Einstein, Pollen, and Randomness

Observations from Dave

I often envy artists, and even those in real estate.  As someone who has spent a career in study of risk and financial strategy, the lack of tangible showpieces can be discouraging.  So perhaps because of that, I am drawn to stories that connect the work I do with this larger beautiful world.  I’ll offer one such story for those who can relate.

In 1827 a botanist named Robert Brown observed that pollen resting in a glass of water was actually moving.  It made no sense. For the better part of that century no one could explain why.

In 1900, Louis Bachelier modeled the movements in his doctoral thesis.  Interestingly, Mr. Bachelier was not interested in the random movements of pollen and water, or for that matter, movements of any particle suspended in a gas or liquid. But he thought this general idea was enticing for his true interests, which were in stock price prediction. So with that motivation, he introduced the concept of “random walk” that later pushed into Brownian motion in the 1960’s by Paul Samuelson.

Thanks to pollen, we use Brownian motions for option pricing, stock volatility, risk scenarios, etc. It is the cornerstone of Monte Carlo analysis and likely impacts your investment portfolio decisions more than you know.  For a finance geek like me, that's a good ending of the story.

Enter Albert Einstein.  A few years later in 1905, Einstein wasn't famous nor was he even a doctor in physics, just a patent clerk. Like Mr. Bachelier, Mr. Einstein was captivated by similar ideas as moving pollen in water.  He advanced it with his contribution on Brownian motion, offering evidence of atoms and he built predictive formulas offering the displacement of particles based on time, temp, size, etc. The idea of atoms and molecules was still controversial in 1905 and this paper cemented the theory and ushered Einstein into the good graces of the scientific community.

So perhaps without curious finance and risk quants, we wouldn't know about Albert Einstein.  …Okay, that’s probably going too far.  But it is nice to reflect how interconnected we are in business to God’s creation.  Just as theoretical physics attempts to offer the ‘how,’ those with forward-thinking decisions in business must also generate viewpoints based on limited observations.  These disciplines do intersect occasionally. 

But why was the pollen moving?  The pollen is huge relative to the water molecules. But these excitable water molecules are bouncing around randomly moving in all directions. As more on one side hit in unison, it may generate enough force to move the giant particle. What is produced is what business people know as a “random walk,” a bit like the up and down fluctuations of a stock in time.  For anyone thinking like an economist, you’ll recognize the parallel, “on one hand… on the other hand” arguments that dislodge asset prices to actually move.  What appears random really just may be competing forces, each occasionally having its way.  It’s not to say causality explains all but perhaps there’s a less clear distinction between the causal and the chaotic. 

Much of above was pieced together over years of learning, for which I have long forgotten the source. Sorry.  But I was reminded of the story by Walter Isaacson's biography of Albert Einstein.  Thanks Mr. Isaacson.

Isaacson, Walter. Einstein: His Life and Universe. Simon & Schuster, 2007.