Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iimahd.ernet.in

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Mon, 27 Dec 2010

Einstein Nobel futures contract

Last week FiveBooks carried an interview with well-known Einstein biographer, Walter Isaacson, reviewing his favourite five books on Einstein. Isaacson discusses a very interesting futures contract related to Einstein’s Nobel Prize:

This is a great piece of writing and of research about Einstein’s relationship with his first wife who served as his sounding-board in the miracle year of 1905 when he discovers special relativity and lays the groundwork for quantum theory. Mileva Maric was a physics student at Zurich Polytechnic, and when she and Einstein met they fell madly in love.

...

When the passionate relationship exploded and Einstein wanted a divorce he couldn’t afford the money Maric wanted to raise their two boys. So Einstein says to her that one day he’ll win the Nobel Prize for his 1905 work and if she gives him a divorce he’ll give her the prize money when he wins. She takes a week to calculate the odds and consult other scientists, but she is a good scientist herself and she takes the bet. He didn’t win until 1921 but he did give her the money and she bought three apartment buildings in Zurich.

I was aware that Einstein gave the prize money to his first wife, but did not know that there was actually a futures contract (or more precisely a forward contract). Wikipedia has more details about the transaction. As I think carefully about it, this futures contract is actually quite hard to value:

Despite all these difficulties, the fact is that Mileva Maric was able to arrive at a reasonable valuation and conclude the negotiations. It is interesting to read that the information asymmetry was resolved not only by her own competence as a physicist, but also by consulting other scientists. This is similar to the use of rating agencies in debt markets.

In the real world, instruments do end up getting valued despite the theoretical difficulties involved. One of Einstein’s famous quotes is probably relevant here with suitable modifications: “God does not care about mathematical difficulties, he integrates empirically.”

Posted at 18:02 on Mon, 27 Dec 2010     View/Post Comments (8)     permanent link




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