Prof. Myron Scholes, 1997 Nobel Prize Winner in Economic Sciences, Delivers Last Lecture | Summary and Q&A

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October 7, 2009
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Stanford Graduate School of Business
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Prof. Myron Scholes, 1997 Nobel Prize Winner in Economic Sciences, Delivers Last Lecture

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Summary

In this video, the speaker discusses liquidity, risk transfer, chaos theory, and the role of hedge funds. They explain how these concepts are interrelated and how they impact the financial industry. They also talk about the value of human capital and the importance of teams in navigating chaotic market environments.

Questions & Answers

Q: What are some ways to predict systemic exposures and make money in the market?

One way to make money in the market is to have skills in predicting systemic exposures such as market factors and currency exchange rates. By forecasting these factors accurately, one can potentially generate higher returns than others in the market.

Q: How do active managers try to outperform the market?

Active managers, such as hedge funds, try to outperform the market by forecasting cash flows and discount rates of stocks. They aim to identify undervalued and overvalued stocks to create a long short strategy that minimizes risk and maximizes returns. However, this is a zero-sum game as active managers need to be superior to others in the industry.

Q: What is the role of risk transfer in the financial market?

Risk transfer involves hedgers paying speculators to carry forward excess inventory and assume risks. This allows hedgers, such as corporations or investors, to transfer the risk to speculators who are willing to provide risk transfer services. It is a non-zero-sum game as hedgers prefer to pay less, but the more speculators there are, the lower the spreads in the market, and more hedging activity can take place.

Q: How does liquidity and risk transfer impact the price of assets?

Liquidity and risk transfer impact the price of assets as they change the price of liquidity and risk transfer services. During times of crisis or increased uncertainty, capital market intermediaries tend to withdraw capital from the market or demand higher prices for liquidity and risk transfer. This leads to wider spreads, increased prices of options, and volatility in asset prices.

Q: How do shocks or chaotic events affect innovation and growth in the financial industry?

Shocks or chaotic events disrupt the normal process of the financial industry and create uncertainty. This uncertainty leads to a slowdown in decision-making and a need for new models and ways of thinking. However, after the shock, there is often new innovation and growth as individuals and teams analyze the event and adapt their strategies.

Q: What is the value of options in a chaotic environment?

Options become more valuable in a chaotic environment with increased uncertainty. The more chaos and uncertainty, the greater the value of flexibility and optionality. However, there is always a trade-off between flexibility and cost, as more flexibility often comes with higher costs.

Q: How does risk transfer affect the role of equity in corporations?

Risk transfer allows corporations to retain idiosyncratic risk and transfer generalized risks to the marketplace. This separation of risks leads to a greater focus on the risks that corporations have a competitive advantage in. The equity cushion, which is expensive, becomes a way to bear all risks, making it difficult to measure how a company is making money. The trade-off between risk transfer and equity is an ongoing challenge for corporations.

Q: What is the role of leadership in running a business?

Leadership in running a business involves directing people to achieve objectives and appreciating their contributions. It requires setting clear objectives, fostering synergistic effects within teams, and separating roles to maximize efficiency. Strong teams can navigate both the details and the big picture, making informed decisions.

Q: How does risk transfer impact the price of liquidity and risk transfer services?

Risk transfer impacts the price of liquidity and risk transfer services by causing capital market intermediaries to withdraw capital or demand higher prices during times of uncertainty or shocks. The price of these services increases as they become more crucial for hedging and risk management.

Q: What is the value of human capital and teams in a chaotic market environment?

Human capital and teams are of great value in a chaotic market environment. They are essential for analyzing and understanding the market, making informed decisions, and innovating in response to shocks. Teams can bring together diverse skills, knowledge, and perspectives to navigate uncertainty and adapt to changing circumstances.

Takeaways

In summary, liquidity, risk transfer, and chaos theory are integral to the financial industry. Hedge funds play a role in providing risk transfer services, and the value of human capital and teams is crucial in navigating chaotic market environments. Options become more valuable in times of uncertainty, and leadership is important in running a business. Risk transfer impacts the price of liquidity and risk transfer services, and human capital and teams have high value in chaotic market environments.

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