Through my parents and relatives I became interested in economics and, in particular, finance. My mother loved business and wanted me to work with her brother in his book publishing and promotion business. During my teenage years, I was always treasurer of my various clubs; I traded extensively among my friends; I gambled to understand probabilities and risks; and worked with my uncles to understand their business activities. I invested in the stock market while in high school and university. I was fascinated with the determinants of the level of stock prices. I spent long hours reading reports and books to glean the secrets of successful investing, but, alas, to no avail.
— Myron Scholes, Nobel autobiography, 1997
At this point let us interrupt the narrative in order to explain the Black- Scholes- Merton revolution. Otherwise you will not be able to make much sense out of what follows. Derman gives a good qualitative discussion of this, but, as the great nineteenth-century Scottish...