A Conversation with Myron Scholes
Good morning Myron morning, Daryl. Let's. Go right to the heart of the matter what. Most people remember about your Nobel Prize in Economics is that it led to a precise, mathematical formula. For the price of an option and, we'll, get into the story of that and in a couple, of minutes but. For those of you, know watching that don't. Know a whole lot about finance, what exactly is an option at, question. Basically. An, option, is the right but not the obligation to. Buy a security, at a fixed, price over, a set. Period of time that's, called a call option and there's also other, options, which give you the right but not the obligation to. Do so to sell the security, at a set. Price over, a specified. Time period so the interesting thing about options. Are basically, they are rights. Or. Ability. To do something without the requirement, to do something, so it's the, flexibility. Or the optionality, that, we think about in life. And, it's. A similarly it applies to securities, as well so it could be equities, could be bonds, could, be commodities, correct equities. Bonds commodities. Commitments. A lot of different things. Okay. So. Now. Let's, go way back in time. Think, of yourself in the late 1960s, and. A. Lot. Of things were going on in finance, around that time major developments, in the you know emerging, field of financial economics, a lot. Of people had worked on how, to price an option was, a hard problem and. I'm. Just, curious, to hear how you actually, got. Involved in this I mean what was it that triggered your interest in solving, this really hard problem well. That's that's. An interesting. A long involved, question but basically. When I was at the university cago as a PhD, student, that. Was a barrier as you mentioned a very embryonic time, for the development of finance. It was a completely, different way of looking at finance, mostly, from an economic. Perspective is. Opposed to a rules-based. Perspective. And it led to the. Development of, finance, as part of economics. Really, and, which. Was much different from the finances, being an ancillary. Sort, of rules, based way. Of thinking about things so at that time there, was a great, understanding. Of how to manage, risk, and the idea, of thinking about risk. As the idea, of buying risky, assets, versus safe assets that, was one dimension, of risk management, and the other dimension, of risk management, was diversification. You know how you would diversify risky. Assets, and that, led to development. Of things such as Bill sharps, great discoveries. And. Amplification. Of Markowitz. His work and talking, about the capital asset pricing model, and that for, us was a great breakthrough because, it was an equilibrium model. Of how assets. Individual, assets, should be priced relative, to, a, benchmark, or, asset, portfolio. And. And. That was one strand that was very prevalent so, that combination, of risk and how to think, about risk but no one had really yet. Had, thought. About risk, from the dimension, of. Insurance. In, our area, a lot, of people have talked about insurance. From, an actuarial way, actuarial. Science, they, had talked about. Pricing. Insurance, from the idea of, thinking about it only in the form of an, option, as I described how to value an option, but, no one had really thought about in terms of an equilibrium, context. Or thinking about how, it fit in to how assets, were held how they were priced in the dynamics. And that fascinated. Me when. I before. I went to. MIT. As, an assistant, professor, and. When. I went, to MIT as, an assistant professor it was mandatory, at the time that, master's students. In the and the, Sloan, program, the master's, program had, to write a thesis and. Several. Students came to me and asked, me to be their advisor and, they had option, pricing, data from the over-the-counter market and, using. That. Data they wanted to price options, so, basically. They wanted. To use the capital asset pricing model which, we had discussed in our classes. And apply that to, the option. Terminal. Values to discount, it to present, value and look at the value of the option, when. I started, reading the theses, and, thinking. About it much more deeply, I realized, that although, it might be easy to get they expected. Terminal, who, the option, it was impossible, to think about discounting. It back to present, value by, using a constant, discount, rate because, the risk of the option, changed dramatically, as a function, of time and as a function more importantly, of how, the underlying.
