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

Primordial Seeds 
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would have us believe. Indeed, most of the day-to-day traders I’ve spo-
ken with find the idea laughable.
But even if markets aren’t always efficient, as they surely aren’t, and 
even if sometimes prices get quite far out of whack with the values 
of the goods being traded, as they surely do, the efficient market hy-
pothesis offers a foothold for anyone trying to figure out how mar-
kets work. It’s an assumption, an idealization. A good analogy is high 
school physics, which often takes place in a world with no friction 
and no gravity. of course, there’s no such world. But a few simplifying 
assumptions can go a long way toward making an otherwise intrac-
table problem solvable — and once you solve the simplified problem, 
you can begin to ask how much damage your simplifying assumptions 
do. If you want to understand what happens when two hockey pucks 
bump into each other on an ice rink, assuming there’s no friction won’t 
get you into too much trouble. on the other hand, assuming there’s no 
friction when you fall off a bicycle could lead to some nasty scrapes. 
the situation is the same when you try to model financial markets: 
Bachelier begins by assuming something like the efficient market hy-
pothesis, and he makes amazing headway. the next step, which Bach-
elier left to later generations of people trying to understand finance, 
is to figure out when the assumption of market efficiency fails, and to 
come up with new ways to understand the market when it does.
It seems that Samuelson was the only recipient of Savage’s postcards 
who ever bothered to look Bachelier up. But Samuelson was impressed 
enough, and influential enough, to spread what he found. Bachelier’s 
writings on speculation became required reading among Samuelson’s 
students at MIt, who, in turn, took Bachelier to the far corners of the 
world. Bachelier was officially canonized in 1964, when Paul cootner, 
a colleague of Samuelson’s at MIt, included an english translation of 
Bachelier’s thesis as the first essay in an edited volume called The Ran-
dom Character of Stock Market Prices. By the time cootner’s collection 
was published, the random walk hypothesis had been ventured inde-
pendently and improved upon by a number of people, but cootner 
was unambiguous in assigning full credit for the idea to Bachelier. In 
cootner’s words, “So outstanding is [Bachelier’s] work that we can say 

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that the study of speculative prices has its moment of glory at its mo-
ment of conception.”
In many ways, Samuelson was the ideal person to discover Bach-
elier and to effectively spread his ideas. Samuelson proved to be one 
of the most influential economists of the twentieth century. He won 
the second nobel Prize in economics, in 1970, for “raising the level of 
analysis in economic science,” the prize committee’s code for “turning 
economics into a mathematical discipline.” Indeed, although he stud-
ied economics both as an undergraduate at the University of chicago 
and as a graduate student at Harvard, he was deeply influenced by a 
mathematical physicist and statistician named e. B. Wilson. Samuel-
son met Wilson while still a graduate student. At the time, Wilson was 
a professor of “vital statistics” at the Harvard School of Public Health, 
but he had spent the first twenty years of his career as a physicist and 
engineer at MIt. Wilson had been the last student of J. W. Gibbs, the 
first great American mathematical physicist — indeed, the first recipi-
ent of an American Phd in engineering, in 1863 from Yale. Gibbs is 
most famous for having helped lay the foundations of thermodynam-
ics and statistical mechanics, which attempt to explain the behavior 
of ordinary objects like tubs of water and car engines in terms of their 
microscopic parts.
through Wilson, Samuelson became a disciple of the Gibbsian tra-
dition. His dissertation, which he wrote in 1940, was an attempt to 
rewrite economics in the language of mathematics, borrowing exten-
sively from Gibbs’s ideas about statistical thermodynamics. one of the 
central aims of thermodynamics is to offer a description of how the 
behavior of particles, the small constituents of ordinary matter, can be 
aggregated to describe larger-scale objects. A major part of this analy-
sis is identifying variables like temperature or pressure that don’t make 
sense with regard to individual particles but can nonetheless be used 
to characterize their collective behavior. Samuelson pointed out that 
economics can be thought of in essentially the same way: an economy 
is built out of people going around making ordinary economic deci-
sions. the trick to understanding large-scale economics — macroeco-
nomics — is to try to identify variables that characterize the economy 
as a whole — the inflation rate, for instance — and then work out the 
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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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