Professor Myron Scholes Shares 1997 Nobel Prize in Economic Science
Photo by Linda A. Cicero / Stanford News
Recognized for his new method of determining the value of derivatives, Scholes became the second Stanford GSB faculty member to win the prestigious award.
In 1970, Myron S. Scholes found the formula for success. Nearly three decades later, it earned him the 1997 Nobel Memorial Prize in Economic Science. Along the way, it changed the way investors and others place a value on risk, giving rise to the field of risk management, the increased marketing of derivatives, and widespread changes in the valuation of corporate liabilities.
Scholes, the Frank E. Buck Professor of Finance, Emeritus, at Stanford Graduate School of Business, shared the Nobel prize with Robert C. Merton of Harvard Business School. The prize was awarded by the Royal Swedish Academy of Sciences for “a new method to determine the value of derivatives” developed by the two, along with the late Fischer Black. Black and Scholes first published the formula as “The Pricing of Options and Corporate Liabilities” in the Journal of Political Economy in May 1973. The formula was further developed by Merton, who showed its broad applicability.
What became known as the Black-Scholes options pricing model, a benchmark formula for the valuation of stock options, put the fledgling options market on its feet.
The theory “is absolutely crucial to the valuation of anything from a company to property rights,” said William F. Sharpe, the STANCO 25 Professor of Finance, Emeritus, who in 1990 became the GSB’s first Nobel laureate for his work on another model to aid investment decisions, the capital asset pricing model.
“In my view, financial economics deals with four main phenomena: time, uncertainty, options, and information,” Sharpe said. “Black, Merton, and Scholes provided the theory from which our understanding of options has been built. While obviously applicable to traded financial options, the principles they gave us apply as well to almost all situations in which value is determined at least in part by decisions that can be made in the future. It is hard to imagine modern financial practice without the tools that they gave us.”
Read the full, original story about Scholes’ groundbreaking work in economic science and how the Black-Scholes options pricing model shaped modern financial theory.
