Honoring Founding Fathers of Modern Finance Economics.
In science it isn't always a case of asking, "What have you done for us lately?" It becomes a matter of "The King is dead. Long live the new King or Queen."
Fair enough. Max Planck got it right when he wrote: "Science advances funeral by funeral." Nonetheless, we scholars all do stand on the shoulders of giants. On this occasion when we make toasts to Sharpes and Modiglianis and Markowitzes--and to Fischer Blacks and Myron Scholeses and Robert Mertons--I want to say some informed words about our teachers and uncles, the pioneers upon whose work all my great contemporaries needed to use in carrying the flag of science steps forward toward the Holy Grail at the North Pole.
Therefore, I have invented a new Nobel Prize. It did not begin 30 years ago in 1969 when the Bank of Sweden, to celebrate its 300th Anniversary, set apart a capital sum to fund the economics Nobel Prize alongside those prizes from Alfred Nobel's will dedicated to Physics, Chemistry, Physiology, and Medicine, and also to Literature and Peace. My new Prize, call it the Samuelson-Nobel Prize, got set up around 1950 out of the undeserved jackpot from my bestselling Economics textbook.
Who got the first Samuelson Prize? Of course it went to Louis Bachelier, the Abraham of our finance line, still alive in 1950 but with a 1900 University of Paris classic thesis not yet discovered by the economics fraternity. From 1900 Bachelier to 1970 Robert Merton was just one little step: but how gigantic that little step is was known only to Norbert Wiener and the Japanese mathematician Kiyoshi Ito. In those pre-inflation days the prize was only $50,000, but invested judiciously in the S&P Index and in puts and calls, the Bachelier heirs must now be in the Fortune 400 Billionaire category.
Second as a prizewinner in finance came an unsung hero Holbrook Working at the Stanford Food Institute. In the SFI Wheat Studies, from 1920 to 1950, Working discovered the random walk in grain futures and laid down the theory of hedging and rational intertemporal guidance from competitive futures markets.
Belatedly, for a deserved third prize in finance, came the tycoon Alfred Cowles III. While being treated for tuberculosis in the Rocky Mountains, Cowles began to test statistically the efficiency of speculative markets. He discovered that the best of 17 market forecasting methods did better than the worst; but using proper statistical tests of significance, Cowles discovered that 17 monkeys typing randomly in the British Museum would have their best contestant do better than the rest in the same non-significant way that the market forecasters did. The Dow Theory of Markets, which beat out the other methods from 1900 to 1937, after 1937 never did perform very well at all. Cowles gave his prize money to Yale University: Harvard, watch out. Cowles was a double-threat team player. It was he who constructed the precursor of the S&P 500 Index and the rest is history.
By luck I have won many prizes. You might put me in some top 20. After us come the next 40. I once did a serious study of those who almost won a Pulitzer Prize, a J.B. Clark Medal, a Society of Fellows appointment at Harvard and all that jazz. Believe me it was a humbling finding that the average quality of the scholars was essentially as high in the bottom half of the 60 as in the top 20.
Drink a toast here to Harry Roberts, to Richard Musgrave and Evsey Domar, to Irwin Friend, to Benoit Mandelbrot and Steven Ross and Eugene Fama and to the young Belgian from Toulouse, Christian Gollier, who in one banner year wrote a dozen superlative papers.
Finance theory is a jewel in the crown of economics. It is a new jewel. One lifetime--my own lifetime-covers its birth and its development. Along the way certain elders in our guild protested Stockholm's recognizing finance. As Max Planck hinted, it was they and not Stockholm who were wrong. No sector of economics so nicely connects up elegance of analysis with empirical verification of market behavior as does modern finance theory.
And as Al Jolson used to say, "You ain't seen nothing yet." The better is still to come. So take your vitamins and cut out your hydrogenated fats so as to be in on the further creation of this lusty dynamic science of finance.
(*.) Paul Samuelson is a Professor Emeritus at Massachusetts Institute of Technology.
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|Author:||Samuelson, Paul A.|
|Article Type:||Brief Article|
|Date:||Sep 22, 2000|
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