(Great Minds in Finance) Colin Read (Auth.) - The Econometricians - Gauss, Galton, Pearson, Fisher, Hotelling, Cowles, Frisch and Haavelmo - Palgrave Macmillan UK (2016) PDF

Colin read
The
Econometricians
Gauss, Galton, Pearson, Fisher, Hotelling, Cowles,
Frisch, and Haavelmo
Great Minds in Finance
Series Editor
Professor ColinRead
Professor of Economics and Finance
former Dean of the School of Business and Economics
The State University of New York
at Plattsburgh (SUNY), USA
Aims of the Series
This series explores the lives and times, theories and applications of those
who have contributed most significantly to the formal study of finance.
It aims to bring to life the theories that are the foundation of modern
finance, by examining them within the context of the historical backdrop
and the life stories and characters of the 'great minds' behind them.
Readers may be those interested in the fundamental underpinnings of
our stock and bond markets; college students who want to delve into the
significance behind the theories; or experts who constantly look for ways
to more clearly understand what they do, so they can better relate to their
clients and communities.
More information about this series at

http://www.springer.com/mycopy/series/15025
ColinRead
The Econometricians
Gauss, Galton, Pearson, Fisher, Hotelling, Cowles,
Frisch and Haavelmo
ColinRead
Professor of Economics and Finance
former Dean of the School of Business and Economics,
The State University of New York at Plattsburgh (SUNY), USA
Great Minds in Finance

ISBN 978-1-137-34136-5 ISBN 978-1-137-34137-2 (eBook)
DOI 10.1057/978-1-137-34137-2
Library of Congress Control Number: 2016948000
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Preamble
This book is the seventh in a series of discussions about the great minds
in the history and theory of finance.
The series describes the contributions of those remarkable individuals
who expanded our understanding of the underpinnings and theories of
modern finance. While earlier volumes discussed those who described
the importance of growth and interest rates on our economic decisions,
described the methods by which we choose assets for our portfolios, dis-
cussed whether markets are efficient, and described the roots and applica-
tions of public finance, this volume treats the statistical and econometric
tools that provide the foundation of all finance theory.
The statisticians and econometricians who we describe here collec-
tively created the framework and the techniques with which we have
viewed finance ever since. Their tools were, at times, developed to solve
problems that were intuitively unrelated to finance, but which were even-
tually tailored to the unique needs of the discipline. A series of great
minds developed their concepts well before theorists and practitioners
had access to modern computing, so their theories were necessarily intui-
tive and geometric, and easy to apply with a pencil and paper and some
incredible imagination. While the technological limitations of their day
had initially limited and somewhat rigidly defined how we now view our
financial variables and analyses, the limitations also offer a simplicity and
create a vocabulary that is most accessible.
v
vi Preamble
The conceptual framework began with the work of Carl Friedrich

Gauss, in his efforts to describe not only the movement of the planets but
also the valuation of a widows pension annuity. His commonsense and
intuitive approach is now one of the earliest taught statistical concept,
and his Gaussian normal distribution now underpins much of financial
theory. Indeed, his method of least squares, the linear regression model,
the concept of maximum likelihood, and the description of data based
on its mean and variance have been broadly applied to finance problems
for the past century, and is the foundation for the courses in statistics we
take in our finance programs.
Gauss contribution was further formalized by the work of Sir Francis
Galton in his seemingly unrelated development of the eugenics move-
ment, by Galtons prodigy, Karl Pearson, the first modern statistician, and
by Sir Ronald Fisher, and his further characterizations of Gauss distri-
bution. Then, Harold Hotelling took this burgeoning study of statistics
to better understand and discern trends in financial data. The totality of
their contributions now represents the basis for the introduction to statis-
tical methods studied by every finance student ever since.
In particular, the characterization of the properties of various statistics
which summarize and represent financial data was an essential step in
proving our confidence in models meant to represent or predict data.
Here, Gauss got us started, and so much more. The next step was in
the construction of mathematical models which can predict our data.
The enigmatic Francis Galton took the statistical methods formulated
by Gauss and produced the intuition for the now familiar and widely
employed linear regression model.
Sir Galton fomented a revolution. The scientific method had advanced
humanitys knowledge manifold in the previous couple of centuries.
Galton brought a new level of sophistication to experimental technique
and to social sciences. He also produced the foundation for the linear
regression model that others would use as a basis for a revolution in
analysis and policy making. But, his contribution, while intuitive and
important, was incomplete and lacked sufficient formality. His prodigy,
Karl Pearson, added rigor and proposed a multitude of statistical mea-
sures still employed today. Then, the brilliant Sir Ronald Fisher par-
layed the poor eyesight he suffered as a young boy into a geometric
Preamble vii
interpretation of the statistics Pearson proposed and produced an axi-

