The Physics of Wall Street: a brief History of Predicting the Unpredictable

Swimming Upstream 
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osborne presented his research with an engineer’s confidence. He 
published “Brownian Motion in the Stock Market” in a journal called 
Operations Research. It was not an economics journal, but enough 
economists and economically minded mathematicians read it that os-
borne’s research quickly garnered attention. Some of this was positive, 
but it was not unambiguously so. Indeed, when osborne published 
his first paper on finance, he was unaware of Bachelier or Samuelson, 
or any of a handful of economists who had, in one way or another, 
anticipated the idea that stock prices are random. Many economists 
pointed out his lack of originality — so many that osborne was forced 
to publish a second paper just a few months after the first, in which he 
presented a brief history of the idea that markets are random, giving 
full credit to Bachelier for coming up with the idea first, but also de-
fending his own formulation.
osborne stood his ground, and rightfully so. despite connections 
with earlier work, his papers on randomness in the stock market were 
sufficiently original that Samuelson later gave him credit for develop-
ing the modern version of the random walk hypothesis at the same 
time that Samuelson and his students were working on it. More im-
portantly still, osborne approached his model as a true empirical 
scientist, trained to handle data. He developed and applied a series 
of statistical tests designed to corroborate his version of the Brown-
ian motion model. other researchers, such as the statistician Maurice 
Kendall, who in 1953 showed that stock prices were as likely to go up 
as to go down, had done empirical work on the randomness of stock 
prices. But osborne was the first to demonstrate the importance of 
the log-normal distribution to markets. He was also the first to clearly 
articulate a model for how stock market randomness worked and how 
it could be used to derive probabilities for future prices (and rates of 
return), all while providing convincing data that this particular model 
of the markets captured how markets really behave. And despite the 
early reservations about osborne’s originality, economists soon recog-
nized that he brought theory and evidence together in a way that sim-
ply hadn’t been done before. When Paul cootner at MIt collected the 
most important papers on the random walk hypothesis for his 1964 
volume — the volume that contained the first english translation of 

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Bachelier’s thesis—he included two papers by osborne. one was the 
1959 paper on Brownian motion; the other was a paper that expanded 
on and generalized the earlier work.
By the time osborne began thinking about markets, he had published 
fifteen papers in physics and related topics. He had held a permanent 
position at the nrL for a decade and a half and had rubbed shoul-
ders with some of the best physicists of the mid-twentieth century, as 
both colleague and correspondent. And yet, osborne still didn’t have 
a Phd, in physics or in anything else. He had left grad school in 1941 
to join the nrL without finishing his degree. on one level, a doctorate 
didn’t mean much for a person like osborne; he had a fulfilling career 
in physics even without a doctorate, and no one seemed to doubt his 
credentials as a researcher. His work spoke for itself. He decided, how-
ever, during the mid-fifties, that he wanted to finish his degree, at least 
in part because it would guarantee him a promotion at the nrL. And 
so osborne followed many of his colleagues at the nrL to the physics 
department at the University of Maryland. there he could finish his 
graduate work without giving up his position at the lab.
osborne’s first attempt at a dissertation was on a topic in astronomy. 
(Usually graduate students write a dissertation proposal. osborne ig-
nored this step. He wrote entire dissertations.) He brought the dis-
sertation to the physics department head, who promptly rejected it 
because too many people were interested in the topic and osborne’s 
research wasn’t original enough. So osborne wrote a second disserta-
tion, based on his research on the stock market. the department head 
rejected this, too, on the grounds that it wasn’t physics. As osborne 
would later put it, “You are supposed to do original research, but if 
you get too original, they don’t know what’s going on.” Stock market 
research may have been acceptable work for a physicist within the gov-
ernment research community, where applied work of any stripe was 
highly valued. But it still wasn’t “physics” from the perspective of a tra-
ditional academic department. And so, though osborne was received 
more favorably by the scientific community than Bachelier, he was still 
something of a maverick for working on financial modeling.
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t h e p h y s i c s o f wa l l s t r e e t

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