PioneersofFinancialEconomics

GeoffreyPoitras,SimonFraserUniversityFranckJovanovic,UniversitéduQuébecMontreal汽車防盜器1HES/AFANewOrleans,Jan.4,2008FinanceinAntiquityFinancialTransactions–involvingthefuturepaymentforloansofrealgoods–likelypredatetheuseofcommonlanguageEarliestexamplesofwrittenlanguage–theSumeriancuneiformtablets--dealwithfinancialtransactionsCodeofHammurabi(circa1750BC/BCE)hadexplicitandharshpenaltiesforloandefaults2HES/AFANewOrleans,Jan.4,2008FinanceinMedievalTimesReligiousrestrictionsonfinancialactivities–especiallypaymentofinterestonmoneyloansandcompensationforriskbearingEducationofmerchantsinfinancetookplacelargelyoutsidetheChurchdominateduniversitiesin‘reckoningschools’--theTrevisoArithmetic(1478)

wasatextforsuchschools.Compoundinterestcalculationswereused,ifnotadmittedto,anddoubleentrybookkeepingwaspopularizedbyFraLucaPacioli(1445-1514?)3HES/AFANewOrleans,Jan.4,2008FraLucaPacioli4HES/AFANewOrleans,Jan.4,2008FinanceinArtAristotelianteachingswhichdominatedscholastichumanismoftheChurchviewedbusinessactivitiesasbanal–reflectedinlackofattentiontobusinessthemesinArtfromtheReformationtotheEnlightenment15thand16thC.woodcutsoffinancialactivitiesfromSwetz(1987)paleincomparisontoDurer’sFourHorsemen…(1498)Untilthe18thC.,Europeanartistswereconcernedwithreligiousthemes–e.g.,Rembrandt(1633)toPannini(1750)with‘JesusThrowingouttheMoneyLenders’5HES/AFANewOrleans,Jan.4,2008FinanceinLiteratureShakespeare’sMerchantofVenice(1600)–immortalizedShylockJosephdelaVegaConfusiondeConfusiones(1688)–writteninSpanishbyaPortugueseJewishémigrélivinginAmsterdam.JonathanSwift,Gulliver’sTravels(1726)andTheBubble(1721),thefirsttwolines:“YewisePhilosophersexplain,WhatMagickmakesourMoneyRise?”ToSwift,IsaacNewtonwasaPhilosopher6HES/AFANewOrleans,Jan.4,2008TheEarlyHistoryofFinancialEconomicsWheretostartthehistory?Whatisfinancialeconomics?SophisticatedpricingformulaeforfinancialsecuritiesdevelopedbeforeAdamSmith(1723-1790)wasbornBuildingonworkofChristianHuygens(1620-1699),JandeWitt(1625-1672)solvedthepriceforalifeannuity7HES/AFANewOrleans,Jan.4,2008DasNeuAdamSmithProblem?8HES/AFANewOrleans,Jan.4,2008PricingofLifeAnnuitiesThetotalnumberofannuitiessoldonalifestartingatyearxisx

xequalsthesumofdx+dx+1+......+dw-1wherediisthenumberofannuitieswhichterminateinperiodiduetothedeathofannuitantnomineesinthathalfyeardi=0forxw.Taking

x+ttobethenumberofnominees,startinginyearxsurvivinginperiodx+t,itfollowsthat:dx+t=x+t-x+t+1andthattheprobabilityofdeathinanygivenhalfyearjis(dx+j

/x).9HES/AFANewOrleans,Jan.4,2008FromE.HalleytoA.deMoivreHalley(1693)isafoundingworkofactuarialscience,demographyandfinancialeconomics.Histabularsolutiontothelifeannuityvaluewas“theshortResultofanotordinarynumberofArithmeticalOperations”AbrahamdeMoivre(1667-1754),agiantinmathematicalstatistics,refinedandsubstantivelyextendedthesolutiontothelifeannuityvaluationproblem.Assumingarithmeticallydecliningsurvivalprobabilities,deMoivreshowedthatthevalueofalifeannuity(E[An])

canbecloselyapproximatedbytheformula:10HES/AFANewOrleans,Jan.4,2008TheGrowthofStockTradingInitialtradingin(joint)stockusuallytracedbackto1602withtheVOC(DutchEastIndiaCompany)inAmsterdamrecountedindelaVega(1688)limitednumberofsecuritiestradedDramaticemergenceofstocktradinginEnglandstartingin1690’sSouthSeaBubbleandMississippiScheme(1719-1721)foundingofLondonStockExchangebuildingin1773Emergenceof‘oldFinance’withThomasMortimerEverymanhisOwnBroker(1761)11HES/AFANewOrleans,Jan.4,2008TheReverendRichardPrice(1723-91)A‘dissenting’(non-Anglican)EnglishministerIntellectualgiantofthe18thC.–ObservationsonReversionaryPayments(1776)thefoundingworkofmoderninsurancemathematics–tookmathematicalcontributionsofdeMoivreandappliedtoproblemsofinsuranceandsocialsecuritydesign–‘fatherofmodernpublicpensionplans’–thefirstactuary(attheEquitable)Essentialcontributionstopoliticalscience(‘Givemelibertyorgivemedeath’),mathematicalstatistics(responsibleforpost-humuspublicationofBayesTheorem),philosophy(moralpragmatism)andreligiousstudies(useofBayestheoremagainstDavidHume’sargumentagainstmiracles).12HES/AFANewOrleans,Jan.4,2008PhilosophyofFinancialEconomicsJulesRegnault(1834-1894)andthe‘socialphysics’projectfromAdolphQuetelet(1796-1874)HenriLefèvre(1827-1885)andthe‘unityofscience’projectfromAugusteComte(1798-1857)13HES/AFANewOrleans,Jan.4,2008HenriLefèvre’sanalogiesbetweenfinancialmarketsandhumanbodyStockmarkets(heart)Government(brain)Speculation(nervoussystem)Options(cardiovascularvalve)Goodsandservices(blood)14HES/AFANewOrleans,Jan.4,2008EfficiencyfromthedivisionoflaborProducersWholesalersBrokersRetailersconsumersspotmarketsFutures+optionsFutures+spotmarketsFutures+spotmarketsspotmarkets15HES/AFANewOrleans,Jan.4,2008AgraphicmethodtoledfinancialmarketmoreefficientCalloptionwitha25cpremiumCombinationoftwooptions(callandput)16HES/AFANewOrleans,Jan.4,2008Exampleofcomplexstrategy17HES