omatic and formal body of results that established modern statistics as a
legitimate body of mathematics.
All these individuals were either astrophysicists, geneticists or applied
mathematicians, though. None of them understood the particular prob-
lems that finance theory invoked. Nor did any of these great minds spend
time analyzing the data sets necessary to turn the art of finance into the
science that is today. The next necessary leap was to take these tools of
mathematical statistics and apply them to problems in finance and eco-
nomics. The Great Mind Harold Hotelling was instrumental in expand-
ing the work of Fisher and in bringing it to new and receptive scholars
in the USA.However, the time series data so prevalent in finance pre-
sented peculiar problems. The rapid development of the specialized tools
of econometrics and financial statistics required a fresh approach.
An heir to a newspaper empire was one of the first to realize that these
techniques could be recast on a systematic basis to treat time series data
that was particularly relevant to finance. While not necessarily a trained
scientist himself, Alfred Cowles III was nonetheless an entrepreneur who
viewed his role as one who could create an environment for others more
scientifically skilled to vaunt forward the new disciplines of finance and
econometrics. He did so by forming an institution that would attract
some of the greatest minds in the history of finance. These include the
Great Minds Milton Friedman, Kenneth Arrow, Jacob Marschak, Harry
Markowitz and others.
Two such luminaries who accepted Cowles intuition and largesse were
Ragnar Frisch and Trygve Haavelmo, a pair of great minds the Nobel
Memorial Prize Committee eventually recognized as the founders of mod-
ern econometrics and financial statistics. Their extension of statistics to the
creation of the more specialized field of econometrics significantly expanded
the sophistication and robustness of empirical financial models ever since.
Cowles, Frisch and Haavelmo also established a research agenda that
would result in the awarding of Nobel Memorial Prizes to almost a dozen
subsequent contributors to the foundations of modern finance, most of
whom are chronicled elsewhere in this series. Collectively, these Great
Minds established the foundation in finance that all financial theorists
have since followed.
viii Preamble
Through their contributions, our theories of finance could be compared

to and validated against real-world data. They have allowed subsequent
scholars to improve, or perhaps reject their models, have permitted policy
makers to offer better public finance tools, and have allowed practitioners
to discover and tease value from the vast reams of data generated from
financial markets. In doing so, these Great Minds helped make the art of
investing a modern science.
Preface to the Great Minds in Finance
Series
When one mentions the word finance to an interested and engaged

listener, people respond in a variety of ways. The word may elicit a yawn
from those who think of finance as the mundane process of ensuring the
family savings will allow them to maintain their familiar level of con-
sumption in their retirement years. Students of finance, at college or in
life, think of the term as a mechanism for a battle of wits, with buyers and
sellers of securities pitting themselves against each other to see who can
profit best from the same information. A banker might think of the con-
servative practices one employs with shareholder and depositor money by
lending it back out to trustworthy businesses in the region, hopefully to
earn a profit. And tax accountants and lawyers may think of the myriad
of ways a corporation can organize to maximize owners profits and mini-
mize risk. Listeners often prefer to relegate the intricacies of finance to an
expert, as they would their legal or medical affairs.
Most people use the terms economics and finance synonymously.
This misconception is understandable. The formal discipline of eco-
nomics defines the laws or principles that govern the choices we make in
meeting our needs. The term economics is derived from the Greek word
oikos, meaning environment but also referring to ones house or life.
It is combined with nomics from the Greek word nomos, or law
of, to label the social science that studies our decisions in furthering
our own interests.
ix
x Preface to the Great Minds in Finance Series
These economic decisions are primarily thought of as financial

