Merton, Robert Cox (1944-…), an American economist, was awarded the Nobel Prize for economics in 1997, together with the American economist Myron Scholes, for work on a new method of valuing investments in financial markets. Merton’s method attempted to allow investors and traders to value the risk (potential loss) carried by a much wider variety of financial assets in a more reliable way. This risk-assessment tool led to the rapid growth of the financial markets that took place during the 1980’s. After the finance crisis that began in 2007, however, some experts believed that the mathematical models meant to reduce risk instead created a mistaken sense of security that actually increased risk in the market.
Merton was born in New York City on July 31, 1944. His father, Robert K. Merton, was a noted educator and sociologist at Columbia University. Robert C. Merton received his Ph.D. in economics from the Massachusetts Institute of Technology (MIT) in Cambridge. Merton taught for many years at MIT. He became a professor of business administration at Harvard Business School in Boston in 1998.
The problem of how to value accurately the risk associated with investments had puzzled financial economists throughout the 1900’s. Myron Scholes and his American colleague Fischer Black developed a formula, published in 1973, that helped investors to assess risk more precisely. Merton refined the formula of Scholes and Black, attempting to allow investors to make better-informed decisions about risk.
In 1994, Merton and Scholes became partners in a high-risk investment company, Long-Term Capital Management, whose investments suffered as a result of Russia’s economic turmoil. In 1998, the company was near collapse, and the Federal Reserve Bank of New York interceded on the firm’s behalf with its creditor banks. In 2000, Long-Term Capital Management paid back the more than 3 billion dollars it was loaned during the collapse of 1998. The firm then closed.
See also Money; Stock exchange.
