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Golden jubilee for an iconic financial formula

Fifty years ago, an equation called the Black–Scholes formula revolutionized finance, leading to a rapid growth of markets and stimulating quantitatively oriented minds. But, with time, its simplicity became a liability — and yet its legacy persists.
  1. Blanka N. Horvath

    1. Blanka N. Horvath is at the Oxford–Man Institute of Quantitative Finance, University of Oxford, OX2 6GG Oxford, UK, and the Alan Turing Institute, British Library, London, UK.

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In the May–June 1973 issue of the Journal of Political Economy, Fischer Black and Myron Scholes introduced a model that transformed mathematical finance theory, and had a profound influence on how financial markets operate1. Their work followed key advances2,3 published the same year by Robert Merton, with whom Scholes shared the Nobel Prize in Economics in 1997, just two years after Black’s death. They had devised a formula that became known as the Black–Scholes equation, a succinct expression of how much investors should be charged for financial products that allow them to mitigate the risks of their investments in assets whose value can fluctuate over time. The model’s impact is largely due to its simplicity, but it also stems from a curious combination of world events, and it precipitated a fascinating half-century in finance.

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Nature 618, 243-245 (2023)

doi: https://doi.org/10.1038/d41586-023-01811-6

Updates & Corrections

  • Correction 13 June 2023: The original version of this article described the investment bank Salomon Brothers as defunct. The bank was acquired by Citigroup in 1997 and Citigroup discontinued use of the name in 2003. There are currently efforts in progress to revive the name.

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Competing Interests

The author declares no competing interests.

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