because they often involve money. Households attempt to manage their
income and wealth to ensure they are able to consume, in the present
and the future, in ways that allow them to thrive. Such careful financial
decisions that will govern our consumption now and in retirement are so
critical for our well-being that it is natural for most people to consider
finance as economics even though, more correctly, finance is a branch
of economics that has great relevance in the day-to-day and livelihood-
defining decisions of us all.
This series describes the ancestry, life, times, theories and legacies of the
great minds who contributed to the modern formal study of finance. Their
collective contributions address the various interpretations of finance not
through dry exposition and even drier equations, but through intuition
and context, their lives and times, and a few equations and diagrams that
each developed to revolutionize financial thought.
Readers may be those interested in the fundamental underpinnings of
our stock and bond markets, college students who want to delve into the
significance behind the theories, and the experts who constantly look for
ways to more clearly understand what they do so they can better relate to
their clients and communities. The series provides important insights of
great minds in finance within a context of the events that inspired their
moments of brilliance. In doing so, I hope to bring life to the theories
that are the foundation of modern finance.
This series covers the gamut of the study of finance, typically through
the lives and contributions of great minds upon whose shoulders the
discipline stands. From the significance of financial decisions over time
and through the cycle of ones life, to the ways in which investors bal-
ance reward and risk, from how the price of a security is determined to
whether these prices properly reflect all available information, we will
look at the fundamental questions and answers in finance. We delve
into theories that govern personal decision-making, those that dictate
the decisions of corporations and other similar entities, and the public
finance of government.
Some of the theories we describe may appear abstract and narrow.
A successful theory must be sufficiently narrow to make strong
conclusions. A theory that is overly general will draw the weakest of
Preface to the Great Minds in Finance Series xi
conclusions that offer little utility. On the contrary, the best theories
draw the strongest possible conclusions from the weakest set of assump-
tions. And, a successful unifying theory in finance can replace a large
number of lesser theories and concepts, just as physicists hold out for
a unifying theory that can draw together their isolated understandings
from a variety of specialties.
By focusing on the great minds in finance, we draw together the con-
cepts that have stood the test of time and have proven themselves to
reveal something about the way humans make financial decisions. These
principles that have flowed from individuals who are typically awarded
the Nobel Memorial Prize in Economics for their insights, or perhaps
shall be awarded someday, allow us to see the financial forest for the trees.
While one might assume that every financial expert would be well
versed in these fundamentals, such is not the case. An investor can suc-
ceed through sheer intuition without having studied the insights of theo-
rists over a century of financial discovery. Mathematicians and physicists
are increasingly employed to develop techniques that recognize patterns
in numbers with little regard or understanding of the underlying forces
that explain these patterns. And, computer experts can design algorithms
that allow great banks of servers to constantly poke and prod the market
to induce, and then profit from, movements in prices of stocks or bonds.
By capitalizing on such shifts in prices milliseconds before others take
notice, these algorithms can garner pennies, or fractions of pennies, at a
time, thousands of times an hour, to yield huge profits.
These practitioners do not depend on, or even care about, the funda-
mental principles that drive markets in the long run. To them, the long
run expires within a week or a day. Such technical analysis is decidedly
transient and short term. In fact, a steady and predictable investment
opportunity based on well-known and well-understood information is
simply insufficiently volatile to yield quick profits.
Unfortunately, such technical analysis that depends only on price
dynamics in the short term has emerged as the lucrative Holy Grail of
modern finance. It allows the most skilled practitioners to make money
when markets are rising or falling. However, it reveals nothing about
how financial decisions should be made in the long run to satisfy an
economys need for capital, investment, reward and reduced risk.
xii Preface to the Great Minds in Finance Series
Nor does it make our economy more efficient. Rather, technical analysts
devote a great deal of talent, energy and effort as they clamor for others
pieces of a fixed economic pie.
The giants who have produced the theories and concepts that drive
financial fundamentals share one important characteristic. They have
developed insights that explain how markets can be used or tailored to
create a more efficient economy. They demonstrate how individuals can
trade risk and reward in the same way that a supplier might trade with a
consumer of a good. Through this process, both sides win. Greater effi-
ciency is a tide that lifts all boats. These pioneers of finance explain how
tools can be used to create greater market efficiency and even suggest the
creation of new tools to create efficiency enhancements that may have
proven elusive otherwise.
Global financial markets are experiencing a technological revolution.
From a strictly aesthetic perspective, one cannot entirely condemn the
tug-of-war struggle for profits the technicians seek, even if they do little
to enhance, and may even detract from, efficiency. The mathematics and
physics of price movements and the sophistication of computer algo-
rithms are fascinating in their own rights. Indeed, my university studies
began with a Bachelor of Science degree in physics, followed by a PhD in
economics. However, as I began to teach economics and finance, I real-
ized that the analytic tools of physics that so pervades theories of modern
finance has strayed too far from explaining the essence of human finan-
cial decision-making.
As I taught the economics of intertemporal choice, the role of money
and financial instruments, and the structure of the banking and financial
intermediaries, I also recognized that my students had become increas-
ingly fascinated with investment banking and Wall Street. Meanwhile,
the developed world experienced the most significant breakdown of
financial markets in almost eight decades. I realized that this once-in-
a-lifetime global financial meltdown arose because we had moved from
an economy that produced stuff to one in which a third of all profits by
2006in the USA were made in the financial industry, with little to show
but pieces of paper representing wealth that had value only if some were
ever ready to buy them.
Preface to the Great Minds in Finance Series xiii
Many were surprised by the Global Financial Meltdown that soon