Asset. Price change. Relative, to the strike. Price of the option, you have a way, in the money option, it behaved, almost, like the stock, and a pure elaborate instrument, and then basically, as it was out, of the money. That moved, very little with regard to changes. In the underlying stock. Or asset price so, that got, me thinking again about options. And then I started, reading. A lot of the literature on, options. That existed, Paul, Kohner, who. Was a, faculty. Member here at Stanford, as well came, under, the Bill. Sharps auspices. And he, had passed away. In. The guess. In the late 70s. Here but he had written. A book or had a compendium. Of articles, on option, pricing, in his book and read. Through all of them all the articles plus the literature and none, were very satisfying, because they didn't have any, any. Really, equilibrium. Model, or equilibrium. Thinking, about, option pricing, so that's, how I started, in thinking about options. And then I thought. About the idea of saying. What. Is in economics. We think about equilibrium, and, how do you think about one, asset price relative, to another and how, the dynamics. Of that assets. Price would evolve over time and. Since. I was schooled and enamored, with and, in love with, the capital asset pricing model, and. What. It implied, about, its, risk and assets. Risk and how that assets, risk would be priced it, became obvious to, me that you. Know that I should think in terms of the beta of the asset, so the beta is the. Idea, of how the returns, on a particular, asset are related, to some, market. Portfolio, equilibrium. Portfolio, and all assets should be, differential. Expected, return just based, on the proportionality, or the beta of that asset, regarding, its. Relation, to the market. Portfolio at, least over a very short period of time and. So. Thinking. In that way I said well let me just think of I can think what the beta of this option, is okay. That would be and so, then I would know what the. Expected. Return would be on the option, for the next period of time and how, it related to. The. Market, itself, and then I thought. About this idea of the hedging. Or the selling, one and buying the other and. You. Know that's when I then. Started. Talking with Fischer black, who. Became, what, I was, working with in other projects, and we, then started, to he, had been thinking about options, as well and working on options. In on. His, own. Independently. Of me and then we joined forces together. And he was visiting MIT at the time no I assure, black actually, I. Met. Fischer black in the fall, of. 1968. When, I am, dating myself and, I'm making myself very, old which I have. I. Know your boy. Basically. I. Came, to MIT and. Michael. Jensen who, was. A colleague. Of mine not a colleague of mine a fellow, student of mine at the universe. Chicago, had, met Fischer black because, Fischer black had was working at. Arthur. D little as, a consulting. Firm and then, had asked, Michael questions, about. A study that he was, that. He Fischer black was working, on and, he. Said Michael said that I should have lunch, with him so I phoned him up and we had lunch together and. In. The meantime I had. Talked. With. Wells. Fargo Bank, in the summer of 68, before. I went to MIT about. Their management, science, group and what they had been doing in terms of using, Markowitz. Technology. To build optimal. Portfolios. When. I wrote my report they. Had had wonderful. Technology. And being able to. Build. Use, covariance, matrices, and, figure out the, efficient. Portfolio however. They, had no inputs, to put in to, the model and they had very few clients, that they could use any of what they had done on this, was Harry Markowitz who also got a Nobel Prize yeah Harry Markowitz, also, has had a Nobel Prize for, with. Merton. Miller and. With. Bill. Sharpe in. 1990. But. He had but. So, I recommended. To them that they, think. About moving to passive, strategies. Because, they had nothing to, lose by doing that and I just felt that at. The time from studies. That might Jenson had done and others that just, buying a portfolio. And, not. Trying, to act a management, back portfolio, could do was approximately. As well as passive, portfolios, at least from, the data and doing it at much less cost and so I. That. Was the end of my project and later in. December. Of that year Wells, Fargo, phoned me up Mac McLeod and said, we'd like you to do more Studies on this idea, of this passive, portfolio idea. And I said well I'm gonna young assistant, professor I'm, stuck here and I'm I can't travel but, I have this fellow Fischer black who, I had talked, with and enjoyed my discussions. And he wants to set up his, own firm, which was called associates, and Finance and, he. Then became, with, me we go. Talk with Wells Fargo and, developed, a lot of empirical, tests to, verify that, passive, investing, you could do approximately, as well as.
Investing. With, an active manager and I. Think, that was sort of the genesis, of for. The institutional, side the genesis, of the. Idea of passive, investing, which later, been. Called index, investing or, ETF investing. And. It. Was the case that Vanguard. In 74. Put out the first. Individual. Index. Fund the, S&P 500 index, fund but, Wells, Fargo, was, really the one that started off in 68, and later, built, a huge business and, now. Black. Blackstone. Blackrock. Has the ETF. Business ETF, business, that all generated. From that particular, Genesis, so Fischer, black and I were doing a lot of empirical, research and, trying. To show that, that. These, were. This. Was at efficacy you. Can do it you know and, through. That we thought. About we discussed myriad. Things we wrote a lot of papers together, was kind of great to be doing research and thus getting and doing publishing, things at the same time is, trying to think, about building this this wing of, investments. In finance, and we talked then. Talk I talked to Fisher a lot about options, and he talked to me about his views and options and that's how the partnership was born. He's. Said to be an interesting person what what, was it like on a personal level to work with Fischer black, Fischer. Fischer, black evolved. Over time when Fischer black was wonderful. To work, with when I was working. With a my I always. Felt that his ideas, were. You. Know he's was, a genius and in, myriad, ways and. You, know he would argue his points, but he was very very. Strong and Arnie's points but it's very male once, he agreed with you he would switch you know and come to agree, with you and then amplify, and why do you were saying so, he. Was I was more evolved, voluble. You know talking, a lot and. He. Was listening you know and listening and then he would intervene. And I'd say okay that's great and you know we would move, off in that direction I almost, visualize your two guys hammering, away at the chalkboard I'm, working on that formula what you know I know, it's, mathematically. A very deep subject but, was there some, kind, of. Lights. Went on and some kind of breakthrough idea. That you had that allowed you to to. Actually come up with the formula well, I think it's science, I don't know maybe from your own experience, in your own research you you have a different. View but a lot of people believe in in your Rica moment, and all of a sudden the lights go on but a lot of science, and a lot of what we did was connectivity. Connecting, various pieces, together and, you know thinking about the various pieces, and then that connectivity, because it's all in your mind, it connects, so maybe there, is quoting. A Rica moment, where you see the connectivity. But, a lot of it as I said in the introduction came, from, the view of, thinking about you know what the beauty of the capital asset pricing model, what, others had done like, Merton Miller and. Merton. Miller and Franco Modigliani views. On capital. Structure, and you know how they thought about arbitrage. You know that idea in, their, papers, they had the idea of you, can't you know that debt. In a firm like there's, a PI concept, you have debt and equity and you have the assets, so you can't have the debt being dependent, of the assets, and the equity, they off to be tied together and, so. All those things were in the mind you know and they were all fresh, and they were in live because that, was so new to everyone at that time and I'm now if people, are studying it in class it's all old you know self but, it's but that time was all like just everything, was so exciting, and it's, exciting for you but, as you said at the time probably. Not that many people understood, the significance of, what you discovered, and, how important, it would eventually become for the practice finance, I, heard. Maybe this is some just a rumor that. You. Actually had difficulty, getting that paper published when you first submitted it well is, that true yes actually, it was, when. Fisher and I first. Submitted. Our paper it was rejected. Myriad. Times okay, it was rejected as being either, too arcane, or insignificant, for. Finance. And. When. It was. Finally. After. The intervention of, Merton. Miller and, gene, fama to tell the journal of political economy that. They should look at the paper again after, having rejected, it they, finally, came back and said that they. Would publish, it. And. I. Think I'm not sure if this is a hundred percent accurate but I think it, has been the most cited, paper, in the history of the journal of the color column it's probably, one of the most cited papers. In all, of economics, so thank you, so. You you you've discovered the formula you wrote the paper, that. Somewhere, after you got the formula Bob, Merton comes into the picture he was interested, in the same problem tell, us a story about your. Discussions. With Bob and what, he eventually did because he also got the, Nobel Prize with you yes very definitely I'm.
