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In the final episode of Season 1, Alex and Tyler explore one of the most consequential quests in the history of economics and finance: the decades-long search for a formula to price options. From Louis Bachelier's groundbreaking work in 1900 to the eventual triumph of Black, Scholes, and Merton in the 1970s, they trace how brilliant minds across mathematics, physics, and economics gradually unlocked the how to properly price financial instruments like calls and puts. Along the way, they examine how this theoretical breakthrough revolutionized modern markets, sparked the creation of the Chicago Board Options Exchange, and transformed our understanding of uncertainty and risk management. The conversation ranges from the hidden histories of early options traders to how options theory now shapes everything from portfolio insurance to oil well investments to mega-sized chip plants. They close by reflecting on how options theory has become fundamental to modern decision-making far beyond trading floors, revolutionizing how we think about and manage uncertainty across the entire economy.
Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/quest-price-options
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Follow Alex on X: https://x.com/ATabarrok Follow Tyler on X: https://x.com/tylercowenSee Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/
Chapters
00:00 - The puzzle of pricing options 03:46 - Louis Bachelier's contribution 09:52 - Enter Paul Samuelson 15:05 - Black, Scholes, and Merton 27:05 - Kassouf, Thorp, and cashing in on options theory 32:28 - Other applications of options pricing theoryRecorded 4/12/2024
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In this exploration of the "new monetary economics," Alex and Tyler revisit the ideas of thinkers like Fischer Black, Eugene Fama, and Robert Hall, whose bold views about the Fed and the money supply once seemed detached from reality but now increasingly describe the financial world we inhabit. They explore why traditional measures like the money supply are becoming obsolete, how crypto and stablecoins are reshaping monetary systems, and why AI might emerge as a major consumer—and creator—of cryptocurrencies. They also discuss the paradox of pegged currencies, the lessons of algorithmic stablecoin failures like Terra, and the surprising connections between fiscal and monetary policy in a world of increasingly liquid assets. Finally, they reflect on how the unconventional ideas of new monetary economics, once dismissed as fringe, are now critical for understanding our modern financial landscape.
Recorded March 14, 2024
Transcript, video, and links: https://www.mercatus.org/marginal-revolution-podcast/new-monetary-economics
Chapters
00:00 - Outlining the ideas of new monetary economics 09:03 - The difficulty of defining the money supply 17:36 - What determines the inflation rate? 22:32 - Crypto's role in validating new monetary economics 26:02 - The role of the Fed in a Modigliani-Miller world 32:09 - Stablecoins and the paradox of pegs 46:11 - The bottom lineStay connected:
Follow Alex on X: https://x.com/ATabarrok Follow Tyler on X: https://x.com/tylercowen See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/ -
Saknas det avsnitt?
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In this episode, Alex and Tyler dive deep into the fascinating and often misunderstood world of insurance, exploring how this trillion-dollar industry underpins modern economies while shaping human behavior in surprising ways. From its ancient roots in maritime adventures to the revolutionary development of life insurance, they unravel the economic logic and social norms that made this market possible. Along the way, they grapple with enduring puzzles: Why do people insure against some risks but not others? Why did life insurance once seem repugnant, only to become a moral imperative? How has the industry's ability to manage moral hazard and agency problems evolved—or not? From mutual aid in Indian villages to the legacy of 17th-century tontines, the conversation illuminates the ways in which insurance reflects both the limits of human foresight and our relentless attempts to navigate an uncertain world.
Recorded March 14, 2024
Transcript and links: https://www.mercatus.org/marginal-revolution-podcast/economics-insurance
Stay connected: Follow Alex on X: https://x.com/ATabarrok
Follow Tyler on X: https://x.com/tylercowen
See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/
Chapters
00:00 - The size and benefits of the insurance industry 02:35 - Insurance as a transaction enabler 10:13 - Nicholas Barbon, Robin Hanson, and insurance bundling 18:22 - The effect of advances in mathematics on insurance 23:45 -Tradable insurance as an early prediction market 32:54 - Risks we don't insure against 37:12 - Charles Ives and changing social attitudes around life insurance 41:33 - Will repugnance fade for paid organ donations as it did for life insurance? 45:31 - Have the agency problems behind insurance been fully solved? 54:44 Good books on insurance and takeaways -
In this final installment of their series on the 1970s, Alex and Tyler turn to the social upheaval and crime wave that marked the decade as one of America’s most turbulent. They explore how rising crime rates transformed cities, fueled a national sense of fear, and led to far-reaching policy shifts, including mass incarceration and changes in urban policing. From the shocking statistics on homicide and stranger violence to the rise of serial killers and political bombings, they consider how the era’s unprecedented violence influenced American culture and policy. The conversation concludes with a caution against complacency, as they reflect on how fragile today’s low-crime environment may be—and what lessons from the past should guide us in preserving it.
Recorded July 17, 2024
Transcript, video, and links: https://www.mercatus.org/marginal-revolution-podcast/1970s-crime-wave
Stay connected:
Follow Alex on X: https://x.com/ATabarrok
Follow Tyler on X: https://x.com/tylercowen
See Alex and Tyler's recent posts on Marginal Revolution: https://marginalrevolution.com/
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In this second installment of their three-part series on the 1970s, Alex and Tyler unravel the economic and geopolitical forces behind the oil shocks that upended global global markets, triggered economic crises, and forced a dramatic reshaping of U.S. energy policy. Along the way, they debate whether the shocks ultimately led to long-term benefits like the rise of alternative energy and the fracking revolution, or if they merely prolonged economic pain. The conversation ranges from OPEC’s newfound power and the Yom Kippur War’s role in reshaping oil markets to broader questions about how shocks like these influence policy in the long-term. They close by reflecting on how the policy failures of the 1970s paved the way for Milton Friedman’s rise to prominence, and why his ideas—born from an era of rampant inflation and misguided price controls—remain crucial for understanding today’s economic challenges.
Read a full transcript enhanced with helpful links, or watch on YouTube.
Recorded July 17th, 2024
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Alex and Tyler share their predictions for the upcoming Nobel Prize in economics, considering potential winners like Michael Woodford for monetary theory, Susan Athey for her bringing machine learning , and Ariel Pakes for industrial organization. They reflect on overlooked economists such as Robert Barro, Richard Posner, Gordon Tullock, Armen Alchian, and Anthony Downs, while also highlighting the importance of dataset creators, including John Haltiwanger, Steven Davis, and the creators of the Penn World Table. They also explore non-traditional picks like Vitalik Buterin for his contributions to crypto, while calling out some questionable past winners.
If you love speculating about who deserves a Nobel—or can’t resist reminding everyone the economics prize technically isn't one—this is your episode.
Read a full transcript enhanced with helpful links, or watch on YouTube.
Recorded Sep 19th, 2024
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Welcome The Marginal Revolution Podcast! In the Season 1 premiere, Alex and Tyler kick off a 3-part series on the 1970s by exploring the decade's defining economic challenge: rampant inflation. They debate the factors behind the inflationary surge, from Keynesian spending policies to the collapse of Bretton Woods to contentious Fed policies. They end by drawing parallels to modern times, questioning why inflation in the 2020s has been curbed with less economic pain. Prepare for a lively discussion and a dash of economist-bashing along the way!
Read a full transcript enhanced with helpful links, or watch the full video.
Recorded July 17th, 2024
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See Alex and Tyler's recent posts on Marginal Revolution
