Friday, 24 August 2012

How did tubercolosis change the world of economics

When you think about factors which attribute to the development of finance, you usually think along the lines of education, security derivatives, advances in risk management and similar stuff. However, that is just one, the impersonal side of the story – while discussing about financial history, everybody forgets about TB, which lead to the creation of Cowles Foundation, which in turn mentored at least 10 Nobel Prize participants. Care to read more?
It all began in 1926...

Image from Wikipedia

The location

Our American readers must have heard about Colorado Springs – it is the second largest city of the state of Colorado, housing about half a million inhabitants and hosting a large number of key players of the defence industry such as Boeing and Lockheed Martin.
At the beginning of the 20th century however, it was not much more than a mid-sized city left to slow decay after the end of the Colorado Gold Rush. However, Colorado still had an economic advantage to exploit – it is located at 6,035 feet (1839 m) above sea level, at the base of the Rocky Mountains, and has beautiful scenery, abundant sources of mineral water(which contains so much fluoride that some contemporary inhabitants actually developed the dental condition commonly called Colorado Stain) and an extremely dry climate. These made the city the perfect rehabilitation spot for tuberculosis patients.

The disease

Tuberculosis – dubbed poetically 'The White Plague' in the 19th century – has been plaguing humanity since the beginning of civilisation. It causes chronic coughs with blood-traced sputum in the affected patients, accompanied with fever, night sweats and weight loss – and when left untreated, it has a mortality rate over 50%. Throughout the centuries, the only known treatment for the disease – even after the discovery of the bacteria by Robert Koch – was rest and waiting, and common wisdom often urged patients to seek high-altitude locations where the air was more favourable to breathe. For almost a century, from the 1850s until the 1940s, this phenomenon generated a large number of luxury sanatoriums targeted at the upper-middle and upper classes - it is hence that when the story of Cowles Foundation began in 1922, it began in Colorado Springs.

The founder

Alfred Cowles was born into a family of wealthy newspaper magnates, editing the Chicago Tribune, in 1891. He was set to carry on the family interests in the family, studying at Yale like the rest of the family, graduating in 1913, then beginning to work for the Tribune in the city of Spokane. That was when he caught tuberculosis, which changed both his life and the history of finance, forever.
His family sent him to Colorado Springs, where he began to help his father with family finances starting from 1926.
(It is interesting to note that his neighbour and co-patient Robert Rhea was also a finance enthusiast, who organised the investment principles of late Charles Dow into the highly popular Dow-method. He also managed to predict both the date of the 1932 recovery and the 1937 collapse, and traded successfully enough with stocks to cover his large medical expenses.)

The incentive

Cowles did this by subscribing to multiple investment publications, containing a wide range of often contradictory tips on investment – hence Cowles decided to scrap all but one of the subscriptions, by finding the best one available. He soon found however, that there was no such a thing – the market collapse of 1929 and the subsequent depression flabbergasted all analysts. Cowles was deeply disappointed, and he decided to find out whether stock prices are predictable at all.
He began to conduct research on the topic, acquiring an early IBM computer in 1932 via Harold Davis, an Indiana University professor, to whom he was introduced by one of his co-patients. Davis urged Cowles to seek contact with the Econometric Society*, which was founded two years earlier – with the hopes of the rich Cowles funding them.
Cowles accepted, and wrote to the president, Irwing Fisher – himself an ex-tuberculosis patient. He offered a yearly sum of 12,000$ to finance a new econometric journal and the foundation of a new research institution dedicated to econometric research.

The foundation

In January 1932, Alfred Cowles officially established the Cowles Comission for Research in Economic, with the motto: „Theory and Measurement”, along with the new journal titled Econometrica.
Cowles himself produced an article in it's first issue, entitled „Can Market Forecasters Forecast?” His answer to the question was „It is doubtful”. Meticulously reviewing 7500 individual recommendations of financial newsletters on stock transactions from 1900 to 1929, he found that out of the 16 examined newsletters, only 6 were making profit, and they only did due to the results of blind luck. His article was one of the best early pieces on the uncertainty of stock picking, and remains quoted to this day.

And the rest is history...

The Comission remained in Colorado Springs until 1939, when – along with the miraculously recovered Alfred Cowles – moved to Chicago, and in 1955 to New York, Yale University. Throughout the years, it mentored the Nobel laureates Harry Markowitz, James Tobin and Franco Modigliani among others, and is considered to be one of the most important scientific powerhouses to this day.

1 comment:

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