"How the eggheads cracked", The New York Times Magazine, January 24, 1999, by Michael Lewis (author of Liar's Poker) begins on p.24. This article is about the rise and fall of Long Term Capital Management, which included Nobelists Merton and Scholes on the board.
Excerpts:
"But at that moment of panic [referring to October 1987, at Salomon Brothers], the young professors did not fully appreciate their own powers. All their well-thought out strategies, which had yielded them profits of perhaps $200 million over the first 10 months of 1987, wilted that October day in the heat of other people's madness. They lost at least $120 million...Two years before they were being paid $29000 to teach Finance 101 to undergrads. Now they lost $120 million...that belonged in part to some very large, very hairy men. They were unnerved...until Merriwether told them to pick their two or three most promising trades and triple them.
"They did it, of course...But ... the young professors weren't happy making money unless they could explain to themselves why they were making money... They discovered the reason: everyone else was confused. Salomon's own bond trader... Years later it would be difficult for them to recapture the thrill of the moment and dozens of others like it. It was if they had been granted a more evolved set of senses... Three weeks after the 1987 crash, they cashed out... with a profit of $50 million. All in all, the bets they placed in ... one of the greatest Wall Street panics ...made them more money than any bets they had ever made, perhaps $150 million altogether.
"In the five years after the 1987 crash, Meriwether and the young professors made billions for Salomon and tens of millions for themselves.
"Deep down, Hans and I shared a dirty little secret: we couldn't keep up with the young professors. We belonged to a new semi-informed breed who could pass as experts on financial complexity without possessing true understanding... Hans was one of those people I might have become had I remained on Wall Street... I heard that Salomon Brothers had paid Hans a bonus of $28million...By the end of 1994, Hans left Salomon to become a partner in Long Term Capital Management's London office..."
"The new science of finance", American Scientist, May-June 1999 (vol87), p. 256-263
"A calculus of risk", Scientific American, May 1998 (vol278), p.92-97
Mathematica in Education and Research in the mid-late 1990s had numerous articles on this topic
Books:
Investment Science, D. Luenberger, Oxford University Press, 1998
The Mathematics of Financial Derivatives, P. Wilmott, S. Howison, and J. Dewynne, Cambridge University Press, 1995
The Econometrics of Financial Markets, J. Campbell, A. Lo, and A. MacKinlay, Princeton University Press, 1997
Mathematical models of financial derivatives, Y. Kwok, Springer, 1998