The Quest to Price Options

About this episode

Alex and Tyler explore the historical quest for a formula to price options and its impact on modern finance and risk management.

In the final episode of Season 1, Alex and Tyler explore one of the most consequential quests in the history of economics and finance: the decades-long search for a formula to price options. From Louis Bachelier's groundbreaking work in 1900 to the eventual triumph of Black, Scholes, and Merton in the 1970s, they trace how brilliant minds across mathematics, physics, and economics gradually unlocked the how to properly price financial instruments like calls and puts. Along the way, they examine how this theoretical breakthrough revolutionized modern markets, sparked the creation of the Chicago Board Options Exchange, and transformed our understanding of uncertainty and risk management. The conversation ranges from the hidden histories of early options traders to how options theory now shapes everything from portfolio insurance to oil well investments to mega-sized chip plants. They close by reflecting on how options theory has become fundamental to modern decision-making far beyond trading floors, revolutionizing how we think about and manage uncertainty across the entire economy. Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/quest-price-options Stay…

People in this episode

Hosts: Alex, Tyler

Topics covered

• pricing options
• economics
• finance
• risk management
• financial instruments
• market revolution

Keywords

• options pricing
• Bachelier
• Black-Scholes
• risk management
• financial markets
• uncertainty
• portfolio insurance

Mentioned in this episode

Organizations: Chicago Board Options Exchange, Mercatus Center at George Mason University

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