Robert C. Merton

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This article is about the economist. For the sociologist, see Robert K. Merton.

Robert Cox Merton (born July 31, 1944), a leading scholar in the field of finance, was one of three men who, in the early 1970s, developed the mathematics of the stock options markets. Merton published a paper on the subject simultaneous with the publication of another paper, reaching essentially the same conclusions, by Fischer Black and Myron S. Scholes. He obtained his PhD in Economics from MIT in 1970, where, studying under Nobel laureate Paul Samuelson, he helped introduce stochastic calculus into financial economics, allowing the behavior of prices to be described in the precise language of probability. He then applied optimal control theory in order to derive consumption and portfolio allocation rules for economically optimizing agents, and his work has paved the way for the now flourishing field of financial engineering, which applies his methods to calculate prices for exotic derivatives with arbitrary payoffs.

It is somewhat unfair to Merton that the resulting formula has ever since been known as Black-Scholes, but with another hyphen the label would be unwieldy.

Merton and Scholes received the Nobel Memorial Prize in Economics for their work on stock options, in 1997, after Fischer Black's death.

In 2002, Merton threw himself into the public controversy over how corporations ought to account for the stock options they often award as parts of a compensation package. Existing rules do not require that these options be treated as an expense when issued, and some economists suspect that the practice of keeping this particular form of compensation off the balance sheet contributed to the 1990s bubble in the value of dot-coms and telecoms. Merton himself is among the advocates of stock options expensing.

Merton is also the son of Robert K. Merton, a distinguished sociologist at Columbia University perhaps best known for having coined the phrase "self-fulfilling prophecy."

Merton was born in New York, New York and received his Bachelor of Science degree in Engineering Mathematics from the School of Engineering and Applied Science of Columbia University.[1] He then entered the Ph.D. program in Applied Mathematics from Caltech from 1966-1967, and picked up an M.S. there, but then transferred to the Ph.D. program in Economics at MIT. [2]. After receiving his Ph.D. from MIT under the guidance of renowned economist Paul Samuelson, Merton joined the faculty at the MIT Sloan School of Management. Currently, he is a professor at the Harvard Business School; he also holds the rank of University Professor, which is the highest professorial rank at Harvard University. Robert Merton and Myron Scholes were on the board of Long-Term Capital Management, a hedge fund company founded by John Meriwether that folded in 1998.

[edit] See also

• Robert Merton's homepage at the Harvard Business School
• List of economists
• List of economics consultancies and think tanks
• new method to determine the value of derivatives.
• List of personalities associated with Wall Street.

[edit] Documentary

Nova - Trillion Dollar Bet (1999)