Myron S. Scholes

In most situations, Myron Scholes proves that he is a cool kid. He never leaves his office without his hip sunglasses, for instance, due to a childhood eye disease that causes sensitivity to light. When receiving a compliment for his stylish look, he playfully wiggles his eyebrows, as if he wants to say: ‘Baby, I know’.

But Scholes is also an eloquent interlocutor. One who takes his time to explain things precisely, and not only about financial markets, his specialty. He is a man of tomorrow. When talking about robots, the future of investing, and future of financial markets in detail, it is as if the professor transforms into a machine himself.

Why does Scholes believe robots are getting 'stupider'?

While the media is overwhelmed with debates about artificial intelligence and taken with the fear that they could not only steal our jobs, but erase humanity, Scholes can only laugh and counter with: “Robots are getting not smart, they’re getting stupider!” He predicts how our human-made technology will be defined by their essence, like putting a cell phone in the robot’s brain, for example. “The cloud computing allows for software to change the nature of things and then the information of how things were changed is sent down to the robot and the robot now performs in different functions,” he says. “So that makes it so much less expensive to actually operating. Cause you produce flexibility.”

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 ones dream house come out of a 3D-Printer before buying it, if it gives you options to optimize it individually? Questions that signal the other side of a common fear: a longing for progress. Scholes remembers a significant moment with one of his “great heroes” Milton Friedman. While visiting China, “Or maybe it was India” he admits, 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 were not for these antiquated technologies. Scholes laughs fervently as he remembers Friedman responding, “Well, why don’t you give them one of those hoes, little shovels, then you go back in the most inefficient way and can employ so many people!”

How does Scholes link technology with human creativity?

But in laughing, he does not want to signal these conflicts are unreal. Sure, it would force our society to become more involved in a whole new form of future interests. The World Economics Forum has already revealed that 65% 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 to face. “It’s not really fearing technology”, Scholes urges. “How do we change the educational system, so that we as individuals can become more productive, when we could use the robots, use technology to do those things that we can’t do fast.” The human ability, even in young people, “is to create things,” he says.

Will blockchain technology change how we invest?

Scholes highlights that especially as the internet moves from transferring information into transferring value, significant benefits for the next generation will come automatically. The less trust there is in financial institutions and investment, due to the recent financial crisis, the more an impending digital development could shake things up: with blockchain technology, the revolution of our financial systems might already be here. “All of us will become the trusted person,” Scholes proclaims. “The trust will come through verification of our transactions, just the same way when we have a restaurant to go to, we can now go to the internet and get people’s ratings on all the things on the internet.”

Why does Scholes call blockchain a trust mechanism?

All of us will become the trusted person. The trust will come through verification of our transactions.

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

How does blockchain improve personalization and efficiency in finance?

 “It’s compressing time,” he says noting the first important reason. “The minute you make it faster, the more difficult it is for cheaters to occur. And then two is 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 more prices.” As the third reason he mentions flexibility, returning to the robot and faster computing. “Serving the individual. Your needs. What Myron needs. 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 globalization and international finance?

The fact that people nowadays are somehow frightened when regarding 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 somewhat funny, but he wants to address benefits we all embrace and forget when thinking about growing together as one.

Why does Scholes compare global finance to email?

“When I email someone in Germany, I don’t think of an international email, I just think of it as an email,” he points out, ever optimistic about a world that has previously been defined by borders moving to a single world identified by transactions.

One could argue that not all will benefit from globalization as it is handled today. That those who feel left behind flirt with extremist parties and that anger becomes the grounds for populism. Even if this might be a current reality, it reminds Scholes of ancient history.

What does Scholes say about isolation and risk?

“In the old days, when we had a village,” he begins, using an appropriate analogy. “We built a moat around it. 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 one thinks of themselves as being protected if you’re in an isolated world, you’re never isolated because of the forces around you.”

When I email someone in Germany, I don't think of an international email, I just think of it as an email.

His analogy might be a nod to the recent tactics of the US-government, and above all, President Trump. But in Scholes’ view, reality is shifting towards the global village and a global exchange of securities and wealth, not a “we versus them” strategy, as he calls it. “You might want to designate today”, he explains. “But this is only because of institutional rigidities, it’s not because of what really benefits people.”

How does inequality shape financial behavior?

To help laymen understand the original problem, or let us say barrier, Scholes uses a well-liked picture to demonstrate the way people always concentrate on how well they are doing relative to someone else.

What does Titanic teach us about relative risk?

“I saw the movie 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, those on the upper deck of the Titanic were better off, but absolutely they were not in good shape.” Then he brings it back to finance, repeating that it’s not about the relation, but how you are doing in terms of the risk you are taking. “The most important risks in investing are the tails of distribution. Those risks that are low probability risks but happen just frequently enough that it effects your long-term experience.” This is also the reason Scholes has been using option markets and option pricing in order to understand what the market can tell us about the forward distribution of risks and hopefully model investment decisions in the future.

Why is the Black-Scholes formula still used today?

The masterpiece of his academic career became the Black-Scholes-option pricing model. In the early 1970s, Scholes and Fischer 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. But once the methodology was established, it became clear that it allowed for a more efficient risk management and helped a lot in protecting your portfolio. Scholes adds how their model still tends to be used by investors around the world – a touch of pride in his voice.

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.

Scholes is sure that huge changes are ahead for financial economics. The six functions of finance he names may not be the final list of the future. “They have dramatically delivered changes over time and new things are built to deliver those functions more efficiently.”

The “power of the cloud” and the “power of big data” are in his opinion the engines of better distribution from which we all can benefit. He smiles as he leaves the conversation, like the future is a Ferrari to jump in. Having made wrong decisions and mistakes by himself, he has learned the most important lesson: sometimes you are successful and sometimes not. It is up to all of us, whether we learn our lessons or not. In any case, we will face new adventures. Scholes puts his sexy sunglasses back on and counters: “You know, it’s just that’s what life is.”