Bond Arbitrage In 1974, John Meriwether, having just received his MBA from the University of Chicago, went to work as a government
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to Salomon in 1988. Hans Hufschmid, with a BA from the University of Southern California and an MBA from UCLA, came to Salomon in 1985. Myron Scholes, a PhD from the University of Chicago and a professor at MIT and Chicago, became a managing director of Salomon in 1991, as well as
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detractors. During the firm’s road show, Andrew Chow, the vice president in charge of derivatives for Conseco Insurance, told Nobel prizewinner and LTCM partner Myron Scholes that “You’re not adding any value. I don’t think there are that many pure anomalies that can occur.”7 “As long as there
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opened many doors, including those of some central banks. Later, other partners joined, including Dick Leahy, Larry Hilibrand, Arjun Krishnamachar, Hans Hufschmid, and William Krasker. Myron Scholes and Robert Merton, who had been associated with Salomon and who would eventually win the 1997 Nobel Prize in economics, also joined LTCM as limited
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tax discrepancies between dividends in different countries, a legal vehicle was set up that was able to make the company more tax efficient. —Interview with Myron Scholes, July 9, 2011 I was one of the first four people to start LTCM with Meriwether, McEntee, and Rosenfeld. I had no desire to become
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have been important to a guy made famous in Liar’s Poker.13 I have spoken with other partners over the year, including Robert Merton, Myron Scholes, Hans Hufshmid, Chi-Fu Huang, and Dick Leahy. None of them were arrogant. All of them are busy and some appear very confident, which can
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implied volatility. The Black-Scholes formula, discovered in 1973, is most commonly used for this purpose. It is named after one of LTCM’s principals, Myron Scholes, and the late Goldman Sachs partner Fischer Black. LTCM made volatility trades in both fixed income and equities. In the fixed-income arena, they noticed
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. The next morning, Larry Hilibrand went to Omaha, Nebraska, to talk to Buffett. Buffett declined to invest because he thought the portfolio was too complicated. Myron Scholes called William Sharpe, another Nobel prizewinner in economics, to ask him for money from a family office that Bill Sharpe was advising. Again, LTCM’s
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everything is fine. They want to keep their capital and do more hunting. In general, it’s a major problem that needs to be addressed. —Myron Scholes interview, July 9, 2011 Although these causes contributed in small ways, the major direct cause for LTCM’s failure had to do with crowding and
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think LTCM’s collapse was a failure of quantitative techniques or a failure of option theory, given the fund’s association with Robert Merton and Myron Scholes, who won the 1997 Nobel prize in economics for their work on the Black-Scholes option pricing theory.25 Others argue that LTCM’s partners
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LTCM, as people would like to believe. It was an understanding, with the help of tools, of why certain situations can make money. —Interview with Myron Scholes, July 9, 2011 Quantitative methods are a tool. It would be silly to argue that tools that help more precisely quantify risks and trades are
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of the swap spreads' odd movement may have been linked to the government-sponsored bank bailout and banks’ subsequent reluctance to lend long term. 9. Myron Scholes would argue that this is one of the main reasons behind an intermediary’s success. A relative-value hedge fund acts as an intermediary, absorbing
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return matrix that might not reflect correlation’s behavior in a crisis. This may have helped banks become too comfortable with their risk. In 2000, Myron Scholes cautioned against VaR in Davos, Switzerland. He had witnessed firsthand the market craze in the LTCM debacle. Before the financial crisis in August 1998, most
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and loss-risk exposures. Now is the time to encourage the BIS and other regulatory bodies to support studies on stress-test and concentration methodologies. —Myron Scholes (Scholes 2000) When banks could use internal market risk models, they took on more risk. A 2003 Federal Deposit Insurance Corporation (FDIC) study found that
