Einstein and Finance

I attended the CFA Society Malaysia Career Day 2016 at Aloft KL Sentral on Sunday 28-Aug-2016.  It was a great event.  There were panel discussions by financial industry leaders, exhibition booths by investment banks and research houses.  I enjoyed the event as it gave me the opportunity to talk to many finance experts, and most of them were very friendly and approachable.

During the events, many were curious why a R&D engineer like me would like to switch to finance field.  When I told them I was inspired by Albert Einstein, their reaction was – “Huh?!”.  This prompted me to write this article.  No technical ingredient today, just some history and thoughts.

As a physics graduate, my idol is Albert Einstein.  During the time when I was working on my Master thesis, I fully utilized the database to look for works by Einstein, asides from my thesis research area.  One day, while searching on the internet, I came across an article where it claimed that Einstein once said that the greatest man’s invention was “Compounding Interest”.  Curiosity kills the cat.  Ever since then, I started to look for more information about finance.  After submitting my master thesis, I decided to enroll in the CFA program and managed to pass all three levels of the exams.

But, did Einstein really said that the greatest man’s invention was “Compounding Interest?  Was the source of the citation reliable?  Over the years, I could not find any solid proof that Einstein made that claim personally.  There were many versions of claim floating around in the internet.  Every piece sounded very genuine but none of them were legitimate.  Highly likely, it could be just an urban legend.

Nevertheless, there is really a linkage between Einstein and finance.  Not on compounding interest but on Stochastic Process.  In finance, the characteristic of how an asset evolved randomly is called a stochastic process.  It was first introduced by a French mathematician, Louis Bacheliar, in his PhD thesis “Theory of Speculation” in 1900.  But his work was not widely recognized at that time due to some minor flaws, which were later found to be acceptable.  Later in 1905, Einstein independently (unaware of Bachelier’s work) proposed a similar mathematical model to explain the random movement of atoms (link).  Einstein’s work attracted other scientists to further improve the stochastic process model and eventually it become a well-established foundation for many financial models such as the Black-Scholes model.

Lastly, did Einstein make any good money in stock market?  There are websites claimed that Einstein lost his Nobel Prize money in 1929 crash.  But again, no solid citation on this claim.  However, there was one great Physicist lost a small fortune in a stock bubble.  Guess who?