Myron Samuel Scholes

Myron Samuel Scholes
(1941)

Canadian-born American economist best known for his work with colleague Fischer Black on the Black-Scholes option valuation formula, which boosted the stock option market by reducing risk for investors. Scholes shared the 1997 Nobel Prize for Economics with Robert C. Merton, who generalized the Black-Scholes formula to make it apply to other areas of finance. (Black, who died in 1995, was ineligible for the Nobel Prize, which is not awarded posthumously.)
After attending McMaster University, Hamilton, Ont., Can. (B.A., 1961), Scholes studied under Nobel laureate Merton H. Miller at the University of Chicago (M.B.A., 1964; Ph.D., 1970). Scholes taught at the Massachusetts Institute of Technology (1968-73) and the University of Chicago (1973-83) before joining Stanford University in 1983 as a professor of both law and finance. He also worked with many economic and financial institutions, including the National Bureau of Economic Research, Salomon Brothers, and Long-Term Capital Management, which was cofounded by Merton.

The greatest contribution Scholes made to the field of economics and the world financial market is that which bears his name: the Black-Scholes formula for option valuation, which was published in 1973. Options represent an agreement in which the trader or investor has the right to buy or sell an asset at a fixed time in the future; without the Black-Scholes formula, investors lacked a means to accurately determine the value of the option at that future time. To reduce the risk of great losses, investors calculated a risk premium; however, there was not an exact method to determine such a premium. The Black-Scholes formula reduced the complexity of investing in options by showing that risk premiums are already factored into the price of the stock. Though it was rather complex and involved many assumptions and restrictions, the Black-Scholes formula made option and derivative trades much more accessible to investors and was adapted by traders worldwide as the main method for valuing stock options. Merton later relaxed many of the restrictions to make the formula applicable to other areas of finance, such as home mortgages, and to risk management in general.