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Italian bank. LTCM helped a major Italian bank, Banco Nazionale del Lavoro (BNL), modernize and revolutionize its retail investment space. Project principals included Bob Merton, Myron Scholes, and Italian native Alberto Giovannini.4 I was slated to be the junior guy on this project. At the time, in 1998, the U.S
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assets. By 2007, JWMP managed roughly $3 billion in assets, most of it from fund-of-funds investors. Platinum Grove Asset Management Former LTCM principals Myron Scholes and Chi-Fu Huang, along with three former LTCM employees, Ayman Hindy, Lawrence Ng, and Tong-Sheng Sun, left to start their own hedge fund
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typical trading-floor chaos. PGAM was primarily a fixed-income hedge fund. It used the same variety of fixed-income strategies that LTCM had favored. Myron Scholes believed this new operation was more sound than LTCM had been, mainly because Scholes was running it.9 PGAM also made some of the same
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investor withdrawals.14 At the end of 2009, PGAM’s principals transferred ownership to the fund’s senior employees, though they retained some economic interest. Myron Scholes and Chi-Fu Huang left, along with Hindy, Ng, and Sun. Loyal, long-term investors helped keep PGAM afloat, even with its extreme losses. The
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, but after 10 years it looked like the 30-year was safe. In every other crisis, spreads tended to go out across the yield curve. —Myron Scholes interview, chairman of PGAM, July 9, 2011 Deleveraging As 2008 began, JWMP had a portfolio filled with many of LTCM’s staple trades. JWMP lost
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funds that eschew leverage can hold through any market imbalance until positions converge, which can take a long time. Some JWMP and PGAM principals, including Myron Scholes, suggested employing relative-value fixed-income strategies in an enhanced portfolio that uses no leverage. These strategies would produce very small returns, but add a
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that night. It’s the same idea. They hadn’t made a real profit. They had sold an option and created a liability for themselves. —Myron Scholes interview, July 9, 2011 Financial leaders and followers alike need more and better financial education. In the United States, growing affirmative action (aka diversity) in
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worse situation whereby participants will begin withdrawing early from an institution as they try to get out before the government jumps in and makes mistakes. —Myron Scholes interview, Nobel prizewinner in economics, July 9, 2011 Many people criticized bailouts for creating moral hazard, but it isn’t clear that this was a
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B will form. It’s like trying to plug a dike with multiple holes. If you plug one hole, water comes out from somewhere else. —Myron Scholes interview, Nobel prizewinner in economics, July 9, 2011 The Crisis of Crowds The last 10 years of crises, from LTCM’s failure to the Greek
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a single-opportunity world. In our current world of finance, we think of all the risks as exogenous. So there is room for tremendous growth. —Myron Scholes interview, Nobel prizewinner in economics, July 9, 2011 The Wine Arbitrage As I sat with Meriwether and Huang that day, I realized that Meriwether was
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in Market, Fed Chairman Testifies; Lawmakers Are Critical.” October 2, 1998. Schoen, Douglas. “Polling the Occupy Wall Street Crowd.” Wall Street Journal, October 18, 2011. Scholes, Myron. “Crisis and Risk Management.” AEA Papers and Proceedings, pp. 17–21, May 2000. SEC. “Concept Release: Rating Agencies and the Use of Credit Ratings under
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government, default on debt by Russian markets Salomon Brothers: arbitrage trading group bond-trading group shutdown copycat positions Traveler’s Group purchase of Schapiro, Mary Scholes, Myron: Banco Nazionale del Lavoro project and Black-Scholes formula career of on diversification on economic system choices on financial models on insurance on Lehman failure
Transaction Man: The Rise of the Deal and the Decline of the American Dream
by Nicholas Lemann · 9 Sep 2019 · 354pp · 118,970 words
the customary operations of Wall Street firms were wrong and needed to change. As a graduate student, Jensen shared an office with another young economist, Myron Scholes. In 1968 Scholes got a job at MIT; Jensen urged him to get in touch with Fischer Black, a mathematician living in Boston whom he
