Three “Failures” in Financial Markets

“Statistics are like a bikini. What they reveal is suggestive, but what they conceal is vital” – Aaron Levenstein

On the 29 of March 1900 at the Sorbonne in Paris a young Ph.D. student was defending his doctoral dissertation titled “The Theory of Speculation”. It was a mathematical treatment of the observed fluctuations of French government bonds and their options. The main conclusions of the study were that:

1. there are no discernible trends in the market
2. the market has absolutely no memory of what it has done in the past
3. the difference of the logged returns are normally distributed

To this date these results still stand as the null hypothesis of modern finance and economics.

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