In. Science. You know we're a little bit like hunters, okay so Fisher, and I her. Husband, what we did we try to work and get as far as we could and what, we were working on together. Without broadcasting, it, or telling other people, what we were working the hunter you know make sure that he doesn't tell where the fish are okay. And when Bob Merton who is a colleague of mine at MIT. Came, into my office and, was talking about his, continuous, time finance, and the idea of thinking about, you. Know the hedging. Portfolios, that he was working on and developing at that time was very important, I said great Bob keep working. On that because both, Fisher and I knew that, Samuelson. Alone, and then Samuelson. And Merton had written papers, on option. Pricing, a warrant pricing. And we. Knew that there, was fundamental. Assumptions, and their papers, that, were incorrect, you know and we wanted to have because. Of our discovery, and we wanted to move as far along as we could, in. 1970. Wells, Fargo. Had, a conference. That they sponsored. At MIT. And, you know all of us people, were brought in from, around. The war around, the country the world wasn't at that time involved, in finance like it is today but, at the time so we had like. Bill. Sharp would come in and you know Michael Jensen and others, for. Example and. Somerton. Miller and. The like so we I I. Was to give it the opening paper of the, second, day, of the conference you. Know and I was gonna. Open. What we had done and discuss with what we had done with, group. And I as, it was for, me and Fisher it was you, know here was a great group of people to introduce. It to and Bob Merton was supposed to come but he overslept, so he didn't hear that he didn't hear the paper okay at that time. About. A, couple, of weeks later he came into my office and. He said I heard you gave this paper at this conference on, you had a exact. Formula. To price an option, and he said I think, that's impossible. You know I mean it, can't be true so I explained. To him I put up how they are hedging, worked and their capital, asset pricing model, and, I showed I showed. The, differential, equation, to him and he looked at it and said no, no could you still have a, systemic. Component. That you haven't got rid of in, the Florida that has to be part of the, pricing, so the idea of the brilliance of what, was discovered, was when he went through this, inductive. Approach to, value an option, as opposed to the adaptive, approach everyone. Had taken the deductive, approach trying, to figure out what the terminal, value of the option was and bring it back to present value what. We did is said no you don't have to do that you can do it each period of time inductively. And then, not you know at that time and then that would be give. You the valuation. And. So. He, you. Know said no that was not didn't, work you know there's an error in that and so we argue which is great when you have wonderful colleagues as you know for your career as well as mine that having, colleagues around, that you, can talk to about things, and our UFO, curious things really enhances. The value for everyone, you know and then so. In talking, to him or going through things says you, know I said look as, we. Use the capital asset pricing model, is, a way to do things for, the simple reason that, we believe in equilibrium. Pricing, so if the capital asset pricing model, applied. Every, instant, of time you. Know then you'd have an equilibrium every, instant of time and, then, you could figure out how, every, asset was priced relative, to, every other asset, and that would mean, that you, would be able then to have, this sequence of correctly.
Priced Assets, in the market and you could head you then and and figure out from, that how, the differential. Equation, came about so, I, explained. That everything to Bob okay, and that and then he argued, that not was not true, and then the argument was. What, is what, does it mean every, instant, of time or, every short period, of time and how close you get to be innocent of time and, then, he's, left, the office and, I would a midweek, sometimes, these things are so vivid because you respect, someone's, brilliance. And its ability to argue. With you and talk to you and then I'm midweek. And then on Saturday, he phoned me at my house and he said that he. Agreed, now that, our formula was right and he used, Ito. Calculus and. Use. We. Didn't use the stochastic calculus, to, come, to our gala nobody, did it no I did it that time right so, use the fasted, calculus, to. Achieve. You. Know an exact, result which. He then. Showed, there, was actually. The replication. If you believed in the generating, processes. Of ito processes. That he had used that, it was exact. Replica. Exactly, replicated, you, know I think Fisher, and I have. Argue. With Bob over, the years, you know that we, liked our initial, formulation. Better. Than the Ito. Calculus. Or, the, continuous-time. Framework, because, of the ability of us, to allow. For pricing, to change in the economy and that you would then be able to have you. Know every, asset having to be priced correctly and, held and, that's we didn't have to assume that but we had to he. Argue that we assume the. Capital asset pricing model, applied. In continuous, time or in very short periods of time but so anyways, and. You. Know his his, work. And his evolution, and then he formalized. Many, more, components. Than we. Had done once you show. Where. The gold, is in them Hills you know it's very hard once, you have your stake for, others not to continue, to stake out lots of different parts. As well and try to find. More, gold and there was a lot of gold that was available time and they are in pricing technology, I read, that he. Generously. Held up the publication, of his next paper on, option. Pricing, so that your, paper would get priority, because you were first is that right correct yeah he did I mean he had his. Original. Is. Extension, 's and what he had done is published, in the Bell Journal of and, they're. Ready to go and then the because. We kept getting rejected, and asking for revisions. You know that basically, the. Journal of economy. Published. Our paper. In, May of 73. Finally. So. Changing gears just a bit as, I mentioned earlier, most. People who don't who, are not deeply immersed in finance do, know that there's, this famous option, pricing formula but. Right in the title of your paper it. Says, that, your. Formula, could be applied to price, corporate, debt right. And that's, now one of the most important applications of the formula. Did. You notice that at the same time that you came up with a formula or before and you were trying to solve both problems or, did it occur to you after, your, priced options, that you could at the same time. Calculate, the market value, of a debt claim on a corporation, Wow. Once, okay. Once. Fisher, and I had the option, pricing. Formula, came up with a pricing formula, then. We idea. Of an option, which is the right to and not, the obligation, to do something then. Both, of us started. Talking. In. Every, direction about, our, lives, were, options. Were everywhere, you know in other, words you it's. Going through the forest if you start focusing on. Something you. Know you'll see things in myriad. Different ways and if you go somewhere else through the forest and focus, on something completely differently. And as, a, result, I remember our. Taking. Vacations, together and walking, on the beach you know and just, talking talking, talking about. How. Options, were, and how we can apply what we had done to other. Things, as, well, and it became obvious. Because. Of you know Franco Modigliani and, Merton Miller's work on the idea of capital, structure but. They and their capital structure, work only had it be for a riskless debt, well and not risky, debt and. Then. So we talked about that and how our our work when applied to risky debt as well and why, debt. Equity. To. Us became, an option, you know the equity, holders had the right to buy back the firm from, the debt holders by, paying off on, the. Debt, obligation. And a, no-fault, bankruptcy. World you know if they didn't they just turned the keys over to the debt holders and and. They. Would take over so basically, the arguments. That Miller. And Modigliani held. At least in a frictionless world applied, in the, same thing if you had risky debt as, you had non, risky debt but the important thing in the debt contract, was, that with risky, debt the, there, was a whole number.