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.” For Jensen to abandon this view was heresy to the minds of his old friends in financial economics. Jensen had stood as a groomsman at Myron Scholes’s wedding; now Scholes refused to speak to him. Solving the principal-agent problem had become a chimera: you’d eliminate what seemed to be
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up becoming another way of making a lot of money. Goldman Sachs, by now Morgan Stanley’s chief rival, had hired Fischer Black. Salomon hired Myron Scholes. Morgan Stanley didn’t hire any future Nobel Prize winners, but it did begin to hire economics Ph.D.s from MIT and Chicago—for
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fund founded by a former star trader at Salomon—which was proud to be an advanced user of technical derivatives trading techniques (Robert Merton and Myron Scholes were among its founders), went out of business. Long-Term Capital was a hedge fund, a member of a category of new, unregulated financial institutions
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of Samuelson, Paul Sanders, Bernie Sarnoff’s law savings and loans: in Chicago Lawn; deregulation of; failures of; federal insurance on; Whitewater and Schmidt, Eric Scholes, Myron School in the Home, The (Berle) Schumer, Chuck Schumpeter, Joseph Schwarzman, Stephen Scientology Sears seasteading Second Bank of the United States Securities and Exchange Commission
Capital Ideas Evolving
by Peter L. Bernstein · 3 May 2007
Number” vii 91 bern_a02ftoc.qxd 3/23/07 8:42 AM Page viii viii CONTENTS 8. Harry Markowitz: “You Have a Little World” 9. Myron Scholes: “Omega Has a Nice Ring to It” 100 110 PART III: THE PRACTITIONERS 10. Barclays Global Investors: “It Was an Evangelical Undertaking” 11. The Yale
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that assures us that the model will eventually fail. Models fail because they fail to incorporate the inter-relationships that exist in the real world. Myron Scholes, speech at NYU/IXIS conference on hedge funds, New York, September 2005 he revolution in the theory and practice of investing that swept over Wall
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to explain why the market is so hard to beat. There was not even a recognition that such a possibility might exist. Before Fischer Black, Myron Scholes, and Robert Merton confronted both the valuation and the essential nature of derivative securities in the early 1970s, there was no theory of option pricing
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have since died: Merton Miller, Franco Modigliani, and Fischer Black. A significant cohort of the total—Harry Markowitz, Robert C. Merton, Merton Miller, Franco Modigliani, Myron Scholes, and William Sharpe—have won Nobel Prizes, and, if he had been alive when Scholes and Merton received * In his f ine book, An Engine
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, the SharpeTreynor-Mossin-Lintner Capital Asset Pricing Model, Eugene Fama’s explication of the Efficient Market Hypothesis, and the options pricing model of Fischer Black, Myron Scholes, and Robert C. Merton. T xxii bern_c01.qxd 3/23/07 8:44 AM Page 1 PA RT I T H E B E
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, of contingent claims—the contribution to the theory of finance for which he earned the Nobel Prize. Merton had joined up with Fischer Black and Myron Scholes in their search for the valuation of options in the spring of 1970, because he doubted they were on the right track in their conviction
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a hedge fund called Long-Term Capital Management, or LTCM, which had opened for business in February 1994. Nobel Prize winners Robert C. Merton and Myron Scholes were partners in LTCM, and the managing partner was John Meriwether, the legendary bond trader from Salomon Brothers. The repercussions of a possible LTCM default
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, and of the Capital Asset Pricing Model in particular. bern_c09.qxd 3/23/07 9:06 AM Page 110 9 Myron Scholes “Omega Has a Nice Ring to It” hen Myron Scholes graduated from McMaster University in Hamilton, Ontario, in 1962, his family wanted him to join their book publishing business. Scholes was
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Grove in 1999 following the abrupt demise of Long-Term Capital Management, W 110 bern_c09.qxd 3/23/07 9:06 AM Page 111 Myron Scholes 111 of which he had been a principal, because he wanted to see whether he could manage risk, preserve capital, and make enough money for
