Sitting Down with Myron Scholes

Talking Bitcoin with the Father of Options Pricing

Last week, I sat down with Myron Scholes, the inventor of the Black-Scholes option pricing formula. This formula, if you are not aware, determines how all options are priced all over the world. He is probably the most powerful figure in economics, measured by actual impact on real practice. There are dozens of Nobel laureates who have written thousands of papers and developed hundreds of models and formulas. But only the Black-Scholes option pricing formula fits the data nearly perfectly, because it is the only one that people use.

An option is the right, but not the obligation, to purchase or sell a security at a specific time in the future. Options were traded over the market in Chicago in the years after World War II. Back then, no one knew how to price them. Fischer Black, Myron Scholes, and Robert Merton, over the course of several years, simultaneously developed a method for valuing an option. In a brilliant twist of mathematics, Fisher Black and Myron Scholes developed a specific way to value options based on the features of the option contract, such as its maturity and strike price, as well as the economic environment, such as the stock price and its volatility. Today, every Excel spreadsheet and Bloomberg terminal can value an option at the click of a button using the Black-Scholes formula.

Here are some notes from my conversation with Myron: