Myron S. Scholes

Nobel 1997 | What is the future of global finance?

Since developing the Black-Scholes-option pricing model with his good friend Fischer Black and co-laureate Robert Merton, Myron Scholes has become one of the leaders in financial economics. But this isn’t a surprise as Scholes, encouraged by his parents, was trading in securities and stocks by his early teens. Undoubtedly, it was this foundation that led to the development of a Nobel-awarded and widely used model to value options.

While others argue about whether robots will render most of our manpower redundant, Scholes is sure that new ways of investing will arise out of these profound changes and that future generations will benefit from these advancements. As a Canadian-American, he advocates for a one-world future and speaks out against borders. He says the future won’t be a place where we talk about “us against them” but somewhere where opportunities are openly and freely exchanged.

Myron S. Scholes

The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, 1997

At a glance

Born: 1941, Timmins, Canada

Field: Financial economics

Prize-winning work: A method to determine the value of derivatives, the Black-Scholes-Formula

Teenage hobby: Trading penny gold and silver stocks with his mother

Worst part of Nobel Prize: The limousine and police escort is only temporary

Life advice: Go where the best are, go with the best, steal from the best, learn with the best. But to go with the best, you have to be the best as well

A man of tomorrow

In most situations, Scholes proves that he’s a cool kid. He never leaves his office without his hip sunglasses, albeit necessary due to a childhood eye disease that causes sensitivity to light. When he’s complimented for his stylish look, he playfully wiggles his eyebrows, as if to say “yeah, baby.”

Scholes is an eloquent speaker. He takes his time to explain things precisely, and not just his expertise of financial markets, but anything that he’s discussing. As a man of tomorrow, his latest hot topics are the future of investing and robots.

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Robots are not getting smarter

The media is loaded with debates about artificial intelligence, driven in part, by the fear that it might not only steal our jobs, but render humanity obsolete. Scholes laughs at this, saying "Robots aren’t getting smarter, they’re getting stupider!" He predicts that manmade technology will be limited to a very basic level, so that we can individualize it, by putting a cell phone in the robot’s brain for example. "The cloud computing allows for software to change the way the robot works, so that it can perform different functions," he says. "This makes it more flexible and so, less expensive to operate."

Flexibility. Embracing change. These are words Scholes uses almost excessively when looking to the future. Booking appointments via cloud sharing, working remotely from halfway around the world. And is there really anything wrong with seeing your dream house come out of a 3D printer before buying it, if it gives you the chance to optimize and personalize it? It’s clear that while many people fear robots and new technology, Scholes is quite the opposite, excited by the opportunities they offer.

Scholes remembers a significant moment with one of his "great heroes," Milton Friedman. While visiting Asia, the two economists watched farmers working in the fields with old-fashioned equipment. While Friedman was indignant about the backwardness and inefficiency of the labor, his point was clear: they would be unemployed if it weren’t for these antiquated technologies. Scholes laughs as he remembers Friedman saying, ‘Well, why don’t you give them one of those hoes, those little shovels, then you go back to the most inefficient way of working and can employ lots of people!’

Why people should stop being scared of robots

Even though he laughs, Scholes doesn’t want to suggest that people’s fears are unfounded. It will force our society to become more involved in a whole new form of future interests. The World Economics Forum has revealed that 65 percent of all children entering primary school today will have jobs that don’t yet exist and for which their education isn’t adequately preparing them. "It’s not really fearing technology," Scholes urges.

How do we change the educational system, so that we as individuals can become more productive, so we can use the robots, and technology, to do the things we can’t do quickly ourselves?

Will blockchain technology revolutionize financial markets?

Scholes highlights that as the internet moves from transferring information to transferring value, there will automatically be significant benefits for the next generation. The less trust there is in financial institutions, and in financial investments, due to the recent financial crisis, the more an impending digital development could shake things up. Blockchain technology might just be the revolution our financial systems have been waiting for. "All of us will become the trusted person," he says. "The trust will come through verification of our transactions, just like when we want to go a restaurant, we can now access the internet to see people’s ratings."

