Most of you here are familiar with the Black-Scholes formula since it’s imbued in every possible textbook of corporate finance 101 under the sections of option pricing. The infamous black-scholes-merton formula was created by Nobel laureates (now unfortunately also blamed for the credit crunch) who used advanced calculus to build a closed form solutions on how to price options which are widely traded on the CBOE today. But most of you don’t know that the science behind options was created over 70 years before it came to practice by a man name Bachelier.
Louis Bachelier was born in Le Havre in 1870, and after education at secondary school in Caen he lost both his parents and had to enter the family business. It was during this period that he seems to have become familiar with the workings of financial markets. In 1900 at Sorbonne, Bachelier defended his thesis Théorie de la Spéculation(Theory of speculation) before Henri Poincaré (the famous mathematician who created the millennium problem labeled as the Poincare Conjecture). Although the concepts are now proudly celebrated as one of the greatest inventions in financial economics of all time, they didn’t impress Henri and he gave it less than a top mark, and called it not qualified to receive the highest honors. But he did mention it as ‘very interesting and original’.
Bachelier had hit upon two of the most important concepts of modern finance -- the random walk of securities prices and the pricing of market volatility over time. Five years later in 1905,Albert Einstein used the same diffusion equation to show that the random walk of small particles colliding with even smaller particles helps explain the atomic structure. Einstein was almost universally credited with a mathematical methodology that Bachelier had developed in his thesis and applied to derivatives markets.
In 1926 Bachelier tried to get back into the society of elite mathematicians, but was turned down on account of a critical report from Paul Lévy (1886-1971), then a professor at the prestigious École Polytechnique. However, Levy, a few years later, was apparently surprised to find other mathematicians citing Bachelier's work, so in 1931, Levy wrote a letter of apology to Bachelier and they were reconciled. But unfortunately, the tragedy behind the process was that regardless of their reconciliation, it was too late to fix the perceived problems around Bachelier’s work, and he failed to continue to build upon his work to advance what we know today as financial engineering.
Even with these sophisticated models at hand, we still are faced with the reality that even the best formulas to incorporate past and present conditions can’t predict the future. What Wall Street doesn’t understand is that regardless of whatever tools that mathematicians build, it’s how they are used that matter at the end.
I’ll leave it up to you to decide whether tools Bachelier built were used for good or bad, but as far as remembering mathematicians goes, Bachelier was a significant hero.
Interesting post, I'm going to look some more into him.
Very interesting
-Awkward use of "imbued."
-I don't think that many people blame Black or Scholes for the crisis (although they ought to blame Moody's for failing to understand the model). Where did you source this info? -Nobody "creates" science. Science is the product of empirical research (which also suggests that finance isn't a science, either). -Awkward use of "proudly." -The closing quotation mark at the end of the second paragraph should come after the period (not before). -Missed space after the comma in the second sentence of the third paragraph. -Most importantly: you failed to demonstrate that he is a "hero." Aside from intelligence or insight, what actual heroic qualities did he display?
WSO staff: either this paid contributor program needs to stop, or you need to start editing.
Clearly you have too much time on your hands if you find satisfaction in nitpicking typos and telling people that their articles are terrible. Believe it or not, most people actually enjoy reading these threads.
Just work in IB for a while and you'll get to know the itch that is caused by infinitesimally small mistakes.
It's not about calling out this particular post. It's about the paid content program, and a clear lack of quality control. I don't like reading shit.
Hey Sandhurst, I think it's unfair to call this shit. Sure it could have used some editing, but the majority of the bloggers are not paid and I found this one particularly interesting as it introduced me to a new interesting historic figure I had never heard of...
"Bachelier had hit upon two of the most important concepts of modern finance -- the random walk of securities prices and the pricing of market volatility over time" - I think that is pretty impressive.
If you feel you can write better, we're always testing out new bloggers to move our best into the prime time spots. You can e-mail WallStreetOasis.com>[email protected] to join the team and show us how it's done...if you're going to nitpick the grammatical errors of bloggers that are trying to help, then probably best if you just ignore the post and move on.
Thanks, Patrick
We appreciate criticism as we continually strive to improve, though I think you're a bit off base here so I want to clear up some things.
Our contributing authors (http://www.wallstreetoasis.com/forums/be-a-wall-street-oasis-contributi…) are not paid (all are volunteers). We do our best to select finance professionals who can write informative, helpful, and/or insightful posts.
Nitpicking such minute errors is fruitless. Take in the overall point of the post and maybe you'll learn something (as Patrick did). Writers we trust have the ability to post directly to the homepage and obviously Saturday evening I'm not sitting at my computer waiting for the post to go up so I can edit it. Major errors we definitely look for but we just don't have the manpower nor time to look out for every little typo (I may even have one or two on this comment, big deal) or "awkward use" of a word.
If you "dont like reading shit" then don't read the post. I really don't understand your logic here.
Like Patrick said, if you think you can do better please feel free and apply to be a contributing author, even on trial basis. Would be happy to explain it in more detail over the phone.
Don't take this as a personal attack; arguing about this here isn't going to do anyone any good, but just as an FYI, the contributing authors are not paid for writing.
For what it's worth, I owe you an apology. You wrote about an interesting subject, and I went after punctuation. I also didn't know that contributor content is unpaid. But that notwithstanding, I still crossed a line, and you didn't deserve it.
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