77th Congregation (2014)
Professor Robert Cox MERTON
In any family, not least an academic one, a famous and successful father can inhibit the ambitions of his son. How can a young man hope to emulate the achievements of the distinguished older man into whose household he was born and in which he grew up? In many cases the son will choose a different career to avoid the pressure of comparison. Even if he chooses the same career, as many loyal sons do, he risks spending his life in his father’s shadow. It takes two exceptional people to make this work: a father who offers a shining but not a stifling example, and an appreciative son of at least equal ability but perhaps a slightly different focus. If I said that Robert Merton won the National Medal of Science in the United States for founding the sociology of science and creating the concepts of the “role model” and the “self-fulfilling prophecy”, you might think that you were listening to the wrong citation. Surely Robert Merton won the Nobel Prize for his work on valuing stock options, and has been a key figure in the shaping of the global financial system? But both are true: for we are talking about the remarkable son, Robert C, of the distinguished father, Robert K. That slightly different focus began to emerge when the younger Robert Merton was still a boy, in the form of a practical interest in making machinery work. He developed a passion for automobiles, graduating to building his own car at the age of 15. Meanwhile the influence of the elder Robert Merton was making itself felt not just in the unspoken examples he set for work effort or clarity of thought and expression, but through introducing his son to the stock market. That early interest in money and finance proved determinative. In a story that will resonate with any Hong Kong audience, the boy bought his first stocks at age 11, spent part of his college years trading, and had his first experience of risk arbitrage at 19. After graduating from Columbia University in 1966, and also, not unimportantly, getting married the same year (he and his wife were to have three children), he moved to graduate school at the California Institute of Technology, where in 1966-67 he spent a couple of hours every morning before class at the local brokerage house trading stocks, warrants, convertible bonds and over-the-counter options. That Cal Tech fusion of practice and research was taken to a new level at the Massachusetts Institute of Technology (MIT) after 1967, where as a doctoral candidate Robert Merton became research assistant to the legendary Paul Samuelson, and started his work on warrant pricing, dynamic portfolio theory and the capital structure of the firm, motivated by the desire to attack unemployment and inflation and to control business cycles. Economics, he felt, could really help millions of people: a lifelong belief shown throughout his career, from his publication in 1969 of Merton’s Portfolio Problem, proposing a formula to help people decide how much income to spend and how much to invest, up until the present day, in his advocacy of sustainable income rather than account balance as the key goal for retirement saving schemes. Professor Merton’s first academic appointment was in 1970 at MIT’s Sloan School of Management, where he remained for 18 years, the last nine as J C Penny Professor of Management, with his undergraduate teaching always informing his research. There he also met Myron Scholes and Fischer Black. Their collective work in the modeling of financial markets containing derivative instruments by estimating option prices over time became known as the Black-Scholes-Merton model. It revolutionized modern financial theory and practice and is still widely used in options markets and risk management today. Robert Merton moved to the Harvard Business School in 1988 where he occupied successively the George Fisher Baker Professorship of Business Administration and the John and Natty McArthur University Professorship. In 2010 he became University Emeritus Professor at Harvard and also returned to the Sloan School as School of Management Distinguished Professor of Finance. At Harvard Professor Merton worked mainly on understanding the financial system, with special emphasis on the role of financial technology and innovation in driving changes in institutions; on the management of financial-service firms; and on regulatory and accounting systems. This research together with the earlier Merton-Scholes-Black research has been central to the extraordinary waves of real-world financial innovation in modern times. In recognition of these achievements, Robert Merton together with Myron Scholes was awarded the Nobel Memorial Prize in Economic Sciences in 1997. The distinguished father lived long enough to appreciate this rare recognition of his son’s achievements. Robert Cox Merton had already received the inaugural Financial Engineer of the Year Award from the International Association of Financial Engineers in 1993. More recently he was honoured with the 2010 Kolmogorov Medal from the University of London, and in the same year he received the Hamilton Medal from the Royal Irish Academy. He received the 2011 CME Group Melamed-Arditti Innovation Award, and the 2013 WFE Award for Excellence from World Federation of Exchanges. He is a past President of the American Finance Association, and has been a member of the National Academy of Sciences of the United States since 1993, as well as a Fellow of the American Academy of Arts and Sciences since 1986. The Merton Exhibit at the Baker Library at Harvard was opened in his honour in 2005. Retaining his real-world, hands-on outlook, Professor Merton was a senior advisor to Salmon Inc in the late 1980s and closely involved during the early 1990s in creating a large-scale financial firm, Long-Term Capital Management. He served as a senior advisor and later a Managing Director of JP Morgan & Company from 1999-2001. He served as a director of Community First Financial Group and Peninsula Banking Group from 2003 to 2010. He is a director of Vical, Inc, and Daedalus Software, Inc, where he is nonexecutive Chairman. He serves on advisory boards of several companies and institutions. Currently he is Resident Scientist at Dimensional Fund Advisors. His many groundbreaking publications include Continuous-Time Finance, Financial Economics and The Global Financial System: A Functional Perspective; it is also worth mentioning that the very first publication in a prolific list was a paper on Gulliver’s Travels, written for an English literature course in his sophomore year at Columbia University. For his revolutionary contributions to financial markets and his translation of finance science into practice in the interests of ordinary investors, it gives me great pleasure, Mr Chairman, to present to you Professor Robert Cox Merton, for the award of the degree of Doctor of Science, honoris causa.