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ways more closely related than they are to what financial markets are all about. bern_c09.qxd 3/23/07 9:06 AM Page 113 Myron Scholes 113 Most people are aware financial markets play an important role in our economy—indeed, in our society—because financial markets are reputedly the grease
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more clearly than many. As far back as 1989, he put it this way: bern_c09.qxd 3/23/07 9:06 AM Page 115 Myron Scholes 115 If the only reason people trade is that they believe they know more than the next person—e.g., have better information— there would
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to the speculator for accepting the transfer of the risk of price f luc- bern_c09.qxd 3/23/07 9:06 AM Page 117 Myron Scholes 117 tuation. Like any service, the service of risk transfer has to earn a return, or nobody would provide it. Scholes has a keen sense
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asset classes that generally exhibit low correlations begin moving together in the same direction.” bern_c09.qxd 3/23/07 9:06 AM Page 119 Myron Scholes 119 I asked Scholes how Platinum Grove actually functions on a dayto-day basis. “We are in a reactive business; we wait for opportunities to
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forms can involve puts and calls on assets that may have nothing to do bern_c09.qxd 3/23/07 9:06 AM Page 121 Myron Scholes 121 with the issuer of the notes, or may include options to either reduce or extend the maturity of the notes. Investors can also use
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concluded there was a shrinking probability of a further relative rise in longer-term bern_c09.qxd 3/23/07 9:06 AM Page 123 Myron Scholes 123 bond yields relative to the ten-year yields from that point forward. Demand for the 7 percent notes fell off rapidly. End of story
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managing money for non-U.S. clients, having also marketed a mutual fund called the Stagecoach Fund, designed by none other than Fischer Black and Myron Scholes (see Capital Ideas, p. 250). All these innovations were rooted in the basic underpinnings of financial theory: diversification, optimizing the risk/return trade-off, market
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class” performance and no blowups. Grauer pointed to the experience with the Stagecoach Fund as an example of what he had to confront. Fischer Black, Myron Scholes, and Michael Jensen noted in empirical tests of CAPM that stocks with low betas realized higher returns than CAPM predicted, while high-beta stocks had
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$5 million. Who dreamed up such an odd combination in the first place? The inspiration for the StocksPLUS strategy came from a passing remark by Myron Scholes, who was a Pimco director in the mid- to late 1980s. Scholes was so impressed with Pimco’s many talents in bond management he suggested
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cannot control the results. The whole process of implementing investment strategies, therefore, must focus on risk management. Here is where our skills really matter. Echoing Myron Scholes, Goldman Sachs identifies risks it can manage and avoids or hedges all other risks. The results have been impressive to observe. bern_c16.qxd 3
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of Bounded Rationality: Psychology for Behavioral Economics,” American Economic Review, Vol. 93, No. 5 ( Fall), pp. 1449–1475. Kahneman, Daniel, Harry Markowitz, Robert C. Merton, Myron Scholes, Bill Sharpe, and Peter Bernstein, 2005. “Most Nobel Minds,” CFA Magazine, November-December, pp. 36–43. Kahneman, Daniel, Paul Slovic, and Amos Tversky, 1974. “Judgment
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Gross, Blake Grossman, Jeff Hord, Ron Kahn, Daniel Kahneman, Martin Leibowitz, Bob Litterman, Andrew Lo, Harry Markowitz, Robert C. Merton, Steve Ross, Paul A. Samuelson, Myron Scholes, Bill Sharpe, Robert Shiller, Larry Siegel, David Swensen, Richard Thaler, and Jack Treynor. Barbara Bernstein, my wife and business partner, was once again my essential
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“A Note on Measurement of Utility” by, 39 Shiller’s work with, 39, 42, 43, 65 Sarbanes-Oxley, 243 Savage, Leonard, 109 Schneeweis, Thomas, 175 Scholes, Myron alpha and beta excluded by, 112 Black-Scholes-Merton options pricing model by, 52, 67, 85, 110, 195 on CAPM return discrepancy, 132 inf luence
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rational. “By the time you are through,” he says, “you have a little world.” bern_bins.qxd 3/23/07 10:44 AM Page 5 Myron Scholes won a Nobel Prize in 1990 for his contribution to the Black-Scholes-Merton option pricing model, but his contacts with academia today are incidental
