Introduction of Nobel LaureatesAuthor(s): Edward J. KaneSource: Financial Management, Vol. 29, No. 3 (Autumn, 2000), pp. 89-91Published by: Wiley on behalf of the Financial Management Association InternationalStable URL: http://www.jstor.org/stable/3666231 .

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Speeches by Nobel Laureates

Introduction of Nobel Laureates

Edward J. Kane*

We are here to celebrate the work of Nobel Laureates in our field. Most of you probably know that the word "laureate" comes from the crowns of "laurel" which Romans used to honor their heroes. While it is said that no man is a hero to his valet, these men are truly heroes to us. I am honored and humbled to be introducing them to you today. I will first introduce them jointly and then introduce them individually.

Early in primary school, a future Nobel Laureate is bound to be labeled by fellow students as a "Big Brain." Although researchers examined Einstein's brain and found that it was of normal size, it did prove 15% wider in the physical areas responsible for mathematical thought.

But we know that the genius of men like Paul Samuelson and Robert Merton lies in things scientists can't measure: their capacity for vision and creativity and not primarily in their brains' obviously stunning capacity to do math. As a business school professor, I feel obliged to provide a visual aid (Exhibit I) to express this hypothesis.

In his 1970 Nobel lecture, Paul Samuelson humbly reminded us that the vision of modern scholars is enhanced by being able to stand "on the shoulders of our predecessors." An ancient Roman-who probably wasn't wearing a crown of laurel at-the time-said that even a dwarf can see for miles if he can climb onto the shoulders of a giant. Without fear of contradiction, I can say that everyone in this room has enjoyed the huge boost that these two giants have given practitioners in our field.

And, we are lucky that they decided to work in our field. Interestingly, neither Paul nor Bob began college as an economics major and both seriously considered careers in other fields before settling into economics. Both give great credit to the economics professors and fellow students they encountered: Paul as an undergraduate at Chicago and as graduate student at Harvard in the 1930s; Bob at MIT in the late 1960s and early 1970s. Also, neither underwent any formal training in finance; rather, an inborn fascination with issues of our field-asset prices, portfolio choice, and financial trading- acted as a magnet that attracted their research activity inexorably into the province of financial economics.

Turning now specifically to Paul, I am convinced that history will rate Paul Samuelson as the greatest and most-versatile economist of our century. He has written pioneering papers in virtually every area of economics and for years penned an influential column for lay persons in Newsweek. His Foundations of Economic Analysis reoriented the field of economics, while his

*Edward J. Kane is James C. Leavy Professor of Finance at Boston College. These speeches were delivered by Nobel Laureates Paul Samuelson and Robert Merton on the occasion of their recognition by the FMA, October 7, 1999, Orlando, Florida Edward J. Kane delivered the introduction.

Financial Management * Autumn 2000 * pages 89 - 99

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90 Financial Management * Autumn 2000

Exhibit I. Nobel Laureates' Brain

Illuminations Brainstorms

Gestalts Apercus

Insi ts

Visions

Mathematical Epiphanies Concepts

principles textbook reoriented departmental curricula around the world. Bob and I both count ourselves as lucky to have studied for our doctorates under Paul

and both of us acknowledge his Foundations as the book from which we truly "learned" economics. Bob goes to the extreme of proclaiming this on his webpage.

Across our profession, Paul is renowned for his wit and for not suffering fools. However, only his students know how extravagantly generous Paul can be with his time and how sympathetically he is willing to entertain poorly formulated student questions. I still remember a wonderful lecture on bilateral monopoly that Paul gave in 1958 during my second semester at MIT. In those days classrooms were not equipped with projectors, so Paul had to carefully draw the edges of the Edgeworth-Bowley Box and the two parties' indifference curves in

differently colored chalk. He put the origin of a "yellow individual's" indifference map in the NE corner of the board and a "white individual's" origin in the SW. He went on to trace the 'c tangencies that generated the contract curve, to explain the indeterminancy of the trading equilibrium, and to walk the class through a series of brilliant applications of the framework. When Paul finished, every doctoral student was simply awed. Everything seemed absolutely clear. However, a so-called special student (who happened to be a citrus farmer from Florida) did raise his hand. His question was: "Why did you draw some of the lines in white and some of them in yellow?" After the laughter died down, Paul's kind reply was: "It seemed like a good idea at the time."

Paul Samuelson is a man whose mind is always full of good ideas. We are all delighted that he is going to share some of these ideas with us today.

Robert Merton grew up in suburban New York. Baseball, poker, the stock market, and

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Samuelson & Merton * Speeches by Nobel Laureates 91

mathematics were childhood passions, and he hasn't outgrown any of them. In particular, he remains hopelessly enamored of his childhood favorite baseball team, the 1956 Brooklyn Dodgers.

Bob arrived at MIT in 1967. At age 23, he brought with him a B.S. from Columbia in engineering math, an M.S. from Cal Tech in applied math, and an amazing amount of experience trading stocks, warrants, convertibles, and OTC options. His talent for economics ripened quickly. Bob became Paul's research assistant in his second semester and his coauthor that summer. He completed his Ph.D. in three years, with three of the five chapters of his dissertation published before the dissertation was submitted.

Bob's watershed book is Continuous-Time Finance. This volume magnificently synthesizes his work on modeling asset-pricing and risk-bearing, and Bob has published (with Zvi Bodie of Boston University) a principles textbook called Finance, which he and the profession hope will raise the financial literacy of the next generation of college graduates.

Bob's Nobel award focused on his early contributions with Myron Scholes and Fisher Black to the theory of option pricing. Some of his later research has sought to apply this theory. Most recently, he has been using it to analyze secular change in financial institutions and in the contracting instruments they use. One particular application gave a huge boost to Andy Chen and me. This was Bob's clever modeling of deposit insurance as a contract that conveys to an insolvent bank the option to put its underwater portfolio of assets to the FDIC in exchange for the value of its debt.

As a professor at MIT (and I suppose now at the Harvard Business School, as well), Bob welcomed student visits to his office. But, he soon became famous for explaining himself so thoroughly that no student questioner could expect to get out of his office in less than an hour and a half. Each student knew that Bob would keep going until the questioner's eyes began to show more than a faint sign of understanding whatever Bob was trying to explain. As a result, when student study groups encountered a question on which they needed Bob's help, they would select a single representative to confer with him. With hindsight, many of his ex-students speculate that this delegation process was exactly the outcome Bob was trying to bring about.

Just as Paul's work pointed the way to the mathematization of the economics curriculum, Bob's work has helped to refocus the curriculum of finance toward well-specified models and away from ratio analysis, extrapolations of time-series graphs, and war stories. Nevertheless, Bob's lecture generates a few extrapolations for us to consider.

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