followed. It became clear that much of our financial understanding
lacked perspective. I set out to discover that perspective and research the
theories that underpin modern finance, with the goal of forming a better
understanding how great financial concepts were created. I decided to
shift my research from academic research in esoteric fields of economics
and finance and toward better understanding of markets on behalf of the
educated public. I began to write a regular business column and a book
that documented the unraveling of the Great Recession. The book, enti-
tled Global Financial Meltdown: How We Can Avoid the Next Economic
Crisis, described the events that gave rise to the most significant economic
crisis in our lifetime. I followed that book with The Fear Factor that
explained the important role of fear as a sometimes constructive, and at
other times destructive, influence in our financial decision-making. I then
wrote a book on why many economies at first thrive, and then struggle
to survive in The Rise and Fall of an Economic Empire. Throughout, I try
to explain the intuition and the understanding that would, at least, help
readers make informed decisions in increasingly volatile global econo-
mies and financial markets.
In this series of great minds in finance, I offer a historical perspec-
tive on how the discipline of finance developed. I also hope to impart
to you how individuals born without great fanfare can be regarded as
geniuses, often in their lifetime but sometimes not until years later. The
lives of each of the individuals treated in this series become extraordi-
nary, not because they made an unfathomable leap in our understand-
ing, but rather because they looked at something in a different way and
caused us all to forever look at the problem in this new way. That is the
test of genius.
Contents
Part I Mathematicians and Astronomers 1
1 The Early Life ofCarl Friedrich Gauss 3
2 The Times ofCarl Friedrich Gauss 11
3 Carl Gauss Great Idea 33
4 The Later Years andLegacy ofCarl Friedrich Gauss 57
Part II From Least Squares to Eugenics 65
5 The Early Life ofFrancis Galton 67
6 The Times ofFrancis Galton 75
7 The Later Life andLegacy ofSir Francis Galton 81
xv
xvi Contents
8 The Early Life ofKarl Pearson 83
9 Karl Pearsons Great Idea 89
10 The Later Life andLegacy ofKarl Pearson 99
Part III The Formation of Modern Statistics 109
11 The Early Life ofRonald Aylmer Fisher 111
12 The Times ofRonald Aylmer Fisher 121
13 Ronald Fishers Great Idea 129
14 Later Life andLegacy ofRonald Fisher 139
15 The Early Life ofHarold Hotelling 149
16 The Times ofHarold Hotelling 159
17 Harold Hotellings Great Idea 165
18 The Later Life andLegacy ofHarold Hotelling 171
Part IV The Birth of a Commission and Econometrics 175
19 The Early Life ofAlfred Cowles III 177
20 The Times ofAlfred Cowles III 187

