Scholes was born to a Jewish family on July 1, 1941 in Timmins, Ontario, where his family had moved during the Great Depression. In 1951 the family moved to Hamilton, Ontario. Scholes was a good student although fighting with impaired vision starting with his teens until finally getting an operation when he was twenty-six. Through his family, he became interested in economics early, as he helped with his uncles' businesses and his parents helped him open an account for investing in the stock market while he was in high school.

After his mother died from cancer, Scholes remained in Hamilton for undergraduate studies and earned a Bachelor's degree in economics from McMaster University in 1962. One of his professors at McMaster introduced him to the works of George Stigler and Milton Friedman, two University of Chicago economists who would later both win Nobel prizes in economics. After receiving his B.A. he decided to enroll in graduate studies in economics at the University of Chicago. Here, Scholes was a colleague with Michael Jensen and Richard Roll, and he had the opportunity to study with Eugene Fama and Merton Miller, researchers who were developing the relatively new field of financial economics. He earned his MBA at the Booth School of Business in 1964 and his Ph.D. in 1969 with a dissertation written under the supervision of Eugene Fama and Merton Miller.

In 1968, after finishing his dissertation, Scholes took an academic position at the MIT Sloan School of Management. Here he met Fischer Black, who was a consultant for Arthur D. Little at the time, and Robert C. Merton, who joined MIT in 1970. For the following years Scholes, Black and Merton undertook groundbreaking research in asset pricing, including the work on their famous option pricing model. At the same time, Scholes continued collaborating with Merton Miller and Michael Jensen. In 1973 he decided to move to the University of Chicago Booth School of Business, looking forward to work closely with Eugene Fama, Merton Miller and Fischer Black, who had taken his first academic position at Chicago in 1972 (although he moved two years later to MIT). While at Chicago, Scholes also started working closely with the Center for Research in Security Prices, helping to develop and analyze its famous database of high frequency stock market data.

In 1981 he moved to Stanford University, where he remained until he retired from teaching in 1996. Since then he holds the position of Frank E. Buck Professor of Finance Emeritus at Stanford. While at Stanford his research interest concentrated on the economics of investment banking and tax planning in corporate Finance.

In 1990 Scholes decided to get involved more directly with the financial markets. He went to Salomon Brothers as a special consultant, then becoming a managing Director and co-head of its fixed-income-derivative group. In 1994 Scholes joined several colleagues, including John Meriwether, the former vice-chairman and head of bond trading at Salomon Brothers, and his Future Nobel Prize co-winner Robert C. Merton, and co-founded a hedge fund called Long-Term Capital Management (LTCM). The fund, which started operations with $1 billion of investor capital, performed extremely well in the first years, realizing annualized returns of over 40%. However, following the 1997 Asian financial crisis and the 1998 Russian financial crisis the highly leveraged fund in 1998 lost $4.6 billion in less than four months and collapsed abrubtly, becoming one of the most prominent examples of risk potential in the investment industry.

In 1997 he shared the Nobel Prize in Economics with Robert C. Merton "for a new method to determine the value of derivatives". Fischer Black, who co-authored with them the work that was awarded, had died in 1995 and thus was not eligible for the prize.

LTCM brought legal problems for Scholes in 2005 in the case of Long-Term Capital Holdings v. United States. The firm's corporate structure and accounting had established an offshore tax shelter to avoid taxes on investment profits. Courts disallowed the firm's claim of $40 million in tax savings, finding it based on formal accounting losses of $106 million that represented no economic substance.

In 2012, he authored an article entitled 'Not All Growth Is Good' in The 4% Solution: Unleashing the Economic Growth America Needs, published by the George W. Bush Presidential Center.

Scholes is also chief investment strategist at Janus Henderson, a role he held at legacy firm Janus Capital Group since 2014. Janus Capital merged with Henderson Group in 2017 to form Janus Henderson. In this role, he leads the firm’s evolving asset allocation product development efforts and partners with the investment team contributing macro insights and quantitative analysis specific to hedging, risk management and disciplined portfolio construction. He also serves on the boards of the Chicago Mercantile Exchange and Dimensional Fund Advisors. Scholes is currently the chairman of the Board of Economic Advisers of Stamos Capital Partners.