2/12/13 - the difficulty of gaining acceptance for new ideas

In today's selection -- too often, new theories that ultimately changed the world have not had easy acceptance. And so it was with the theory of Louis Bachelier that probability theory could be used to understand financial markets, a theory that underpins most market analysis today. Bachelier was a quiet young Frenchman with a fascination for mathematical chance equations who aspired to a professorship in mathematics, when family misfortune instead led him to a stint in the trading pits of the nascent Paris Bourse:

"Despite his fascination with chance, Louis Bachelier never had much luck in life. His work included seminal contributions to physics, fi­nance, and mathematics, and yet he never made it past the fringes of academic respectability. Every time a bit of good fortune came his way it would slip from his fingers at the last moment. Born in 1870 in Le Havre, a bustling port town in the northwest of France, young Louis was a promising student. He excelled at mathematics in lycee (basi­cally, high school) and then earned his baccalaureat es sciences -- the equivalent of A-levels in Britain or a modern-day AP curriculum in the United States -- in October 1888. He had a strong enough record that he could likely have attended one of France's selective grandes ecoles, the French Ivy League, elite universities that served as prerequisites for life as a civil servant or intellectual. He came from a middle-class merchant family, populated by amateur scholars and artists. Attending a grande ecole would have opened intellectual and professional doors for Bachelier that had not been available to his parents or grandparents.

"But before Bachelier could even apply, both of his parents died. He was left with an unmarried older sister and a three-year-old brother to care for. For two years, Bachelier ran the family wine business, until he was drafted into military service in 1891. It was not until he was re­leased from the military, a year later, that Bachelier was able to return to his studies [and secured a position at the Bourse]. By the time he returned to academia, now in his early twenties and with no family back home to support him, his options were limited. Too old to attend a grande ecole, he enrolled at the Uni­versity of Paris, a far less prestigious choice.

"Still, some of the most brilliant minds in Paris served as faculty at the university -- it was one of the few universities in France where fac­ulty could devote themselves to research, rather than teaching -- and it was certainly possible to earn a first-rate education in the halls of the Sorbonne. ...

"And so it was that Bachelier wrote his [doctoral] thesis, finishing in 1900. The basic idea was that probability theory, the area of mathematics invented by Cardano, Pascal, and Fermat in the sixteenth and seven­teenth centuries, could be used to understand financial markets. In other words, one could imagine a market as an enormous game of chance. Of course, it is now commonplace to compare stock markets to casinos, but this is only testament to the power of Bachelier's idea.

"By any intellectual standard, Bachelier's thesis was an enormous success -- and it seems that, despite what happened next, Bachelier knew as much. Professionally, however, it was a disaster. The problem was the audience. Bachelier was at the leading edge of a coming revolu­tion -- after all, he had just invented mathematical finance -- with the sad consequence that none of his contemporaries were in a position to properly appreciate what he had done. Instead of a community of like-minded scholars, Bachelier was evaluated by mathematicians and mathematically oriented physicists. ... The general percep­tion among mathematicians was that mathematics was just emerging from a crisis that had begun to take shape around 1860. During this pe­riod many well-known theorems were shown to contain errors, which led mathematicians to fret that the foundation of their discipline was crumbling. ... The idea of bringing mathematics into a new field, and worse, of using intuitions from finance to drive the development of new mathematics, was abhorrent and terrifying. ...

"Bachelier's dissertation received a grade of honorable, and not the [necessary] tres honorable. The commit­tee's report, written by [his advisor, the esteemed Henri] Poincare, reflected Poincares deep appreciation of Bachelier's work, both for the new mathematics and for its deep insights into the workings of financial markets. But it was impossible to grant the highest grade to a mathematics dissertation that, by the standards of the day, was not on a topic in mathematics. And with­out a grade of tres honorable on his dissertation, Bachelier's prospects as a professional mathematician vanished."


James Owen Weatherall


The Physics of Wall Street


Houghton Mifflin Harcourt


Copyright 2013 by James Owen Weatherall


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