Contents xvii
21 The Great Idea ofAlfred Cowles III 191
22 Legacy andLater Life ofAlfred Cowles III 199
23 The Early Life ofRagnar Frisch 201
24 The Times ofRagnar Frisch 205
25 Ragnar Frischs Great Idea 211
26 Legacy andLater Life ofRagnar Frisch 219
27 The Early Years ofTrygve Haavelmo 223
28 The Times ofTrygve Haavelmo 227
29 Haavelmos Great Idea 231
30 Legacy andLater Life ofTrygve Haavelmo 241
Part V What We Have Learned 245
31 Conclusions 247
Glossary 251
Index 257
About the Author
Colin Read is Professor of Economics and Finance, former dean of the

School of Business and Economics at SUNY College at Plattsburgh and
a columnist for the Press Republican newspaper (Plattsburgh, NewYork).
He has a PhD in Economics, JD in Law, MBA, Masters of Taxation, and
has taught environmental and energy economics and finance for 25 years.
Colins recent books include BP and the Macondo Spill: The Complete
Story, The Fear Factor, Global Financial Meltdown: How We Can Avoid
the Next Economic Crisis, The Rise and Fall of an Economic Empire: With
Lessons for Aspiring Nations, Great Minds in Finance: The Life Cyclists,
Great Minds in Finance: The Portfolio Theorists, Great Minds in Finance:
Market Efficiency, Great Minds in Finance: The Corporate Financiers and
Great Minds in Finance: The Public Financiers. He has written dozens
of papers on market failure, volatility and housing markets, writes a
weekly newspaper column and appears monthly on a local PBS televi-
sion show to discuss the regional and national economy. He has worked
as a research associate at the Harvard Joint Center for Housing Studies
and served the Ministry of Finance in Indonesia under contract from the
Harvard Institute for International Development. He maintains a blog at
www.vision2040.com and, in his spare time, he enjoys floatplane flying
from his home on Lake Champlain that he shares with his wife, Natalie,
daughter, Blair, and dog, Albert.
xix
List of Figures
Fig. 1.1 The ancestry of Carl Friedrich Gauss 5

Fig. 2.1 The calculation of geometric means 14
Fig. 2.2 The pentagon in a unit circle 15
Fig. 2.3 An isosceles triangle of hypotenuse p and adjacent
and opposite sides q 18
Fig. 2.4 The complex plane 24
Fig. 2.5 The unit circle on the complex plane 26
Fig. 2.6 Regular polygons in the unit circle on the complex plane 28
Fig. 3.1 The Gaussian distribution 53
Fig. 5.1 The ancestry of Francis Galton 69
Fig. 8.1 The ancestry of Carl Pearson 85
Fig. 10.1 The ancestry of Maria Sharpe 103
Fig. 11.1 The ancestry of Ronald Fisher 113
Fig. 13.1 The predicted cone of a hypothesis test 131
Fig. 15.1 The ancestry of the Rawson family 151
Fig. 15.2 The distant ancestry of Harold Hotelling 153
Fig. 15.3 The immediate ancestry of Harold Hotelling 156
Fig. 19.1 Distant ancestry of Alfred Cowles III 178
Fig. 19.2 Immediate ancestry of Alfred Cowles III 180
Fig. 19.3 Ancestry of Elizabeth Cheney 184
Fig. 23.1 Ancestry of Ragnar Frisch 202
Fig. 27.1 Ancestry of the Haavelmo family 224
xxi
Part 1
Mathematicians and Astronomers
We begin with the struggle of some great mathematicians who wrestled

