Prelude to the Option Pricing Model
The work of Robert Merton, Fischer Black and Myron Scholes is the culmination of a series of discoveries and theories spanning the twentieth century. From Louis Bachelier, an obscure French mathematician who wrote at the turn of the century, through the contributions of scholars such as Harry Markowitz, John Lintner, William Sharpe, Eugene Fama, Franco Modigliani, and Merton Miller, the quest to apply the lessons of probability theory to the stock market has been a key focus of twentieth-century American finance.
As a doctoral student at the Massachusetts Institute of Technology in the late '60s, Merton was able to both draw on the tradition preceding him and begin establishing new foundations in economics through his working relationship with Paul Samuelson. Perhaps more than any other economist to date, Paul Samuelson is credited with ushering in the modern era of mathematical economic analysis incorporating formal probability theory and optimization methods.