The Myth of the Rational Market: A History of Risk, Reward, and Delusion on Wall Street
by Justin Fox · 29 May 2009 · 461pp · 128,421 words
whole crowd of quantitatively minded, computer-savvy students was beginning to make waves. The ones who were to attain the most prominence were Michael Jensen, Myron Scholes, and Richard Roll. Jensen and Scholes both enrolled in the Chicago MBA program in autumn 1962. Jensen was the son of a printer at the
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mutual fund, and along the way became the nation’s chief employer of moonlighting finance professors—most of whom McQuown had met at CRSP seminars. Myron Scholes and Michael Jensen were the first hires, followed by such present and future notables as Sharpe, Burton Malkiel, Barr Rosenberg of UC–Berkeley, and Fischer
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matter what the stock’s expected return was. The return was already reflected in its price. All that mattered was volatility. Black teamed up with Myron Scholes, who had just arrived from Chicago to teach finance at MIT’s Sloan School, and the pair worked out the proof for an equation that
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Exchange in April 1973. By this time, Lorie and Miller had hired Fischer Black to teach finance at Chicago and were working to bring back Myron Scholes. They had also smoothed the feathers of their friends in the Economics Department to get the pair’s paper published in the prestigious Journal of
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WAS PERSUASION. THIS became a specialty of Joel Stern, a blustery Brooklynite who entered the Chicago MBA program the same year as Michael Jensen and Myron Scholes, but didn’t stick around for a Ph.D. Instead, he went to work at Chase Manhattan Bank in New York, where he was assigned
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fund that was hard to distinguish from the value funds run by efficient market nonbelievers. The most fascinating case was that of Robert Merton and Myron Scholes. In the 1980s, a spectacularly successful proprietary trading operation emerged at the bond brokerage Salomon Brothers. At its head was Chicago MBA John Meriwether, who
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that the field of financial economics is a genuine science, in the same league with physics and mathematics.”15 Seven years later, Robert Merton and Myron Scholes won the Nobel. Fischer Black had died in 1995; otherwise he surely would have shared in the prize. The option-pricing model the three put
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dramatically from their fundamental values. The hedge fund had grown out of the proprietary trading desk at Salomon Brothers, and signed up Robert Merton and Myron Scholes as partners. It followed the approach of quantitative pioneer Ed Thorp: Find two securities that by all rights ought to be traveling in the same
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at the annual meeting of the American Finance Association. As is customary, another scholar was assigned to critique his paper. In this case, it was Myron Scholes. When Shleifer finished, Scholes got up and said: This paper reminds me of my rabbi back in Palo Alto. My rabbi, when he gives his
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the way all other compensation was handled that the accountants never seriously considered it. Options remained free. The options-valuation formula of Fischer Black and Myron Scholes offered an alternative. It took a while, but in the 1980s the Financial Accounting Standards Board (FASB, usually pronounced “fazbee”), which determines what constitutes generally
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this story,” Jensen said afterward. In the mid-1990s, Jensen had gotten into a telling debate with UCLA finance professor Michael Brennan. Brennan had been Myron Scholes’s student at MIT in the late 1960s, and was president of the American Finance Association in 1989. He was part of the efficient market
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of his way to reach out, coauthoring several papers with mainstream finance scholars and launching a new journal, Quantitative Finance, that included Robert Merton and Myron Scholes (along with Kenneth Arrow and Benoit Mandelbrot) on its advisory board. But his work has yet to really penetrate the academic mainstream either.30 Still
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. Fischer Black Computer scientist who was introduced to finance working alongside Jack Treynor at the consulting firm Arthur D. Little in the 1960s. Coauthor with Myron Scholes of the Black-Scholes option pricing model, later a partner at Goldman Sachs and an early supporter of behavioral finance research. John Bogle After arguing
