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October 14, 1997 Press Contact: Larry Arbeiter
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Myron Scholes, double alumnus and former faculty member, shares 1997 Nobel Prize in economics

Myron Scholes, who shares the 1997 Nobel Memorial Prize in Economic Sciences, is a double alumnus of the University of Chicago, having earned both his M.B.A. (1964) and Ph.D. (1970) degrees from the University’s Graduate School of Business, where he was later a faculty member for 10 years. He receives the award for work he did to explain the pricing of stock options with the late Fischer Black, also a former faculty member.

Scholes is the 69th Nobel laureate to have studied or taught at the University of Chicago. Since the Economics prize was established 29 years ago, 19 of the laureates have been Chicago faculty or alumni, including five who are currently on the faculty.

Scholes shares the award with Robert C. Merton of Harvard University, who extended and generalized the work of Scholes and Black. Merton received an honorary degree from the University of Chicago in 1991.

Nobel laureate Merton Miller was Scholes’ thesis advisor and the chairman of his Ph.D. examining committee at Chicago. Miller, who won the Nobel himself in 1990, is the Robert R. McCormick Distinguished Service Professor Emeritus in the University’s Graduate School of Business.

“I feel about Myron’s award the same as I would if it had been won by one of my children,” Miller said. “This is well-deserved, and I am extremely gratified by his recognition.”

Scholes began working for Miller in 1961 when he was a new M.B.A. student. Miller was looking for “a computer whiz” to help with a research project, and Scholes not only helped analyze Miller’s data, but he developed a taste for research.

“Myron suddenly developed a real passion for research,” Miller said, “and it was soon no longer enough to help others with their research–he wanted to do his own.” Scholes and his mentor collaborated on several projects over the years. “Myron was part of a great group of students, including several others who may well be honored with the Nobel.

“He was always a very ingenious student, but there is one other sense in which I hope I had a good influence on him,” Miller said. “I always stressed how important it is to be able to clearly communicate your ideas, whether in writing or through public speaking. He has become excellent at both, to the benefit of his colleagues and the wider public.”

Miller has on his bookshelf a book on writing by a fellow University of Chicago faculty member, English professor Joseph M. Williams. It is a gift from Scholes, who inscribed it “Thank you for sparking my interest in studying style and good writing.”

Asked about the remarkable influence of Chicago’s students and faculty on economics, Miller was unequivocal.

“We take economics seriously here, and we are passionate about its relevance. It isn’t just a classroom trick to us, but something that has real meaning and that pervades life. I think we convey that to our students, and I think this is another example of what effect that has on them.”

After receiving his Ph.D. at Chicago, Scholes was a member of the faculty of the Graduate School of Business for 10 years until 1983, when he accepted an appointment at Stanford University.

Scholes is being honored for having developed a pioneering formula for the valuation of stock options, an important mechanism for managing risk in financial markets. The Nobel committee explained that this work has had profound importance for economic valuations in many areas and has also helped generate new financial instruments and facilitated more efficient management of risk in society.

The work “has provided us with completely new ways of dealing with financial risk, both in theory and in practice. Their method has contributed substantially to the rapid growth of markets for derivatives in the last two decades,” the committee wrote. “The scientific importance extends to both the pricing of derivative securities and to valuation in other areas...including currency options, interest rate options and options on futures.”

“This contribution to the pricing of derivatives–which include both futures and options-was founded on the other most important contribution to finance, the Miller-Modigliani theorems of capital structure,” said George Constantinides, the Leo Melamed Professor of Finance in the University’s Graduate School of Business. The Miller-Modigliani theorems led to Nobel prizes for both authors.

Because other types of economic contracts and decisions can also be viewed as options, the new work has been applied as well to investment in buildings and machinery.

An example of the relevance of the work of Scholes and Black is the explosive growth in options trading at such places as the Chicago Board Options Exchange, which introduced trade in options in April 1973, one month before publication of the option-pricing formula. Today, thousands of traders and investors use the formula every day to value stock options in markets throughout the world.

The Nobel committee wrote: “Such rapid and widespread application of a theoretical result was new to economics. It was particularly remarkable since the mathematics used to derive the formula were not part of the standard training of practitioners or academic economists at that time.

“The ability to use options and other derivatives to manage risks is quite valuable. For instance, portfolio managers use ‘put’ options to reduce the risk of large declines in share prices. Companies use options and other derivative instruments to reduce risk. Banks and other financial institutions use the method developed by Black, Merton and Scholes to develop and determine the value of new products, sell tailor-made financial solutions to their customers, as well as to reduce their own risks by trading in financial markets.”

Today, mathematicians, economists and computer experts are extending the work to find new ways to value options. Many of them are being trained in special programs in financial mathematics, such as the one recently begun at the University of Chicago.

“This work is the cornerstone of serious mathematical analysis of financial markets,” said Robert Zimmer, a professor of mathematics and associate provost at the University. “It and the work that comes out of it are exactly what we are teaching these new master’s degree students.”
Last modified at 03:50 PM CST on Wednesday, June 14, 2000.

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