Myron Scholes

Bob Merton is, intellectually speaking, one of the most formidable people on this list.

He shared the Nobel Prize in Economics with Myron Scholes in 1997 for his work on options pricing.

He has spent decades at the intersection of financial theory and institutional practice.

And he has thought more carefully than almost anyone about the question that actually matters to most people listening to this podcast right now.

And it was more than just Fama.

It was... you know the finance faculty there were really amazing and being able to work with them present papers to them and then you know see their research as it was coming out it was incredibly stimulating and this was back before any of them had gotten nobel prize in in economics and you know a number of them went on to become nobel laureates In fact, other people I worked with way back then, I mean, three of them got Nobel Prizes, and then our mutual fund board has those in addition to the Merton Miller and Myron Scholes, and they've added Bob Merton and Doug Diamond over time, so...

In total, we've worked with five Nobel laureates.

And these are all young, bright people doing great research at the time.

And, you know, if you could read the research, you could see it was explosive and incredibly important, which is eventually what I figured out was something that turned out to be good for me and good for the business school.

I realized I probably was better off Trying to apply the ideas and letting people like Fama and Merton Miller and Myron Scholes develop the great ideas.

And so that's how history unfolded.

And these are still good friends.

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And now we get to the most interesting thinker in part one, I think, the one who's going to now push back on everything you just heard, kind of.

Myron Scholes won the Nobel Prize in economics in 1997 for his work on options pricing, specifically the Black-Scholes model, which is one of the foundational equations in modern finance.

He also notably was a principal at Long Term Capital Management, a hedge fund that collapsed spectacularly in 1998 in a way that nearly took the global financial system with it.

I mention this not to diminish his brilliance, the man is a genuine genius, but because I think it is a relevant context for his views on risk management.

Right, and the interesting thing there was that there were really two avenues that were being explored simultaneously.

We had one group that I worked in, and we used as our primary outside consultants Fisher Black and Myron Scholes.

More Nobel laureates.

Two more, yeah.

Well, Rex was part of the initial group of Dimensional, sorry.

And we brought in, to help us out, one of the first two people we talked to were Gene Fama, my mentor in the research side, and Mac McQuown, who by that time had left Wells as well.

So that's how we—then we pulled together the other leading academics we worked with, you know, people like Merton Miller, who was, you know, a 1990 Nobel laureate, Myron Scholes, a 97, along with Fama.

So out of all of this, your first fund that you launched when DFA began in Brooklyn was a small cap or a micro cap

There's some pyrrhic victories in there [laughs] on the, on research.

You know, I remember standing up there first time or two presenting a paper to people like Gene Fama and Merton Miller and Myron Scholes or whatever.

And of course, they had a lot of, let's call it constructive feedback-

[laughs]

He comes out and have, has dinner with me and then invites me to join him at Wells Fargo, which I did in September of '71, just as they're getting ready to launch what you can consider to be the first index portfolio for the Samsonite account.

It's known in the literature as the Samsonite account 'cause Samsonite funded with six million dollars a- A portfolio strategy.

This strategy was developed by Fisher Black and Myron Scholes.

When I went to work at Wells Fargo, the consultants we used were Fisher Black and Myron Scholes primarily for my group.