Blockchain technology

Crowdsourcing. A hope? A promise? The necessary game-changer through which a new generation can invest more confidently? Scholes has no doubt that blockchain technology will make a huge difference and gives three reasons as to how it will make us better off by solving old problems.

"It’s compressing time," he begins. "The minute you make anything faster, the more difficult it is for people to cheat the system. The second reason is that there’s huge value in making things that are individualized. The transfer of value among individuals that’s coming in the future will allow us to make things more and more individualized because we’ll have a greater range of options and therefore prices." The third reason he mentions is flexibility. "Serving the individual,” he says. “The more data you provide, the more data is provided, the more individuals can become involved. The more individuals become involved, the more efficiencies you have."

Should we fear international trade and globalization?

The fact that people today are frightened when thinking about international finance and globalization leads Scholes to interesting, unusual questions. For example, why do we always talk about global markets and international finance but not about international email? His comparison sounds funny, but it highlights the benefits we all embrace, and then forget about, when we think about growing together as one. "When I email someone in Germany, I don’t think of an international email, I just think of it as an email," he says, ever-optimistic about a world that has previously been defined by borders, moving to a single world identified by transactions.

But he knows that not everyone benefits from globalization as it is today. Those who feel left behind are tempted by extremist parties and their anger becomes the grounds for populism. "In the olden days, when we had a village, we built a moat around it,” he says. “We feared nothing because the moat protected us. But then, unfortunately, from time to time foreign troops came in and destroyed the whole city. So even though you might think you’re protected, if you’re in an isolated world, you’re never isolated because of the forces around you." 

Why should we embrace global finance?

His analogy might be a nod to political forces that advocate building walls but in Scholes’s view, the world is shifting more towards the global village and a global exchange of securities and wealth, not an us versus them strategy.

Should people pay attention to those at the top?

To help understand the original problem, Scholes uses a movie to demonstrate the way people concentrate on how well they’re doing relative to someone else. "I saw Titanic a number of years ago," he says. "Those on the upper deck were drinking champagne and listening to music, as those on the lower decks were drowning or trying to find the lifeboats. Relatively-speaking, those on the upper deck of the Titanic were better off, but they were absolutely not in good shape."

He brings relates it back to finance, reiterating that it’s not about the relationship between you and those at the top of the finance world, but about how you’re doing in terms of the risk you’re taking. "The most important risks in investing are the tails of distribution, those risks that are low-probability but happen just frequently enough to affect your long-term experience," he says. This is why Scholes has been using option markets and option pricing to understand what the market can tell us about the forward distribution of risks and hopefully help us model investment decisions in the future.

The six functions of finance

Black-Scholes Formula: an indispensable tool for financial markets

The masterpiece of his academic career is the aforementioned Black-Scholes option-pricing model. In the early 1970s, Scholes and Black created a formula to get the present value of an option.

We came to the conclusion that one could value an option without really knowing what the expected return was. All you had to do was understand volatility or uncertainty.

Unsurprisingly, the Nobel Prize-winning work included a lot of sophisticated mathematical analysis. Once the methodology was established, it became clear that it allowed for more efficient risk management and was a great help in protecting portfolios. Their model is still used today by investors around the world.

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How the formula changed financial markets

Scholes is sure that huge changes are ahead for financial economics including the very functions of finance. In his opinion, the power of the cloud and of big data are the engines of better distribution from which we can all benefit.

He smiles as he leaves the conversation, like the future is a Ferrari he’s about to jump into. Having made mistakes himself along the way, he’s learned the most important lesson is that sometimes you’re successful and sometimes you’re not. It’s up to all of us whether we learn from these lessons. Either way, we’ll face new adventures. Scholes puts his stylish sunglasses back on and says "You know, that’s just the way life is."

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