Today's WSJ has an interview with Myron Scholes (available free here). Scholes is especially known for the Black-Scholes option pricing model, winning the Nobel Prize (received along with Robert Merton), and being a co-founder of Long Term Capital Management, which failed in 1998, shortly after the award of the Nobel. (In the interview, he is very honest and philosophical about the LTCM situation.)
This is a very nice piece, well worth reading. There are at least three specific comments that I found particularly interesting:
(1) The writer of the piece refers to Scholes as a "life-long student of risk." A wonderful title, and a great goal for many of us -- I like to tell my students that they should strive to become "students of the insurance industry and the actuarial profession." "Student of risk" is perhaps an even better goal and title.
(2) Scholes characterizes the financial system as moving between greater and lesser stability (or less and more risk taking). When the system becomes stable and quiet, people tend to begin taking more risks, lessening the stability. Lower stability leads to greater cautiousness and more stability, etc.
(3) When asked whether the LTCM collapse put the entire financial system in danger, Scholes admits he doesn't know. I would have thought such a view, which has occasionally been expressed, to be largely hyperbole. Interesting...
- Rick
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