A man of tomorrow
In most situations, Myron Scholes proves that he’s 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 he’s complimented for his stylish look, he playfully wiggles his eyebrows, as if to say: ‘Yeah, baby’.
But Scholes is also an eloquent speaker. He takes his time to explain things precisely, and not just financial markets, his specialty, but anything he’s discussing. As a man of tomorrow, his latest hot topics are the future of investing and… robots.
Will blockchain technology revolutionize financial markets?
Scholes highlights that as the internet moves from transferring information to transferring value, there’ll 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," Scholes proclaims. "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."
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 cites three reasons it will make us better off by solving old problems. "It’s compressing time," he says noting the first important reason. "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; returning to the robot and faster computing. "Serving the individual. Your needs. Myron’s needs. The more data you provide, the more data is provided, and 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 nowadays are somehow 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 points out, ever-optimistic about a world that has previously been defined by borders, moving to a single world identified by transactions.
It’s debatable whether everyone benefits from globalization as it is today. Those who feel left behind flirt with extremist parties, and their anger becomes the grounds for populism. Even if this is true today, it reminds Scholes of ancient history. "In the olden days, when we had a village," he begins, "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 you might think you’re protected if you’re in an isolated world, you’re never isolated because of the forces around you."
His analogy might be a nod to political forces that advocate building walls or isolating themselves. But in Scholes’s view, reality is shifting 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 non-experts understand the original problem, Scholes uses a well-known movie to demonstrate the way people always 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." Then he brings it back to finance, repeating 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." 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.
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 more efficient risk management and was a great help in protecting portfolios. Scholes adds with a touch of pride in his voice, that their model is still used today by investors around the world.