Louis Bachelier’s “Theory of Speculation”

Louis Bachelier’s 1900 PhD thesis Théorie de la Spéculation introduced mathematical finance to the world and also provided a kind of agenda for probability theory and stochastic analysis for the next 65 years or so. The agenda was carried out by succession of the 20th century’s best mathematician and physicists, but the economic side of Bachelier’s work was completely ignored until it was taken up by Paul Samuelson in the 1960s. By that time the mathematics— which certainly was not developed with any view towards applications in economics—was in perfect shape to solve Samuelson’s problems, and quickly led to the Black-Scholes formula, the watershed event in financial economics. The aim of this talk is to give some account of this twin-track development, based on the discussion in the recent book Davis and Etheridge (2006). The text below consists of some abridged extracts from the book.

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