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

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 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 theory

Recorded 4/12/2024

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 line

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/

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