Robert C. Merton – Biography of Robert C. Merton

Robert Cox Merton, born July 31, 1944, in New York, USA, is an American economist known for his work in financial theory and risk management and especially for his contribution to the evaluation of the value of stock options and other derivatives.

In 1997, Merton shared the Nobel Prize in Economics with Myron S. Scholes, whose option pricing model, the Black-Scholes formula (developed with the economist Fischer Black), provided the basis for much of his work. Merton. (Following his death in 1995, Black became ineligible for the Nobel Prize, which is not awarded posthumously.)

After studying engineering and mathematics at Columbia University (BS, 1966) and applied mathematics at the California Institute of Technology (MS, 1967), Merton he turned to study economics at the Massachusetts Institute of Technology (Ph.D., 1970). He taught at MIT’s Sloan School of Management from 1970 to 1988, when he joined the faculty of Harvard Business School. In addition to his academic duties, he served on the editorial boards of numerous economic journals and was a senior fellow at Long-Term Capital Management – an investment firm he co-founded and in which Scholes was also a partner – which went bankrupt in 1998. Merton wrote many economic treatises, as well as the book Continuous-Time Finance (1990).

Although his research covers many areas of financial theory and economics, the work of Merton on option pricing is perhaps the most influential. Prior to 1973, when Black and Scholes published their landmark formula, determining the value of stock options was extremely risky and difficult due to the nature of options, which are essentially agreements that give investors the right to buy or sell a stock. fixed assets, at a certain time in the future. The challenge of an option is predicting its value at that distant moment; Before the Black-Scholes formula was introduced, option investors determined a risk premium to protect against significant financial losses. The Black-Scholes formula showed that risk premiums were not necessary for investing in stock options, because these premiums are already factored into stock prices.

Merton He used his math expertise to generalize the formula by relaxing certain constraints and assumptions made by Black and Scholes, such as the rather unlikely assumption that the stock will pay no dividends. When modifying the formula, Merton allowed it to be applied to other financial matters, such as mortgages and student loans.

In 2006, Merton he co-created the SmartNest financial planning system and the following year became co-editor of the Annual Financial Economy Report.