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 3: Irving Fisher and the Mathematics of Risk

Donald R. Stabile

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


The first stock market in the United States was formed in May 1792, when 24 brokers met under a buttonwood tree to sign an agreement to establish a central location at Wall Street for the trading of investment securities. At the time it was formed, the chief securities traded were US government bonds and bank stocks. In 1817, brokers participating in the market formally established the New York Stock and Exchange Board: its name was change to the New York Stock Exchange (NYSE) in 1863. As the US economy expanded, railroad companies grew in size and scope, and their shares began being traded on the Exchange. In the post-Civil War era, the US economy underwent a significant transformation as corporations manufacturing with the methods of mass production began to sell in national markets. These corporations replaced the small family-owned firms that had constituted most of the business community prior to this time. In 1893, railroad stocks still dominated the NYSE. The Wall Street Journal had only recently begun publishing. Its editor, Charles Dow, also created the index of stocks that now bears his name along with that of his partner, Edward Jones. Dow also developed a theory for predicting stock prices using trends that he thought would continue until the market itself sent a signal, through a disruptive pattern indicating the trend was ending. Dow also predicted in 1892 that the ‘industrial market’ would become ‘the greatest speculative market’ of the United States (Bernstein 1992, p. 27). This prediction proved...

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