first with an understanding of problems that concerned their gambling
patrons, and then with ways their understanding of probability could be
used to better predict the movement of the planets.
These explorations over the seventeenth and eighteenth centuries even-
tually allowed a very young nineteenth-century theorist to translate the
insights of those who came earlier with a discovery that revolutionized
almost every aspect of science, including finance and statistics. Perhaps
what is most surprising, though, is that the genius of Carl Friedrich Gauss
came from the most humble of beginnings.
1
The Early Life ofCarl Friedrich Gauss
There is perhaps no discipline that is so intrinsically tied to data than the

study of finance. Every financial theory is formulated not for some eso-
teric purpose, but rather to better understand future occurrences based
on past information. This world of financial data is so broad that it makes
little sense unless it can be simplified and represented by a few familiar
measures. Our models then incorporate these measures to predict move-
ments in financial variables. This problem is not unlike the challenge
of those who gazed at the planets and stars and tried to predict their
motion. One such mathematical explorer enjoyed more success in chal-
lenging predictions than any other. His surprisingly humble upbringing
almost defies his incredible insights and contributions to dozens of sci-
ences since, finance included.
The circle of academics was an extremely small one before the twenti-
eth century. There was no public education, and hence little opportunity
for higher education, except for the noble and elite. Nor was science so
technical then that it commanded extensive knowledge, or large teams
devoted to research. Indeed, intellectual discovery was a luxury supported
by family wealth and royal courts which might sponsor one or two such
men of ideas.
The Author(s) 2016 3

C. Read, The Econometricians, Great Minds in Finance,
DOI10.1057/978-1-137-34137-2_1
4 The Econometricians
These prodigies were viewed more as intellectual athletes and mystics.

They would be pitted against each other to demonstrate their intellectual
cunning and lend pride to their patrons. These were not the circles in
which a humble boy of modest means and upbringing could find himself.
Carl Friedrich Gauss was an exception. He also became one of the
most exceptional mathematicians of all time, who is spoken in the same
breath only with Euclid and Newton.
Gauss came from a family of farmers and laborers. His great-great-
grandfather, Hans Gauss (c.1600?), was born in Hanover, Germany,
and had found his way to Wendeburg, a small farming village in the
neighboring district of Peine of Germanys Lower Saxony region. He had
a family of small size in this era: a wife, two sons and four daughters. At
first, his family and progeny remained close to home.
His son Henrich Gauss (1 December 164825 October 1726) was
born in Wendeburg. He married three times. The first marriage resulted
in a dowry of a farm that had belonged to his first wife, Anna Grove, a
widow, in nearby Volkenrode, less than six kilometers to the southeast of
Wendeburg (Fig. 1.1).
Henrich had a dozen children, four from each marriage, and was left
a widower from each of his first two marriages. His last marriage resulted
in a son Jurgen.
Jurgen Gauss (or Goos) (3 November 17125 July 1774) was born
in Volkenrode and grew up tending the farm. However, as one of the
last of a dozen children, there would be no room for him on the farm
once he became an adult. Instead, he moved to the large German city of
Braunschweig, or Brunswiek in Low German, Brunswick in English, at
the extreme southern port of the Oker River as it makes its way toward
the North Sea. At the time, Brunswick was a major economic and cul-
tural center for Germany. It was also a center for education.
Jurgen Gauss arrived in Brunswick late in the decade of the 1730s,
with a new bride, Katharine Magdalene Eggling (5 March 17133 April
1774), the daughter of Hans Heinrich Eggling (166725 December
1714) and Cathrine Heuer. Soon upon his acceptance as a resident of
Brunswick, he took his first job off of the farm, on 23 January 1739. His
adopted city first employed him as a day laborer, then as a clay mason
and a butcher. Each of the latter occupations entitled Jurgen membership
Pedigree Chart for

