Nepedia
Back to Discover
Advanced Reader
📖

Myron Scholes

society Maturity 13-18 politics Next article →

This article covers sensitive topics: politics. Parents can manage visibility in Parental Controls.

Myron Samuel Scholes is a prominent Canadian-American financial economist. He is widely recognized for his groundbreaking work in asset pricing and risk management. Scholes currently serves as the Frank E. Buck Professor of Finance, Emeritus, at the Stanford Graduate School of Business. His career has spanned prestigious academic institutions and high-level roles in the financial industry. He is most famous for co-originating the Black-Scholes options pricing model. This mathematical breakthrough fundamentally changed how the world understands financial value and risk.

The Black-Scholes model works by providing a systematic way to value options. An option is a financial contract that gives someone the right to buy or sell an asset. Before this model, researchers struggled to price these contracts accurately. They previously assumed the price depended on the expected return of the underlying stock. Scholes and his colleague, Fischer Black, discovered a different way. They realized that in a continuous-time market, a riskless hedge could be maintained. This is known as the "risk-neutral" insight. It allows the expected return of the stock to be replaced by the risk-free interest rate in the equation.

This model introduced several key components used to measure financial sensitivity. These measurements are often called "the Greeks." One important measure is Delta, which tracks how an option's price changes when the underlying stock price moves. Another is Gamma, which measures the rate of change in Delta. Vega is a critical tool for risk management because it measures sensitivity to volatility. Volatility refers to how much a stock's price fluctuates over time. Other measures include Theta, which tracks time decay, and Rho, which measures sensitivity to interest rates.

Scholes's journey into economics began in Ontario, Canada. He was born on July 1, 1941, in Timmins. His family moved to Hamilton, Ontario, in 1951. Even in high school, he began learning about the stock market. He earned a Bachelor's degree in economics from McMaster University in 1962. He then pursued graduate studies at the University of Chicago. He earned his MBA in 1964 and his Ph.D. in 1969. During his time at Chicago, he studied under famous researchers like Eugene Fama and Merton Miller.

His academic career took him to several world-class universities. In 1968, he took a position at the MIT Sloan School of Management. It was there that he met Fischer Black and Robert C. Merton. They collaborated on research regarding asset pricing. In 1973, Scholes moved to the University of Chicago Booth School of Business. He later moved to Stanford University in 1981. He remained at Stanford until he retired from teaching in 1996. His work helped create a foundation for the rapid growth of global financial markets.

In recognition of his massive contributions, Scholes received the Nobel Memorial Prize in Economic Sciences. He was awarded this prize in 1997. He shared the honor with Robert C. Merton. The Royal Swedish Academy of Sciences noted that their work allowed options to be observed in a scientific manner. This helped people manage economic risk across the globe. Beyond options, Scholes also pioneered tax strategy research. He co-developed the Scholes-Wolfson Framework in 1992. This framework looks at tax planning through three pillars: all taxes, all parties, and all costs.

Scholes also spent time working directly within the financial markets. In 1994, he co-founded a hedge fund called Long-Term Capital Management, or LTCM. The fund started with $1 billion of investor capital. For the first few years, it performed very well with annualized returns over 40%. However, the fund faced major challenges following financial crises in Asia and Russia. In 1998, LTCM lost $4.6 billion in less than four months and collapsed. This event showed the complexities of using high levels of leverage in global finance.

Today, Scholes's influence continues through his work in both academia and industry. He currently serves as the Chief Investment Strategist at Janus Henderson. His mathematical models remain essential tools for modern finance. They allow for the systematic valuation of corporate debt and the assessment of credit risk. By treating equity as an option on total assets, his work connected different parts of the financial system. His legacy is found in the way modern institutions calculate risk every day.

715 words

Where will your curiosity go next?

Keep exploring at your chosen reading level.

More to explore

🔬 Go deeper

More advanced topics to explore

🪜 Step back

Simpler topics to build understanding

What is Nepedia?

A free, ad-free encyclopedia for children. Every article is written at five reading levels, so the same page works for a five-year-old and a fifteen-year-old — use the level switcher above to see this one change. No account needed to read.