Tradition continues Economics prize goes to alumnus, former faculty member

The University's strong connections to the Nobel Memorial Prize in Economic Sciences continued with the selection of 1997 winner Myron Scholes, who served on the Chicago faculty after receiving his graduate training at the University.

Scholes received his M.B.A. in 1964 and his Ph.D. in 1970 from the Graduate School of Business, where he was later a faculty member from 1973 to 1983. He received the Nobel for work he did with the late Fischer Black, also a former faculty member, to explain the pricing of stock options.

"Sometimes you're at the right place at the right time, and I think that was part of it," Scholes said in an interview with the Chicago Sun-Times. "I think people who study at the U of C have sort of a common bond, and it was just sort of a breakthrough period."

Scholes is the 69th Nobel laureate to have studied, taught, or conducted research at the University. Since the economics prize was established 29 years ago, 19 of the laureates have been Chicago faculty or alumni, including five who are currently on the faculty: Gary Becker, Ronald Coase, Robert Fogel, Robert Lucas and Merton Miller.

Scholes shares the award with Robert C. Merton of Harvard, who extended and generalized the work of Scholes and Black. Merton received an honorary degree from the University in 1991.

Nobel laureate Miller was Scholes' thesis advisor and the chairman of his Ph.D. examining committee at Chicago. Miller, who won the Nobel in 1990, is the Robert R. McCormick Distinguished Service Professor Emeritus in GSB.

"I feel about Myron's award the same as I would if it had been won by one of my children," Miller said. "This is well-deserved, and I am extremely gratified by his recognition."

Scholes began working for Miller in 1961 when he was a new M.B.A. student. Miller was looking for "a computer whiz" to help with a research project, and Scholes not only helped analyze Miller's data, but he developed a taste for research.

"Myron suddenly developed a real passion for research," Miller said, "and it was soon no longer enough to help others with their research -- he wanted to do his own." Scholes and his mentor collaborated on several projects over the years. "Myron was part of a great group of students, including several others who may well be honored with the Nobel.

"He was always a very ingenious student, but there is one other sense in which I hope I had a good influence on him," Miller said. "I always stressed how important it is to be able to clearly communicate your ideas, whether in writing or through public speaking. He has become excellent at both, to the benefit of his colleagues and the wider public."

Miller has on his bookshelf a book on writing by fellow Chicago faculty member Joseph Williams, Professor in English Language & Literature. It is a gift from Scholes, who inscribed it "Thank you for sparking my interest in studying style and good writing."

Asked about the remarkable influence of Chicago's students and faculty on economics, Miller was unequivocal.

"We take economics seriously here, and we are passionate about its relevance. It isn't just a classroom trick to us, but something that has real meaning and that pervades life. I think we convey that to our students, and I think this is another example of what effect that has on them."

After receiving his Ph.D. at Chicago, Scholes was a member of the faculty of the GSB for 10 years, until 1983, when he accepted an appointment at Stanford.

Scholes is being honored for having developed a pioneering formula for the valuation of stock options, an important mechanism for managing risk in financial markets. The Nobel committee explained that this work has had profound importance for economic valuations in many areas and has also helped generate new financial instruments and facilitated more efficient management of risk in society.

"This contribution to the pricing of derivatives -- which include both futures and options -- was founded on the other most important contribution to finance, the Miller-Modigliani theorems of capital structure," said George Constantinides, the Leo Melamed Professor of Finance in the GSB. The Miller-Modigliani theorems led to Nobel prizes for both authors.

Because other types of economic contracts and decisions can also be viewed as options, the new work has been applied as well to investment in buildings and machinery.

An example of the relevance of the work of Scholes and Black is the explosive growth in options trading at such places as the Chicago Board Options Exchange, which introduced trade in options in April 1973, one month before publication of the option-pricing formula. Today, thousands of traders and investors use the formula every day to value stock options in markets throughout the world.

The Nobel committee wrote "Such rapid and widespread application of a theoretical result was new to economics. It was particularly remarkable since the mathematics used to derive the formula were not part of the standard training of practitioners or academic economists at that time."

Today, mathematicians, economists and computer experts are extending the work to find new ways to value options. Many of them are being trained in special programs in financial mathematics, such as the one recently begun at the University of Chicago.

"This work is the cornerstone of serious mathematical analysis of financial markets," said Robert Zimmer, the Max Mason Distinguished Service Professor in Mathematics and Associate Provost. "It and the work that comes out of it are exactly what we are teaching these new master's degree students."