The World Accroding to Robert Merton

JayHecht at JayHecht at
Thu Jul 9 07:20:52 PDT 1998

In a message dated 98-07-08 16:09:16 EDT, you write:

<< modesty forced me to excise

the blurbs] >>

Well some of us would like to see them!



How is this going to work? Is it like this chat group, or a little more "real time?"

BTW, the lead article in the 6/88 AER, "Applications of Option-Pricing Theory: Twenty Five Years Later" reprints the Nobel lecture by Robert C. Merton. Since I'm preparing to become a full-time finance teacher, I just had to asorb all that the master said.

Merton's credits Louis Bachellier's 1900 dissertation with the "twin births of both continuous-time mathematics of stochastic processes and the continuous- time economics of derivative-security pricing." These technqiues were incorporated into the later by Black, Scholes, and himself along with Samuelson to form what Merton's terms "technologies" as in "Applications of the Option-Pricing technologies."

It is my impression that the the financial crisis of the 1970s and 1980s were "solved" by these technologies, just as Arkwright, Edision, Bell, and other inventors did for the industrial revolution. Here is the KILLER quote that I'm going to hand out in class:

"Further improved technology, together with growing breadth and experience in the application of derivatives, should continue to reduce transaction costs as both users and producers of derivatives move along the learning curve. Like retail depositers with automatic-teller machines in banks, initial resistance by INSTITUIONAL CLIENTS to contractural agreements can be high, but once customers use them they tend not to return to the traditional alternatives for implementing financial strategies (my emphasis)."

I see now, I'm going to have 20% of my paycheck deposited to an exotically hedged options account that will guarantee me a 40% return. Hmm, so what if I can't "kick the tires," I'm obviuosly a financial waif.

Doug, maybe we can use this quote as an opening session for the seminar.


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