Robert C. Merton, an architect of modern finance theory and Nobel laureate in economics, has rejoined the faculty of MIT Sloan School of Management.
Merton first came to MIT as a graduate student in the 1960s to study under the late Paul Samuelson — the first American to win the Nobel Prize in Economics — who later became his mentor and collaborator. After Merton received his PhD from the Department of Economics in 1970, he joined the Sloan faculty in finance, a position he held for 18 years. In 1997, he won the Nobel Prize for a new method he created to determine the value of derivatives, research he published during his early years at Sloan.
“I started my professional life at MIT, and did my most influential work there,” he said. “Now, as the world begins to rebuild its financial infrastructure from the ashes of this economic crisis, I believe MIT is primely positioned to play a leadership role in shaping the future through its research and educational programs. I feel it is the right time to return.”
Merton, 65, joins Sloan’s finance faculty, which includes distinguished professors such as John Cox, Andrew Lo, Jiang Wang, Stew Myers, and Stephen Ross. He will teach mainly in Sloan’s Master of Finance (M.Fin.) program, which was launched last year.
“We need people in the private sector, but also in finance ministries, and central banks who understand how the system works, and how to improve it,” said Merton. “We need people with strong quantitative skills who understand complex instruments and how risk is transferred; we need people who know how to build models, but who also have the breadth of finance knowledge and judgment to make sound abstractions and know well the models’ limitations, the art of the science. MIT, because of its history, its culture and its approach, is the ideal place to take up this task of educating the next generation, and to do it on a large-enough scale to have a macro effect.”
In addition to teaching and research, Merton will be involved in leading conferences and executive education seminars aimed at providing sophisticated financial training for senior managers and regulators.
David Schmittlein, dean of Sloan, described Merton as “a lively and engaging teacher, a generous mentor, but above all else an outstanding scholar whose contributions have had a great impact on modern economics. Bob is committed to a deeper collaboration between industry, academia, and the policy world. He joins a faculty dedicated to serious research that not only contributes to a greater understanding of the issues of the day, but also has an influence on practice.”
A colleague of Merton’s, H. Gifford Fong, president of Gifford Fong Associates, a firm specializing in fixed income, derivative product and asset allocation analysis, calls him “a muse of finance. Bob has a passion for what he does and an ability and intensity to get it done. He has the dedication and commitment to be involved in both academia and the practice,” he said.
Merton’s current academic interests are in understanding and controlling the propagation of macro financial risk including designing financial instruments to implement automatic stabilization policies for central banks, and improving methods of measuring and managing sovereign risk.
He is also working on a next-generation retirement savings system. As the global population ages, both public- and private-sector retirement-benefit schemes are putting enormous pressure on government budgets and national economies. “This is a global challenge and I believe finance science and market-proven technology can be used to address it,” he said. “Some people at this stage in my life ask: Why aren’t you retiring? But how could I even consider that with so many big challenges and exciting global opportunities in finance? If I can say at the end of the day that in some small way I helped to make millions of people even a little bit better off, it doesn’t get any better.”
Andrew Lo, director of the MIT Laboratory for Financial Engineering and a professor at the Sloan School, was once one of Merton’s students. “He made finance come alive,” he said. “Much of the Sloan School’s ‘franchise’ in finance is attributable to him. Even after 22 years here at MIT, I still feel like a houseguest in the house that Bob Merton built.”
Merton has co-written and co-edited 10 books, and is the author of more than 90 articles. He is past president of the American Finance Association, a member of the National Academy of Sciences, and a Fellow of the American Academy of Art and Sciences. He graduated from Columbia University with a degree in engineering mathematics in 1966, and earned a master's degree in applied mathematics from the California Institute of Technology.
He will take up his new role on July 1. He is currently the John and Natty McArthur University Professor Emeritus at Harvard Business School.