Of Incentives. That would come into play and there was a friction. Between the, debt, holders and the equity holders because if, they changed the risk of the assets, that could affect the debt holders differentially. From the equity, holders and basically. If the firm got in the trouble, then if they issued equity, that would increase. The value of the debt etc and, so that was so exciting, to talk about and, think about it as you know your work, over. Time as you formalize, those things so that that became a very important. Part so we talked a lot about that and actually. In, once, you had the basic. Formula. To price an option, then. You obviously had the basic formula. The. Dynamics. The price a debt contract, but, unlike, the option, contract which we can think is isomorphic. Whether, you're above it and you're watching it when, you got to the firm and thinking about the firm can do then there was this war between the debt holders and the equity and they could change the characteristics. Of the assets, or the evolutionary, process, of the assets, that would, affect debt and equity they get a dividend, policy they, can have issuing. More data or. Etc. Or buying back equity, and so, all the covenants would come in and so that was a rich area that led to many papers, and and Bob Merton formalized. A lot of that and what he had written on in his paper something. Of that so we did describe how to price you. Know a debt contrast, simple debt contract, as. That. In an extension. Because um. So. We had tried to do was. We. Published initial paper we, just thought about it as being a, piece you, know we'd have this sequence, of other papers. And we'd have us repair an. Assistant. Professor now I'm going to send some faster having papers. So, once you have a train. You want to have published more but you know I didn't you realize, that once, you expose, a whole, new area that's that. People, will that then take up I remember giving, the paper here, at Stanford. University, coming here it's a Berkeley, Stanford. Joint. Seminar so it was like 150 people, in the audience you know they're listening to the.
Black-scholes Paper, and a lot of people obviously, because, was so unusual, to think you can value something in finance without. Having to know what the expected return, was, that, we were shocked in the audience, you know it was and - and so there, was those things so this is false but I remember, mark, Rubinstein, coming, up to me after, the seminar was, over and Mark said he said, this is going to change the whole nature of finance, and I I didn't it. Was right he was right I didn't know that it had ended up a lot of avenues yeah, so. Speaking, of that. Moving. Ahead through time like, about. 25 years later. The. Phone rang early, in the morning yeah. They. Were calling from Stockholm I suppose, yes. Oh tell, us about that phone call how, did you react to that well. It's actually I was in Pebble Beach giving. A talk as you know remember, and. It. Was. Okay. Yeah obviously everything, is always a shock to you when you have. You. Have the. Phone ringing and people say you've been awarded that prize I had, unfortunately. Fisher black had passed away in, 1995. Two years earlier, and I. Have, thought that, you, know because people said that your work was, possibly. Going to be awarded the prize and, you, know it's. Interesting that ever even though the expectation. Might, be high there's an error to the expectation. And right and you never know you never know year any given year even if it's likely you'll get the prize at some point you don't know which year it's correct, so it must have been quite a shock it was a shock and, also and I had thought that you, know obviously the first thing I had thought about was great that, Bob, and I were. Awarded, the Nobel, Prize but then I haven't, moaned the fact that you know Fischer had. Passed away and wasn't, going to. Participate. As. Well and. Then, you, had to go to Stockholm, correct. And there's, big event the king is there kind. Of take, us back paint. The picture of. Of. What. This event was like for you and and what. Happened right. Well it's, uh it. Was new for me in the sense that I went to, Stockholm. And, everything. Is, very well prepared, they have a playbook, because, they, had about a hundred or so years of experience.
