If you asked educated people to name a mathematician whose work has had a major impact, they might say Isaac Newton or Alan Turing, or perhaps the “Prince of Mathematicians”, Carl Friedrich Gauss. The chances are, no would say Louis Bachelier.
Yet Bachelier helped to transform our understanding of how investing and the financial markets work.
Born in the port city of Le Havre in northern France in 1870, Louis Bachelier had a fairly unremarkable academic career. Severely affected by his experience of serving in the First World, he sadly didn’t fulfil his true academic potential in his lifetime.
Yet, shortly after Bachelier’s death, someone discovered his PhD thesis, Théorie de la Spéculation, and the work was shared with prominent economists. They included Paul Samuelson, who declared that Bachelier had been decades ahead of his time. Effectively, Bachelier had posited the so-called random walk theory more than 70 years before it was popularised by Burton Malkiel in his best-selling book, A Random Walk Down Wall Street.
Samuelson was one of at least five Nobel Prize winners who were influenced by Bachelier’s thesis, which is now widely acknowledged as one of the foundational works in the field of financial economics.
ROBIN POWELL tells the remarkable story of Louis Bachelier, and explains what investors today can learn from him, in his latest article for Index Fund Advisors.
Even if you aren’t interested in the stock market, it’s impossible to escape it. Market movements are reported daily in newspapers, and hourly in the broadcast media. There are whole TV channels devoted to relaying the latest ups and downs, and which particular stocks are either beating or lagging the rest of the market. There are also thousands of commentators on social media trying to make sense of what’s going on.
But what if I told you that the daily movements of markets and of individual stocks are completely irrelevant and tell us nothing of any value? What if prices move up and down in a totally random fashion? Extraordinary as it might seem given all the attention paid to the markets every day, both of those things are true.
We’ve known for a very long time that, unless you were privy to inside information, market movements were very hard to predict. “Even in the late 1800s,” writes the financial historian Mark Higgins in his new book, Investing in U.S. Financial History, “market efficiency was a formidable obstacle to outperformance. The famed stock operator Daniel Drew captured this sentiment when he reportedly commented, “To speckilate [sic] in Wall Street when you are no longer an insider, is like buying cows by candlelight.”
Then, in 1900, a French mathematical student named Louis Bachelier presented a PhD thesis that explained why, for all intents and purposes, it’s impossible to know in advance which stocks are going to go up or down from one day to the next.
READ THE FULL ARTICLE HERE
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