Lunch with a Laureate: Robert Merton

As an MIT Museum audience peppers him with queries ranging from the barter system to development, trade relations, and the role of intuition in economics, Nobel Prize-winner Robert Merton pushes back against any assumptions that he might be a “renaissance man.” He carefully steers listeners to his areas of expertise — financial engineering and innovation, and risk management. Merton starts with the breakthrough work that earned him his laurels, and which has recently stirred up controversy: derivatives. There are “no mysteries” to these financial instruments, insists Merton. They are neither complex nor threatening. Derivatives are “nothing more than insurance,” coming into play when people exercise the right to buy or sell an asset or stock at a guaranteed price. Merton developed formulas for valuing such guarantees. These “tools of analysis” are now central to many areas of big finance, such as pricing corporate liabilities, student loan guarantee programs, and federal deposit insurance, and pop up in ordinary life as mortgages with the right to prepay, and car leases with a purchase option. Merton relishes extending theory into the world of practice. He says, “I’m an engineer by nature; I like to solve problems.” He’s wrestling with two very big current projects: developing a new model for retirement that takes into account the uncertainties that unfold over 30-some years of a working life, and provides the desired standard of living when that working life ends; and improving the risk profiles of small, developing countries. During give and take with the audience, Merton finds himself fending off some harsh questions around the role of derivatives in the current financial crisis, even suggestions that his contributions to economics have been discredited by the events of the past year or so. Merton declares that his models factored in the possibilities of such crises, and we should acknowledge that “rare events can occur.” He does not view the a...

Channel: MIT World Video Length: 0s Date Found: Sun, Sep 05 2010 7:01 AM Category: Science Date Produced: Tue, May 25 2010 12:00 AM View Count: 0