ABSTRACT OF PAPER
Title: Which controversy mirrors the other? Econometrics and finance in the 1930’s
Author: Cot Annie L., Walter Christian
The controversy arising in the 1940s between the Cowles Commission and the National Bureau for Economic Research (NBER) about “measurement without theory” is nowadays well documented. But economic historiography never focused on the parallel controversy, which crossed the financial field during the same period. In the 1930s, the analytic description of stock market movements was the field of a huge controversy in which statistician analysts faced chartist analysts about the possible predictability of future prices. For the statisticians, following Cowles’ first works (1933, 1937), the market behaviour was totally unpredictable and the stock prices followed a random walk process – a stochastic process with independent and stationary increments, in other words a price process avoiding any idea of cycles, trends and predictability. Whereas, embedded in Dow’s theory (1930) of market waves, the chartists believed that some predictability was available, given the fact that a recognition of some specific cyclical patterns and clear trends was possible, based on Dow’s methodology, polished up by Gann’s approach of waves, and systematized by Elliott’s definitive compact treatment of multiple and entangled market waves. On the one hand, a new scientific view of stock market behaviours by a “measure without theory”, transforming the art of investing to a science of investment, paved the way for the future mathematical finance. One the other hand, an alchemical theory, rebirthing the Pythagorean numerological ratios without measurement to detect, in the chaotic behaviour of markets, the shadow of a hypothetic order, resisting any statistical approach of the financial world. For the first group, the spectrum of price variations was completely white (Samuelson, 1973) but no theory existed to explain this statistical phenomenon. For the second group, a white spectrum could not explain anything , due to the presence of strong persistence, hard trends and large cycles, exhibited in the Elliott’s waves charts. These two competitive schools of thoughts were irreconcilable until the 1980’s, when the irreconcilable conflict between pro and con stock market trends and reality of financial cycles vanished, due to a breakthrough in financial mathematics, with the generalization of random walks processes and martingale approaches of arbitraged prices. This new paradigm exploded with the 2008 financial crisis. The paper contains four parts. In the first part, we recall the origins of the conflict between the Cowles commission and NBER. The second part exhibits the same methodological debate in finance, between statisticians and chartists. The third part enters the issue of the debate -the notion of “trend” and “cycles” - and sketches the technical tools used to detect theses objects. The fourth part suggests to consider both economic theory and financial theory as “tooled” disciplines.
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