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2 U.S. professors win Nobel prize for economics

Two American economists won the Nobel prize for economics Tuesday for their ground-breaking work on stock options and other derivatives that have helped fuel the 1990s' bull market.

Professors Robert C. Merton of Harvard University and Myron S. Scholes of Stanford University developed "a pioneering formula for the valuation of stock options" that thousands of traders and investors now use, the Royal Swedish Academy of Sciences said."If you ask what idea in the last 50 or 60 years coming from economic research has had the biggest impact on the world, this is it," said Avainash Dixit, an economics professor at Princeton. "It's changed the way the financial markets allocate risks among different types of investors."

"I'm in a state of shock," said Merton, who was informed shortly before 6 a.m. as he was leaving his Cambridge, Mass., home for a flight to New York. "I'm thrilled and extraordinarily honored and very, very surprised."

Merton said the work that led to the prize has evolved from just stock options and can be applied to the risks of bonds and corporate bonds, paying home mortgages early, evaluating student loan guarantees and production flexibility.

Merton, 53, said he wasn't sure what he would do with his share of the prize money.

Speaking from Monterey, Calif., where he was scheduled for a speaking engagement, Scholes said: "I was ecstatic and really surprised and pleased and all the other words one can say."

He said he learned of the prize from his brother, who heard it on the radio.

Scholes, 56, is currently a professor emeritus at Stanford. For the last few years, he and Merton have been partners in Long-Term Capital Management in Greenwich, Conn., where he lives.

In purchasing derivatives, investors are not buying a stock but a financial instrument connected to a stock. For instance, purchasing a so-called "call option" gives the purchaser the right to purchase a stock at a certain price.

Because the derivatives are not stocks, their value is somewhat abstract. They are used by sophisticated investors to insulate themselves from losses due to sudden market shifts.