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Finance professors win the 1997 Nobel

Robert C. Merton of Harvard University and Myron S. Scholes
of Stanford University have been awarded the 1997 Nobel Prize in economics
“for a new method to determine the value of derivatives.”  They join
the list of past winners of the prize.

The late Fischer Black was cited along with the two winners as contributing
to the work for which the nobel was awarded. As the award cannot be awarded
posthumous he was not on the official list of winners. However I think
it is safe to say that the award goes to the Black-Merton-Scholes trio.

For an overview of the the research leading to the Nobel see the prize
announcement
. The Nobel site also has further
background
on their work.

 

The Prize a surprise?

Nobel Medal

Last week this space was devoted to getting predictions
about the winner of the prize. Of 35 responses none were for Merton or
Scholes. The Internet
Poll
for Nobel Laureate in Economics sponsored by the European JOE
received over 500 votes and only three (2 for Scholes and 1 for Merton)
were for the actual winner. The leader in both informal polls was A. Sen.

One reason that the award may have been somewhat a surprise was that
the Nobel prize was awarded in 1990 to three Marlowvitz, Miller, and Sharpe
for their “pioneering work in the theory of financial economics”. In the
past the Nobel committee has tended to give the award to a diverse range
of fields within economics and only rarely repeating fields in such a short
period of time.

As for Merton’s reaction… “I was speechless”.

“Value of Derivatives”

The winners were cited as having solved a pricing problem that had long
plagued economic theory. The specific work sited by the committee was a
1973 paper by Fischer Black and Myron Scholes which published “the famous
option pricing formula that now bears their name” (c.f. 1973, Journal of
Political Economy). Also in 1973, Robert Merton published articles with
the formula and various extensions (1973, Bell J., Econometrica).

From the announcement: “The option-pricing formula was the solution
of a more than seventy-year old problem. As such, this is, of course, an
important scientific achievement. The main importance of Black, Merton
and Scholes´ contribution, however, refers to the theoretical and
practical significance of their method of analysis. It has been highly
influential in solving many economic problems. The scientific importance
extends to both the pricing of derivative securities and to valuation in
other areas.”

Congratulations

Best of luck to the two newest winners of the prize.

 


See Also:



 




Past Winners 

 


  1. R. Frisch, J. Tinbergen 


  2. “developed and applied dynamic models” 

  3. P. Samuelson


  4. “economic theory and… raising the level of analysis in economic science” 

  5. S. Kuznets


  6. “empirically founded interpretation of economic growth” 

  7. J. Hicks, K. Arrow 


  8. “general economic equilibrium theory and welfare theory” 

  9. W. Leontief 


  10. “development of the input-output method” 

  11. G. Myrdal, F. Von Hayek 


  12. “theory of money and economic fluctuations and… analysis of the interdependence
    of economic, social and institutional phenomena” 

  13. L. Kantorovich, T. Koopmans 


  14. “theory of optimum allocation of resources” 

  15. M. Friedman 


  16. “consumption analysis, monetary history and theory and… demonstration
    of the complexity of stabilization policy” 

  17. B. Ohlin, J. Meade 


  18. “theory of international trade and international capital 

    movements” 

  19. H. Simon 


  20. “decision-making process within economic organizations” 

  21. T. Schultz, A. Lewis 


  22. “economic development research” 

  23. L. Klein 


  24. “econometric models … analysis of economic fluctuations and economic
    policies” 

  25. J. Tobin


  26. “analysis of financial markets” 

  27. G. Stigler 


  28. “industrial structures, functioning of markets and causes and effects
    of public regulation” 

  29. G. Debreu 


  30. “new analytical methods… and… rigorous reformulation of the theory
    of general equilibrium” 

  31. R. Stone 


  32. “development of systems of national accounts” 

  33. F. Modigliani 


  34. “analyses of saving and of financial markets” 

  35. J. Buchanan 


  36. “contractual and constitutional bases for the theory of economic and
    political decision-making” 

  37. R. Solow 


  38. “contributions to the theory of economic growth” 

  39. M. Allais 


  40. “theory of markets and efficient utilization of resources” 

  41. T. Haavelmo 


  42. “probability theory foundations of econometrics and his analyses of
    simultaneous economic structures” 

  43. H. Marlowvitz, M. Miller, W. Sharpe 


  44. “pioneering work in the theory of financial economics” 

  45. R. Coase 


  46. “clarification of the significance of transaction costs and property
    rights for the institutional structure and functioning of the economy” 

  47. G. Becker 


  48. “extended the domain of microeconomic analysis to a wide range of human
    behaviour” 

  49. R. Fogel, D. North 


  50. “renewed research in economic history” 

  51. J. Harsanyi, J. Nash, R. Selten 


  52. “equilibria in the theory of non-cooperative games” 

  53. R. Lucas 


  54. “hypothesis of rational expectations, and thereby having transformed
    macroeconomic analysis” 

  55. J. Mirrlees, W. Vickrey 


  56. “economic theory of incentives under asymmetric information” 

  57. R. Merton, M. Scholes


  58. “for a new method to determine the value of derivatives”


 

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