Forerunners of Modern Financial Economics

Forerunners of Modern Financial Economics

A Random Walk in the History of Economic Thought, 1900–1950

Donald R. Stabile

The economists who began using statistics to analyze financial markets in the 1950s have been credited with revolutionizing the scholarship of investing and with inaugurating modern financial economics. By examining the work of economists who used statistics to analyze financial markets before 1950, Donald Stabile provides evidence about the forerunners of modern financial economics.

Chapter 1: Introduction: Finance, Risk, and Statistics

Donald R. Stabile

Subjects: economics and finance, economic psychology, financial economics and regulation, history of economic thought

Extract

Starting in the 1950s, a small group of economists began using the methods of statistics to study financial markets. Their path-breaking work revolutionized the study of investing and created a new field of financial economics with the simple idea that risk can be measured with statistical methods. Every revolution has antecedents, however, and this book will study the forerunners of modern financial economics. Financial economics has not been considered an important topic in the history of economic thought, with a few exceptions (Crockett 1980; Markowitz 1999; Miller 1999; Poitras 2000; and Rubinstein 2003). In this book, I am going to focus on a group of economists who used the methods of probability theory and statistics to analyze financial markets in the period before 1950. These economic thinkers were explorers, seeking places for the paths to be started. Along the way, they found resistance to their ideas among holders of traditional views of finance and economics. Those skeptics regarding the application of statistics to finance will also be part of the story told in this book. MODERN FINANCIAL ECONOMICS Before the development of modern financial economics, investors in financial securities followed a number of strategies in making their decisions. Technical analysis and its companion approach the Dow Theory, which dates back to the 1890s (both will be described more fully in Chapter 6), use charts of stock prices in order to find trends investors could use to buy on an upswing and sell before a downswing (technical analysis) or looks for...