And So they know everything and the order of everything's gonna happen I was, just this, person, that's there and the. Like but it's. Um it's very a great ceremony, because they combined a combination. Of fur, viola D in other words you know the students, have skits and, preparations. They also have, ceremony. You know where the king and queen of Sweden award, the prize in, and, the and. They, have a banquets, that follow informal, banquets, and they also have serious. Scholarship, you know you give seminars at. Various. Universities in, in, Sweden. And so in. The combination, of the scholarship. The fruit of ecology, and the ceremony, is a pretty rich experience. I when. I returned, home, after. The. Whole. Affair, you know I given. Me before, a driver. And. Tache. And, you know you had your own cars. And everyone, would watch you, in Stockholm, as you're going through, Stockholm. So it was a very important, event for those people, in Stockholm, in Sweden, generally, and so, I got into, the backseat. Of my car. Expecting. My car to go to the supermarket, to buy my, food. And that and it, obviously. Didn't go anywhere so I had to go in the front but they're fascinating. Fascinating. Is, everyone, in the press always asks, you about what. Are you going to do with the prize money now. At. The time at. The time the, prize was approximately. 1 million dollars. And, obviously. Had to. Split, it with robert. Merton so, he received. 500,000. And then. The united states government they, wanted about, 250,000. Of my, 500,000. But i you've, been in stockholm, and it's very expensive, so i had to bring my family and, and pay, for their airfare and, their, dresses, and all. The other things they needed, to wear for the ceremonies, and the like and so i think when I got home maybe I had about thirty two thousand, dollars left. Of, the money to. Either spend, on myself or, invest. So one, of the Nobel, Prize winners Phillips, who was worth a Nobel Prize with it Steven, Chu is actually was saying you know as the Stanford, physics. Professor, was awarded, the prize in the same year there was three who were awarded the prize in Finnick they said he belong the fact to me that actually he, lost money because what. Surprised in, three, the, treadmill ward the awarded the prize itself is. Ignoring. Or forgetting the monetary, value is so huge because your life changes, so dramatically, after that, well. It's certainly I, mean you didn't need the prize to validate the. Impact. Of your of. Your contribution. So. Speaking, of that yeah, another. Quarter. Century has passed almost, and. The. World has been changed a lot, by. The work that you did almost. Fifty years ago. Help. Us understand, that legacy what you, know what's going, on in finance today, that. Had you not discovered. This prized, part. Of me had you not discovered, this this. Breakthrough formula in this methodology, for pricing, options. And for pricing corporate, debt. What. Would be different today what's the legacy of what you did. Conditional. On others not discovery because you know I always worry, about that that someone once you discover something that you know you have to publish it because others, will discover as well, but look.
I Think that it changed the, whole nature, of. Finance. And, and. You. Know in. Applications. Of Finance, to. Practice. Okay. Because, when. I we, started off in the business, then, the. Investment, banking world for, example or. Insurance. Companies, or banks, were. All we are just marrying. Together buyers, and sellers they were just sort of agents. Okay, and, once the technology, was. Developed technology. Was developed they. Then move from the world of agency. To being principle in part, and they. Innovated, in so many different ways to make, things faster, for clients, when you're just an agent you have to find a buyer and a seller they. Can if they could act as a principal, in part and hedge their risk and learn how to use quantitative. Techniques, and and in. What, they were doing it. Just lets, go through during a concrete way I'm a client. Of whatever Goldman Sachs right I called them up and I say I have this. Corporate. Or personal. Investment. Problem I'm. What. Do I do I mean where does the work, that you did come into the solution, for, a problem. And give me an example of a problem all. Right example. Of that might be that. A. Particular. Corporation. Might. Want a. Security. That would pay off in, different. States. Okay under different conditions and, that. Would not be a standard, form contract, it would be for their they might have oil or they have different, things they would, be willing to pay off more on if that if oil prices were higher than lower so that's not already traded on an exchange option, say Goldman has to kind of manufacture, that contingent, claim for you correct, and how does your how, does your work help them figure, out how to do that how. Much to charge you for that right. Well charging. Part I don't know there's. Obviously, that, a charging. Part first is what the value increment. Would be that how. Much I'm willing to pay for the solution, that befits me versus, the one my. Shoe size, versus having one shoe fit all that they all the, old way of doing things was one shoe fit all you know you just had a standard. Contract and. Then, as you can make things more individualized. The, value, to me increases. But then with a charge or the pricing, of that depends. On competition, and Goldman, would be doing a tour JP, Morgan would be doing, it is etc, the same way so, as. The technologies, development people know what the pricing, comes down because you. Know then everyone can learn, and copy from each other so we're all better off you. Know and how, we're using it but individualization. Of. Is. Damas, that. The. Manufacturing. Process. Became. Not, one a, manufacturing. Process became, one of saying okay. We, will issue, this, claim. That you have to. A. Client. That we have but, that client, doesn't want to buy what you want okay. But, we will give the client, what they want, and we. Will hedge, the risks, on our own so go, goldman. Would then act as an, intermediary they. Would buy the claim, that the corporation. Wanted. To issue and, they, would sell another, claim, to someone else who wanted to buy something, else and then they'd have to figure out how to handle the middle part which is the excess risks, of the excess pieces that, weren't, matched in. The match and then they would use the, technology.
