Myron Scholes: Early Life and Education, Works, FAQs

Myron Scholes is a Canadian-American economist and professor. He received the Nobel Prize in economics in 1997 for his contribution to the Black-Scholes model, a differential equation widely used to price options contracts.

Scholes taught at the Massachusetts Institute of Technology and the University of Chicago. He is currently the Frank E. Buck Professor of Finance, Emeritus, at the Stanford Graduate School of Business.

Early Life and Education

Myron Scholes was born on July 1, 1941, in Ontario, Canada. He received a bachelor's degree in economics at McMaster University in 1961 and completed his Ph.D. at the University of Chicago in 1969.

Scholes began his career at the Center for Research in Security Prices at the University of Chicago. In 1983, he joined the faculty at Stanford University. Myron Scholes was a managing director at Salomon Brothers before co-founding Long-Term Capital Management, L.P., in 1994.

The Black-Scholes Method

As a professor at the MIT Sloan School of Management, Scholes met Fischer Black and Robert Merton in 1968. Together, they pursued groundbreaking research on options pricing.

In 1973, at the University of Chicago, they created the Black-Scholes model, a differential equation used to price options contracts by valuing financial instruments over time. The formula requires five variables, including volatility, the price of the underlying asset, the strike price of the option, the time until expiration of the option, and the risk-free interest rate.

The Black-Scholes method allows options sellers to set rational prices. Myron Scholes and Robert Merton shared the 1997 Nobel Prize in economics for their model. The methodology paved the way for economic valuations in areas that generated new financial instruments and more effective risk management.

Long-Term Capital Management (LTCM)

In 1994, Myron Scholes and Robert Merton joined the hedge fund, Long-Term Capital Management, L.P. Incorporating the Black-Scholes model, “dynamic hedging," and placing large bets on the convergence of European interest rates within the European Monetary System, LTCM realized annualized returns of over 40% in its first three years.

To earn high rates of return on its capital, the fund borrowed considerable money to leverage its positions. By the end of 1997, LTCM was holding approximately $30 in debt for every $1 of capital. The once strong business model of Long-Term Capital Management faced failure when the markets behaved irrationally. An economic crisis that began in Thailand, and spread across Asia into Japan and Korea unleashed mayhem in the marketplace.

By 1998, $3 billion in equity was depleted at Long-Term Capital Management and the firm faced bankruptcy. The Federal Reserve, concerned that counterparties would also exit their market positions and create a rapid and widespread sale of assets, intervened with a bailout plan to ensure stability in the U.S. market.

Liquidated in early 2000, LTCM's failure represents a lesson on the limitations of financial mathematical models during periods of market instability.

The Bottom Line

Myron Scholes developed the Black-Scholes model, used to determine the fair price or theoretical value for a call or a put option. He earned the 1997 Nobel Prize in economics for his contributions. Scholes continues his work in business and finance as a professor emeritus at Stanford University.