Myron Scholes, co-developer of the Black-Scholes options pricing model, continues to explore the financial markets, with a focus on artificial intelligence (AI) and decarbonization strategies.
The Black-Scholes model revolutionized the pricing of options and contributed to a shift from agency-only banking to a principal business.
The options market can be seen as a crowd-sourcing platform for determining market risk levels and helping business owners make decisions.
Scholes applies his risk-return portfolio theory to decarbonization, highlighting the importance of understanding constraints and smoothing volatility.
He advocates for market efficiency in determining fair value for carbon credits and envisions a future where carbon credits become a commoditized asset.
Scholes believes that individuals should have the freedom to make their own decisions regarding the allocation of risk budgets for carbon credits.
He acknowledges the fallacies of data mining and AI, cautioning against the clustering fallacy and the challenge of reverse-engineering models.
Scholes emphasizes that creativity and the ability to establish new fixed points are crucial in a rapidly changing world driven by volatility.
When it comes to career choices, Scholes advises pursuing what aligns with one’s personality and interests.

Myron Scholes on the Black–Scholes Model, Decarbonization Strategies, Artificial Intelligence, and Parenting

Nobel laureate Myron Scholes, known for his contributions to the financial markets through the development of the Black-Scholes options pricing model, continues to explore new frontiers in finance. His current research interests include artificial intelligence (AI), decarbonization strategies, and their comparison with options.

Scholes recently participated in a fireside chat hosted by CFA Society Hong Kong, where he discussed the continued relevance of the Black-Scholes model after 50 years and his research in these areas. Below is a summary of the discussion:

The Black-Scholes Revolution

The Black-Scholes model, published 50 years ago, explained how to price options and revolutionized the banking landscape. It highlighted the importance of uncertainty in life and the value of having options to deal with risks. Scholes sees the options market as a platform for determining market risk levels and enabling business owners to make informed decisions.

Decarbonization and Portfolio Construction

Scholes applies his risk-return portfolio theory to decarbonization, emphasizing the need to understand constraints. He believes that smoothing volatility and cutting tails in investment returns can lead to better compounded returns. Scholes sees decarbonization as a way to smooth the path to reducing carbon emissions, comparing it to a put option that provides an alternative path to achieving a goal.

When it comes to determining the fair value of carbon credits, Scholes believes in using market efficiency as a guiding principle. He acknowledges the challenge of separating good and bad credits but believes that a credit rating system, similar to the one used for corporate fundamentals, can help investors assess the level of risk associated with carbon credits.

Three Fallacies of Data Mining and AI

Scholes identifies three fallacies in the financial industry: data mining, clustering, and reverse-engineering models. He cautions against relying solely on data mining and highlights the risks of creating artificial clusters that may not accurately represent reality. Scholes also points out that every model has an error term, but as people reverse-engineer models to exploit them, the validity of the error term is compromised.

While AI can analyze past data efficiently, Scholes notes that it has not yet mastered the ability to establish new fixed points as the world evolves. He asserts that creativity and human adaptability are essential in a changing environment.

Finally… Parenting

When asked about career choices, Scholes advises individuals to pursue what aligns with their personalities and interests. He stresses the importance of exploring possibilities and finding one’s passion in life.

Overall, Myron Scholes continues to explore new areas in finance, leveraging his expertise in options pricing and applying it to emerging fields such as AI and decarbonization. His insights provide valuable perspectives on risk management, market efficiency, and the limitations of data mining and AI.