Derivative, Technology. To be able to hedge. That risk. And to be able to manufacture. By. Going to the capital, markets and, buying, things you've done obviously. A lot of research on your own I'm thinking, about these hedging. Technologies. And, how they would apply to the, intermediating. Business so it changed the nature of intermediation. Quite. Dramatically, and that, attracted. A lot of quantitative. People. A quantitative, interest. In, coming. To investment. Banks and finance. Generally. So. There, there seemed to be no end of applications, of what, you've done look looking. Forward, do you foresee. Some. New, kind. Of technology for. Finance that. Either. Enhances, what you did or takes us in a completely, new direction going, forward well. I I, don't know if I'd say it's a completely new direction but I do think, of it as being, a way. To think about using. What we know in, a different way, and what I mean. By that is. One. Of the great. Findings. Sort of sort. Of like the arrow-debreu. Technology. Or the state pricing. Technology. They. Built. A technology, that try to price, risk. In various. States so instead of thinking about a riskless. World we thought about a, risky. World where the, prices, of assets would change, cross-sectionally. Depending, on the state of nature that arose not. An interesting thing is that that. Had myriad. States and. Period. Prices, and just, as we had thousands, of goods around the world today, well that. Technology. The the. Option. Pricing, technology. If, you believe, there are certain state, variables, like the like, growth assets or, interest. Rate assets, allows you to. Be able to. Economize. On pricing. And everything becomes, price. Relative, to the evolution. Of the state prices, the. Interesting thing. Is that what, we observe. In the option. Prices. Or market, prices, is the, prices, of insurance. Okay. And if you look at the prices, of insurance, they're, not constant. Over time they're. Changing, over time that, means that the risk is changing, over time and if the risk is changing, over time the distribution of risk are changing, over time then, we have to now give. Up the, one period, models. That we have been using or. In a one period model, I mean in an evolutionary sense, we just assume you. Know that the evolution, is no honor that and. That calibration, is constant. And then figure. Out how to use, the information in, the market prices, to. Decide, on then how to change the. Way we think about capital. Budgeting decisions, the way we think about. Discounting. The way we think about portfolio. Management, so. You know there's tremendous amounts, of dynamics. That are left to still work on in our area which I think, using the basic framework, and, the value, of prices, that we see in the market, to really enhance our. Ability. To understand. Those things that we, know that, that. It, we, can't assume that we're drawing from the same earn each period, of time you know, you. Need your self have done a tremendous amount of thinking about what happens at times of shock you know in which and. How. Price. Has changed, dramatically. And, so. We. Can start, incorporating some. Of those and. More directly, in what we're doing and I think those are tremendous. Growth areas, ahead yeah. Speaking of shocks those. Finance. Is often, associated, with big shocks to the economy associated. With financial crises financial, instability but. With what, you've described, this. Morning I I hope. That. Those. Watching, will understand, that. Research. Discoveries. Like yours can, improve. Society, can add a lot of value to. The real economy by, providing solutions. That weren't otherwise available and, I. Really want to thank you, for. Coming in today and and. Going. Over I know it's old history but going over. How. This how this came about, so. Thanks, again oh you're welcome dear thank you very much and really appreciate it yeah. You.