Myron Scholes
Myron Scholes | |
|---|---|
| Born | July 1, 1941 |
| Nationality | Canada, United States |
| Academic career | |
| Field | Financial economics |
| School or tradition | Chicago school of economics |
| Influences | George Stigler, Milton Friedman, Merton Miller |
| Contributions | Black–Scholes model |
| Awards | Nobel Memorial Prize in Economics (1997) |
Myron Samuel Scholes (born July 1, 1941) is a Canadian-born American financial economist who is best known as one of the authors of the Black–Scholes equation. In 1997 he was awarded the Nobel Memorial Prize in Economic Sciences for a new method to determine the value of derivatives. The model provides the fundamental conceptual framework for valuing options, such as calls or puts, and is referred to as the Black–Scholes model, which has become the standard in financial markets globally. Trillions of dollars of options trades are executed each year using this model and derivations thereof. All binomial option models have evolved from this original concept.
Biography
Early life and education
Myron Scholes was born on July 1, 1941 in Timmins, Ontario, a city in Canada where his family had moved during the Great Depression. In 1951 the family moved south to Hamilton, Ontario.[1] Scholes was a good student, although fighting with impaired vision starting with his teens until finally getting an operation when he was twenty-six. Through his family, he became interested in economics early, as he helped with his uncles' businesses and his parents helped him open an account for investing in the stock market while he was in high school.
As his mother had recently died from cancer, Scholes remained in Hamilton for undergraduate studies and earned a Bachelor's degree in Economics from McMaster University in 1962. One of his professors at McMaster introduced him to the works of George Stigler and Milton Friedman, two University of Chicago economists that would later both win Nobel prizes in economics. After receiving his B.A. he decided to enroll in graduate studies in economics at the University of Chicago. Here, Scholes was a colleague with Michael Jensen and Richard Roll, and he had the opportunity to study with Eugene Fama and Merton Miller, researchers who were developing the relatively new field of financial economics. He earned his MBA in 1964 and his Ph.D. in 1969 with a dissertation written under the supervision of Merton Miller.
Academic career
In 1968, after finishing his dissertation, Scholes took an academic position at the MIT Sloan School of Management. Here he met Fischer Black, who was a consultant for Arthur D. Little at the time, and Robert C. Merton, who joined MIT in 1970. For the following years Scholes, Black and Merton undertook groundbreaking research in asset pricing, including the work on their famous option pricing model. At the same time, Scholes continued collaborating with Merton Miller and Michael Jensen. In 1973 he decided to move to the University of Chicago Graduate School of Business, looking forward to work closely with Eugene Fama, Merton Miller and Fischer Black, who had taken his first academic position at Chicago in 1972 (although he moved two years later to MIT). While at Chicago, Scholes also started working closely with the Center for Research in Security Prices, helping to develop and analyze its famous database of high frequency stock market data.
In 1981 he moved to Stanford University, where he remained until he retired from teaching in 1996. Since then he holds the position of Frank E. Buck Professor of Finance Emeritus at Stanford. While at Stanford his research interest concentrated on the economics of investment banking and tax planning in corporate finance.
In 1997 he shared the Nobel Prize in Economics with Robert C. Merton "for a new method to determine the value of derivatives". Fischer Black, who co-authored with them the work that was awarded, had died in 1995 and thus was not eligible for the prize.[2]
Investment activity
In 1990 Scholes decided to get involved more directly with the financial markets and he went to Salomon Brothers as a special consultant, then becoming a managing director and co-head of its fixed-income-derivative group. In 1994, Scholes joined several colleagues, including John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers, and his future Nobel Prize co-winner Robert C. Merton, and co-founded a hedge fund called Long-Term Capital Management. The fund, which started operations with $1 billion of investor capital, was extremely successful in the first years, with annualized returns of over 40%. However, following the 1997 East Asian financial crisis and the Russian Financial Crises the highly leveraged fund in 1998 lost $4.6 billion in less than four months and failed, becoming one of the most prominent examples of risk potential in the investment industry.
LTCM brought more problems for Scholes in 2005, when he was implicated in the case of Long-Term Capital Holdings v. United States, being accused of having used an illegal tax shelter in order to avoid having to pay taxes on profits from company investments. It was found that Scholes and his partners were not eligible for $40 million tax savings resulting from $106 million accounting losses that had no economic substance.[3][4]
Scholes is currently the chairman of Platinum Grove Asset Management, a hedge fund, which he started with former LTCM partner Chi-fu Huang. The company manages $4.5 billion and has an average annual return of 9.4 percent as of 2007.[5] The Platinum Grove Contingent Master fund suffered a 38 percent loss from the beginning of 2008 through October 15. The decline caused Platinum Grove to temporarily halt investor withdrawals from its largest fund.[6] He also serves on the boards[7] of various organisations, such as the Chicago Mercantile Exchange and Dimensional Fund Advisors, a pioneer of passive investing which manages $100 billion.[8]
Long Term Capital Management was found to have entered into certain tax avoidance transactions. Approximately $100 million of losses claimed by Long Term Capital Management were disallowed by United States District Court of Connecticut. An e-mail dated March 10, 1995, to Jan Blaustein Scholes, Myron's girlfriend at the time and general counsel responsible for setting up leasing transactions associated with the disallowed losses, stated : "For our CHIPS III entity let’s use a name unrelated to CBB. It makes it just a bit harder for the IRS to link all the deals together." Additionally, Myron asserted under oath that he was not an expert on tax law. A textbook, "Taxes & Business Strategy" (principally written by Myron Scholes), was introduced as evidence after such testimony. The textbook contains chapters on both economic substance and step transactions, which are the two concepts under which the tax loss was disallowed by the IRS.[9]
See also
- List of economists
- List of Jewish Nobel laureates
- List of personalities associated with Wall Street
- List of quantitative analysts
References
- ^ Myron S. Scholes, "Autobiography", in The Nobel Prizes 1997, Editor Tore Frängsmyr, [Nobel Foundation], Stockholm, 1998
- ^ Presentation Speech by Professor Bertil Näslund of the Royal Swedish Academy of Sciences, December 10, 1997.
- ^ "A Tax Shelter, Deconstructed" by David Cay Johnston, New York Times, July 13, 2003
- ^ "Federal judge rejects tax shelter used by Nobel winners" by Diane Scarponi, Associated Press, August 27, 2004
- ^ Scholes, Nobel Laureate, Seeks Japan Advisory License by Mariko Yasu and Oliver Biggadike, Bloomberg, 21 June 2007
- ^ Scholes's Platinum Grove Fund Halts Withdrawals After Losses. Bloomberg News. Nov 6, 2008. [1]
- ^ Stanford profile of Myron Scholes
- ^ "Dimensional Fund Advisors Moves to Austin", Austin American-Statesman, August 15, 2006
- ^ [2]