18 ATaleofTwoMarkets
Bachelier’s wor kwas not widely noticed when it was published,
perhaps because the mathematical parts of it preceded by five years
Einstein’s famous wor kon the random motion of colliding gas mol-
ecules. Einstein “discovered” the equation that describes the phe-
nomenon of random molecular motion, known as Brownian motion
(after the Scottish botanist Robert Brown, who first observed it),
which was precisely the equation Bachelier developed to describe
price behavior in financial markets.
Although the mathematical properties Bachelier employed were
of direct and immediate interest to physicists and mathematicians
(including Einstein and his intellectual progeny), economists paid
little attention to the subject until the middle of the century. Indeed,
virtually no studies before the early 1950s made any reference to
Bachelier’s wor kor to the theory of random processes in financial
markets.
Maurice Kendall is frequently credited with bringing the random
wal kmodel to the attention of economists in the early 1950s. Bach-
elier’s wor kitself, however, was not “discovered” by economists until
they stumbled across it in the mid-1950s.
While rummaging through a library, Leonard Savage of the Uni-
versity of Chicago happened upon a small boo kby Bachelier pub-
lished in 1914. He sent postcards to his economist friends asking if
they had “ever heard of this guy.” Paul Samuelson could not find the
boo kin MIT’s library but did locate and then read a copy of Bach-
elier’s doctoral thesis. Just after Samuelson’s discovery in 1959, the
random wal kmodel became a very popular area of research.
Bachelier’s long obscurity was also due to a widely reported 1937
study by the renowned economist Alfred Cowles concluding that
stoc kprices did move in a predictable way. This study shut down
research on the random wal kmodel for decades until in 1960 the
Stanford professor Holbrook Working discovered a mistake in it.
Cowles then corrected the mistake, and his revised study supported
the random wal kmodel.
SIMPLICITY
Once Samuelson and his colleagues rediscovered Bachelier, they also
had the great fortune of being able to harness his insights on a large
scale with the advent of the computer age and the widespread avail-
ability at universities and research foundations of high-speed com-