The Black-Scholes Formula Won the 1997 Nobel Prize Without Black
Fischer Black, Myron Scholes, and Robert Merton invented modern options pricing — but Black died in 1995 and Nobels aren't posthumous.
In May 1973 the Journal of Political Economy published a paper called "The Pricing of Options and Corporate Liabilities," by Fischer Black and Myron Scholes. It had been rejected by the same journal twice and by the Review of Economics and Statistics once. The argument was simple in form and hard in detail: under a few clean assumptions, the price of a European call option on a stock is determined entirely by the stock price, the strike, the time to expiry, the risk-free rate, and the stock's volatility. Volatility was the only unobservable input, which was the formula's gift to the world: it let traders price options as bets about volatility itself.
A second paper appeared the same year. Robert C. Merton, who had been Paul Samuelson's PhD student at MIT, generalized the result, established the rigorous arbitrage argument behind it, and gave the model the name it goes by. The Chicago Board Options Exchange, which had opened on April 26, 1973 — a month before the Black-Scholes paper appeared — wrote the formula into its trading screens within a few years. Listed options went from a niche product to a global market measured in the tens of trillions.
In October 1997 the Royal Swedish Academy of Sciences awarded Merton and Scholes the Nobel Memorial Prize in Economic Sciences for the work. Fischer Black had died of throat cancer in 1995. The Nobel rules forbid posthumous awards, but the academy noted his contribution at length in the citation. A year later, Long-Term Capital Management — co-founded by Merton and Scholes — collapsed and required a $3.6 billion bailout.
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