Nobel laureate speaks to students

By: Kyle Hansen

Posted: 4/16/07

A large crowd of students packed the Engineering building auditorium last Thursday for a speech by Nobel Memorial Prize winner Myron Scholes.

Scholes received the 1997 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel and came to San Jose State University to discuss the roles of leaders in today's speculative economic world.

The lecture was part of the ongoing Silicon Valley Leaders Symposium sponsored by the College of Engineering.

"He was very knowledgeable," said Andrew Horton, a senior majoring in economics. "A lot of that stuff was definitely over my head. It was geared at a more professional audience than an SJSU one."

Scholes compared the finance world to his media center. He said that when he was in college he had a stereo system that was one piece, all in one box. Then, as technology changed and he got more equipment, the system got bigger and bigger.

Recently, he had a professional come make him a new entertainment system, and he ended up with everything in one box again, but this time it was one customized box exactly how he wanted it.

"Finance is always the media center," Scholes said. "That's what it is - it is the box that defragments and comes apart and into pieces because it's not efficient to have the box. … So it's destruction, reconstruction, destruction, reconstruction.

"Now we are seeing all these pieces - like all the derivatives and all the components that you had for your stereo system - and you're starting to see people put it back together again, but its more efficient every time you put it back together."

Scholes said that the changes in the finance world are similar as companies transfer risks and speculate on finances.

College of Engineering Dean Belle Wei said that Scholes' work is significant to all students.

"There are many university students here who may wonder why Dr. Scholes' work is of interest or importance to you, I think there are three reasons," Wei said.

"First, many of you study probability and statistics, … he will show you how probability and statistics are very important tools for you to understand the uncertainty of this complex world.

"Second, upon graduation you want to get a job with one of the many companies in the valley. Whether that company has money to hire you or not depends on the overall financial health on the market… .

"The third reason is that if you do have a job with one of the Silicon Valley companies, you will be given stock options. The company has to compute the values of the stock options that will be given you, and guess what? How will they compute the value? They will use the Black-Scholes options pricing model."

The Black-Scholes model is what Scholes is most famous for, and what led to his Nobel award. According to the Nobel Prize Web site, the model is used to calculate the value of stock options.

"Thousands of traders and investors now use this formula every day to value stock options in markets throughout the world," according to the Web site.

Scholes spent about 45 minutes talking about the way that his company invests money based on speculation about how the market is going to perform.

"The whole world is changing as a result of the development of derivative pricing, and the ability to price and manage risk," Scholes said. "Because now, every corporation … is deciding on what risks to take and what risks to transfer. Your skills or expertise to make money requires that you take risk or concentrate.

"You can't make money without concentrating in a business activity, but there are lots of risks that you take in undertaking a business that are not germane to the actual business at hand."

Scholes talked about how businesses transfer risks to others who try to make money by speculating on the market.

"Risk is not really risk minimization, it optimization," Scholes said. "You take the best you can, in terms of return, for the risks you are taking. There is always a trade off."