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Oskar Morgenstern’s expected utility theory. Robert Merton Student of Paul Samuelson at MIT who helped solve the option-pricing puzzle with Fischer Black and Myron Scholes and went on to devise a hypermathematical, hyperrational approach to finance and risk management. Shared the 1997 economics Nobel with Scholes, was a partner with
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decades. Also coauthor of a seminal paper on expected utility with Milton Friedman, and rediscoverer of the work of French market theory pioneer Louis Bachelier. Myron Scholes Classmate and friend of Michael Jensen and Richard Roll at Chicago. Devised the Black-Scholes option pricing model along with Fischer Black while teaching at
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how to beat the house at blackjack and writing a bestselling book about it, figured out the formula for pricing options before Fischer Black and Myron Scholes did and became a pioneer of computer driven, black-box hedge fund management. Jack Treynor As a consultant at Arthur D. Little in the late
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Odean, John O’Brien, Charles Plott, S. J. Prais, Alfred Rappaport, Kenneth Reid, Jay Ritter, Richard Roll, Barr Rosenberg, Stephen Ross, Mark Rubinstein, Paul Samuelson, Myron Scholes, William Sharpe, Hersh Shefrin, Robert Shiller, Andrei Shleifer, Harindra de Silva, Rex Sinquefield, Meir Statman, Jeremy Stein, Joel Stern, Joseph Stiglitz, Lawrence Summers, Nassim Nicholas
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Senate testimony, 123–24 and Summers, 198, 358n. 19 Santa Fe Institute, 301–4 Savage, Leonard “Jimmie,” 52, 56, 65, 75, 77, 176–77, 327 Scholes, Myron, 327 and capital asset pricing model (CAPM), 346–47n. 30 and the Chicago School of Economics, 100 and derivatives, 151 and “joint hypothesis,” 105 and
Capital Ideas: The Improbable Origins of Modern Wall Street
by Peter L. Bernstein · 19 Jun 2005 · 425pp · 122,223 words
: Fischer Black, Eugene Fama, William Fouse, Hayne Leland, Harry Markowitz, John McQuown, Robert C. Merton, Merton Miller, Franco Modigliani, Barr Rosenberg, Mark Rubinstein, Paul Samuelson, Myron Scholes, William Sharpe, James Tobin, Jack Treynor, and James Vertin. Each of them spent long periods of time with me in interviews, and most of them
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bringing the theory of option pricing to fruition were Fischer Black, a young mathematician in Boston who would end up on the MIT faculty, and Myron Scholes, a fledgling member of the MIT faculty. At the time Black began his study of options, he had little awareness of Samuelson or his work
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warrant value did not depend on the stock’s expected return, or on any other asset’s expected return. That fascinated me. He adds: “Then Myron Scholes and I started working together.”7 That was in 1968. Scholes, who had graduated from McMaster University in Hamilton, Ontario, in 1962, had recently received
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play down widespread alarm at these developments. He played a critical role in shaping the careers of such younger scholars as Fischer Black, Eugene Fama, Myron Scholes, William Sharpe, and Jack Treynor. In the mid-1950s, the investment course at Harvard Business School was so boring students dubbed it “Darkness at Noon
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working at Arthur D. Little in Boston, he met Jack Treynor and was captivated by his theories. Although not yet an academic, Black collaborated with Myron Scholes and Robert Merton in the early 1970s to develop the most widely used formula for pricing options. Fischer Black had been stuck on the options
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problem for “many, many months” when he started working with Myron Scholes. Scholes collaborated with Black to unlock the puzzles of option pricing. Their article on the subject was rejected at first as excessively specialized, but thanks
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of Merton’s leaving MIT to cross the Charles River and join Harvard Business School: “A key part of the option paper I wrote with Myron Scholes was the arbitrage argument for deriving the formula. Bob gave us that argument. It should probably be called the Black-Merton-Scholes paper.”28 The
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was a voracious consumer of the wisdom that the academic stars could contribute to what he refers to as “the heavy work.” Fischer Black and Myron Scholes were among his first recruits. Scholes, who had started to work with McQuown almost immediately after leaving Chicago to join MIT in the fall of
