Robert C. Merton

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

Robert C. Merton
Born	(1944-07-31) July 31, 1944 New York City, New York, USA
Nationality	United States
Alma mater	Columbia University California Institute of Technology Massachusetts Institute of Technology
Known for	Black–Scholes model ICAPM Merton's portfolio problem Merton Model Jarrow-Turnbull model Long-Term Capital Management
Awards	Nobel Memorial Prize in Economic Sciences (1997)
Scientific career
Fields	Finance, economics
Institutions	Harvard University Massachusetts Institute of Technology
Doctoral advisor	Paul Samuelson

Robert C. Merton (born 31 July 1944) is an American economist, university professor and Nobel laureate in economics.

Biography

Merton was born in New York City to sociologist Robert K. Merton and Suzanne Carhart. He grew up in Hastings-on-Hudson, NY. He earned a Bachelor of Science in Engineering Mathematics from the School of Engineering and Applied Science of Columbia University, a Masters of Science from the California Institute of Technology, and his doctorate in economics from the Massachusetts Institute of Technology in 1970 under the guidance of Paul Anthony Samuelson. He then joined the faculty of the MIT Sloan School of Management where he taught until 1988. Subsequently, Merton moved to Harvard University, where he has held John and Natty McArthur University Professorship in the Graduate School of Business Administration since 1998. Merton also sits on the QFINANCE Strategic Advisory Board.

Career

Merton has made several seminal contributions for which Samuelson has hailed him as the Newton of Modern Finance. In 1969, Merton published Merton's portfolio problem, which proposed a formula to enable people to decide how much of their income they can consume at present and how much of the remainder should be allocated toward investments. In 1970, he introduced the Merton Model, which treated equity as an option on a firm's assets, and introduced the use of continuous-time default probabilities to model options on the common stock of a company. This was extended by Merton's student Robert A. Jarrow and Stuart Turnbull and is known as the Jarrow-Turnbull model. In 1973, Merton introduced the Intertemporal Capital Asset Pricing Model ICAPM, which incorporates explicit hedges that investors make to protect themselves from savings shortfalls. He published the Merton model for pricing European options (1973), which is an elegantly derived, more generalized pricing formula than the Black-Scholes model. Together, they constitute the Nobel Prize winning Black-Scholes-Merton model.

Merton has extensively consulted for the industry. These efforts have sometimes ended badly. Together with Myron Scholes, Merton was among the board of directors of Long-Term Capital Management (LTCM), a hedge fund that failed spectacularly in 1998 after losing $4.6 billion in less than four months. The Federal Reserve was so concerned about the potential impact of LTCM's failure on the financial system that it arranged for a group of 19 banks and other firms to provide sufficient liquidity for the banking system to survive. Although these investors were eventually paid off, the reputation of Merton and Scholes were tarnished.

In 2007, Merton was hired as Chief Science Officer of Trinsum Group, a financial advisory firm. On January 30, 2009 Trinsum Group put the following press statement on its website,

"Trinsum Group, Inc., a holding company, announced this week that it has filed a voluntary petition under Chapter 11 of the Federal Bankruptcy Code in the United States Bankruptcy Court in the Southern District of New York. The Chapter 11 proceeding does not include the Company's operating subsidiaries, including its consulting subsidiary, and their operations will not be affected.
During the past several months, the Company had explored a number of alternatives to strengthen the Company's financial base, resolve certain legal issues, and dispose of non-core businesses outside of Bankruptcy. Despite some progress, the Company concluded that the Chapter 11 route provided the most efficient mechanism to achieve its goals with minimal disruption to each of its businesses.
"We have come to the conclusion that our businesses are better off as focused and independent entities," said James McTaggart, current Chairman of Trinsum. "The goal of the reorganization is to separate each of these businesses in order to permit each to continue to operate independently of one another as strong and focused concerns."

Personal life

Merton was married to June Rose from 1966 to 1996. They have three children; two sons and one daughter.

Honours and awards

In 1993, Merton became a member of the U.S. United States National Academy of Sciences.

In 1997, Merton was awarded the Nobel Memorial Prize in Economic Sciences with Myron Scholes for their work on stock options.

In 1999, Merton was awarded a lifetime achievement award in mathematical finance.

In 2002 Merton entered the debate over how corporations ought to account for the stock options they award as part of a compensation package. Merton was among those advocating expensing stock options. Shortly afterward, the Financial Accounting Standards Board changed their rules and began to require the expensing of options.

In 2005 the Baker Library at Harvard University opened The Merton Exhibit in his honor.

In 2006, Merton developed SmartNest, a pension management solution that addresses deficiencies associated with traditional defined-benefit and defined-contribution plans.

See also

• List of economists

Publications

• Merton: Theory of rational option pricing (1971), [1]

External links

• Page at the Harvard Business School
• PBS, Nova - Trillion Dollar Bet (2000)
• The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 1997
• Press Release: The Sveriges Riksbank (Bank of Sweden) Prize in Economic Sciences in Memory of Alfred Nobel for 1997
• Doctoral Dissertation
• Trinsum Group profile
• IDEAS/RePEc