Nobel Laureate Myron Scholes, '64 speaks to students on February 28, 2006 as a part of Chicago GSB's Distinguished Speaker Series.
Speculative investing combines a microeconomic understanding of why models indicate a particular inventory is cheap with a macroeconomic understanding that it might be a long—or short—time before the inventory is turned over, said Myron Scholes, MBA ’64, PhD ’70, chairman of Oak Hill Platinum Partners, a private equity partnership. “Basically, you also want to be able to say who will be the ultimate buyer of all this,” the Nobel laureate told a standing-room-only audience gathered for the Distinguished Speaker Series at Hyde Park Center on February 28. “Also, what’s very important is how much capital is necessary to put up against the risks that you’re holding.”
Innovation occurs in American society in two ways: from “idiot savants” such as Einstein who create things completely different from what is anticipated, and from the shocks of salient events such as the dot-com bust or oil prices, Scholes said. “These shocks create completely different ways of thinking about the problem because it forces us to give up our old ways,” he said. “We love going down the same path. That path is very familiar to us as society or as individuals. Innovation occurs from these chaotic events.” Scholes said he prefers options because they become more valuable with chaos.
Scholes used the analogy of his grandson making a sandcastle on the beach to dispel the notion that today’s economy is tame. “He drops just a little sand on that castle and it’s just a little avalanche,” he said. “So the papers write, ‘Shock occurred; economy fine’ for this sandcastle event. Everyone is observed as being perfect in their predictions of the past. Then he puts another shovel of sand on and nothing happens, so everybody gets more confident and starts to think the sand castle is really cement. But it’s got all these grains of sand and all of this information is hard to know how the structure of it is.
“Then he puts another shovel on and it gets an avalanche. The papers say, ‘It’s a great shock. We should have known this.’ Congress makes a whole bunch of laws to try to protect us against the next shock, but unfortunately that sand castle is very complicated and who knows what’s going to happen next?”
Scholes is known for his work in options pricing, capital markets, tax policies, and the financial services industry. He collaborated with Robert Merton and the late Fischer Black to create the Black-Scholes options pricing model, which is the basis of the pricing and risk management technology used to value and manage the risk of financial instruments around the world. For it, Scholes was awarded the Nobel Prize in 1997.