Myron Scholes

Who Is Myron Scholes?

Myron Scholes is a Canadian-American economist, professor, and Nobel Laureate in economics. Scholes is the co-originator of the Black-Scholes model, a mathematical model used to price options. He was a key player in the collapse of Long-Term Capital Management (LTCM), one of the biggest hedge fund disasters in history. Scholes also serves as a board member for a number of organizations and is a professor emeritus at Stanford.

Understanding Myron Scholes

Myron Scholes was born in Timmins, Ontario, Canada, in July 1941. He studied economics at McMaster University in Hamilton, Canada, and earned a graduate degree, MBA, and his doctorate from the University of Chicago.

Scholes is the chief investment strategist at Janus Henderson, where he is in charge of the company's asset allocation efforts. Working with the investment team, he provides guidance about hedging, managing risk, and portfolio construction. Scholes has also served on the board of a number of organizations including the Chicago Mercantile Exchange. He is also the chair of the Board of Economic Advisers of Stamos Capital Partners, and the Frank E. Buck Professor of Finance, Emeritus, at the Stanford Graduate School of Business.

Scholes was influenced by Eugene Fama and Merton Miller, trailblazers in the new field of financial economics. In 1968, he began teaching at the MIT Sloan School of Management, where he met Fischer Black and Robert Merton. Together, they pursued groundbreaking research on options pricing, after which Scholes returned to the University of Chicago in 1973 to work closely with Fama, Miller, and Black. That's when they created the Black-Scholes model, a model used to price options contracts by valuing financial instruments over time. Scholes and Merton won the Nobel Prize in Economic Sciences in 1997 for the Black-Scholes model.

There are five important variables you need for the Black-Scholes model, including an option's strike price, the stock price, the time remaining until the option expires, the risk-free rate, and the volatility.

In 1990, Scholes became a managing director at Salomon Brothers before making the fateful decision to join hedge fund Long Term Capital Management, as a principal and co-founder. John Meriwether, the former head of bond trading at Salomon Brothers, recruited Scholes and Merton, to give the firm credibility.

Special Considerations

LTCM was a hedge fund founded in 1994 by John Meriwether. The firm realized annualized returns of over 40% in its first three years, having placed large bets on the convergence of European interest rates within the European Monetary System. By 1997, LTCM was cashing in on the prestige of Scholes' and Merton's Nobel Prizes. But LTCM's use of insane amounts of leverage — using debt and derivatives — without allowing for adverse movements in security prices, led to its spectacular and abrupt collapse in 1998, following the Asian and Russian financial crises.

When market volatility spiked, the firm's huge directional bets on sovereign bonds blew up and forced margin calls that presented such a systemic risk that the Federal Reserve had to intervene. The fund lost $4.6 billion and was liquidated in early 2000. It was a salutary lesson on the limitations of value at risk (VaR), and the folly of placing thoughtless faith in financial models. According to LTCM’s VaR model, the $1.7 billion it lost in August 1998 should only have occurred every 6.4 trillion years.