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the wildly optimistic market of 1971–1972 confirmed the foolishness prevalent in the investment management profession. It was at this moment, in December 1972, that Myron Scholes and I had disagreed on the market outlook. From the summer of 1970 to the beginning of 1973, the Standard & Poor’s Composite had risen
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Wells Fargo to attend conferences featuring Wells Far-go’s academic consultants or members of its own staff. The conference at the Sloan School that Myron Scholes had organized and Robert Merton slept through was one of the conferences in this series. The most important client of the consulting service was the
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Miller, cheek-by-jowl at Carnegie Tech, say much the same about corporate financial officers, though the Wall Street Journal takes no notice. Fischer Black, Myron Scholes, and Robert Merton change the whole world of finance by staring at differential equations. Through it all, the only sound we hear is the clanking
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–A Memorial Selection, W. Allen Wallis, ed. American Statistical Association and The Institute of Mathematical Statistics. Scheinman, William X. 1991. “All Win.” Timings, January 28. Scholes, Myron S. 1972. “The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices.” Journal of Business, Vol. 44, No. 2
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(April). Also in Lone and Brealey (1972). Scholes, Myron S. 1990. “In Honor of Merton H. Miller’s Contributions to Finance and Economics.” Journal of Business, Vol. 63, No. 1, Part 2 (January), pp
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Roll, Richard Roos, Charles Rosenberg, Barr Rosenberg, June Ross, Stephen Rothschild, Nathan Roy, A. D. Rubinstein, Mark Sametz, Arnold Samuelson, Paul Savage, Jimmie Scheinman, William Scholes, Myron Schumpeter, Joseph Schwayder, Keith Schwert, G. William Sharpe, William Shepard, Alan Shiller, Robert Shultz, George Smith, Adam “Smith, Adam” Smith, Edgar Lawrence Solow, Robert Sprenkle
The Quants
by Scott Patterson · 2 Feb 2010 · 374pp · 114,600 words
eccentric economist then teaching at the University of Chicago. The letter contained a draft of a paper that Black had written with another Chicago economist, Myron Scholes, about a formula for pricing stock options. It would become one of the most famous papers in the history of finance, though few people, including
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never could have predicted, the layers of leverage caused the fund’s capital to evaporate. The traders behind LTCM, whose partners included option-formula creators Myron Scholes and Robert Merton, have often said that if they’d been able to hold on to their positions long enough, they’d have made money
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known as Long-Term Capital Management. LTCM was manned by an all-star staff of quants from Salomon as well as future Nobel Prize winners Myron Scholes and Robert Merton. On February 24 of that year, the fund started trading with $1 billion in investor capital. LTCM, at bottom, was a thought
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amount possible. By carefully hedging its holdings, LTCM could reduce its capital, otherwise known as equity. That freed up cash to make other bets. As Myron Scholes explained before the disaster struck: “I like to think of equity as an all-purpose risk cushion. The more I have, the less risk I
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, and eventually gravitated toward finance after working for a management-consulting firm near Boston called Arthur D. Little. In the fall of 1968, he met Myron Scholes, a young MIT economist from Canada. Scholes had recently started thinking about a tough problem: how to price stock warrants. Black had been mulling over
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1970s, Black took a job teaching finance at the University of Chicago. His third-floor office in Rosenwald Hall was sandwiched between the offices of Myron Scholes and Eugene Fama. He then took a job teaching at MIT for the following nine years. But he was getting restless, stymied by the slow
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, didn’t have to end that way girl. In the late 1990s, Muller went to a derivatives conference in Barcelona, attended by luminaries such as Myron Scholes of LTCM. After Muller gave his talk, he grabbed his five-pound electronic keyboard and took a cab to La Rambla, the city’s funhouse
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