Carl Friedrich Gauss
Parents Grandparents Great-Grandparents 2nd Great-Grandparents
Jurgen Gauss Henrich Gauss Hans Gauss

b: 03 Nov 1712 in Vlkenrode, b: 01 Dec 1648 in Wendeburg
Braunschweig, Niedersachsen, m:
Germany d: 25 Oct 1726 in Volkenrode
m: Bef. 1739 in Vlkenrode,
Braunschweig, Niedersachsen,
Katharine Lutke
Germany
Gebhard Dietrich Gauss d: 05 Jul 1774 in Brunswick, b:
b: 13 Feb 1744 in Brunswick, Braunschweig, Niedersachsen, d:
Braunschweig, Niedersachsen, Germany
Germany
m: 25 Apr 1776 in Velpke, Germany Katharine Magdalene Eggeling Hans Heinrich Eggeling
d: 14 Apr 1808 in Brunswick, b: 05 Mar 1713 in Rethen, Meine b: 1667 in Rethen, Meine
Germany d: 03 Apr 1774 in Braunschweig, St. m:
Katharinen d: 25 Dec 1714 in Rethen, Meine
Cathrine Heuer
Carl Friedrich Gauss
b:
b: 30 Apr 1777 in Braunschweig,
Braunschweig, Niedersachsen, d: ; Y
Germany
m: 09 Oct 1805 in Brunswick,
Braunschweig, Niedersachsen, Christoph Benze Andreas Bentze Andreas Bentze
Germany
d: 23 Feb 1855 in , Gottingen, b: 02 Mar 1717 in Velpke, Germany b: 04 Feb 1687 in Velpke, Germany
Niedersachsen, Germany m: m: 15 Jan 1715 in Velpke, Germany
d: 01 Sep 1748 in Velpke, d: 02 Mar 1730 in Velpke, Germany
Helmstedt, Niedersachsen,
Germany Marie Elizabeth Suepke
Dorthea Benze b: 20 Apr 1693 in Velpke, Germany
b: 18 Jun 1743 in Velpke, Germany d: 02 Nov 1729 in Velpke, Germany
d: 18 Apr 1839 in Gottingen,
Germany
Katharina Maria Crone
b: 1710
d: 1771
Fig. 1.1 The ancestry of Carl Friedrich Gauss
to guilds, and all would provide him with employment through the four
seasons. The family enjoyed a level of urban economic comfort not read-
ily afforded to the youngest child in a farming family.
Jurgen Gauss and Katharine soon secured a small and narrow house
for his family, at 10 Ritterbrunnen. They lived in that home for 14 years,
and raised four children there, including an eldest son, Gebhard Dietrich
Gauss (13 February 174414 April 1808). The family then moved to a
larger home at 30 Wilhelmstrasse, where Jurgen would die of tuberculosis
on 5 July 1774, just three months and two days after the death of his wife
from a prolonged fever.
By the time his father died, the second child and the eldest son,
Gebhard, had worked and learned the family trades. Upon his parents
death, Gebhard used a dowry from his first wife, Dorothea Emerenzia
Warnecke, and a loan from the towns mayor Wilmerding, to buy out the
shares of his family home from his brothers Johanne Franz Heinrich and
Peter Heinrich. By the age of 30, Gebhard was able to provide a home
and a secure but not affluent living for his own family.
Gebhards first wife did not long enjoy the house, though. She died on
5 September 1775 of tuberculosis as had her father-in-law, but not before
giving birth to a boy. Johann Georg Heinrich was born on 14 January
1769.
Seven months after Dorothea Warnecke died, Gebhard married
Dorothea Benze, the daughter of a stonemason, Christophe Benze (2
March 17171 September 1748). Dorotheas father died prematurely as
well, from pulmonary respiratory illness associated with his profession as
a stonemason. He also left a son, Johann Friedrich. Both of Christophe
Benzes children were thoughtful and intelligent, but neither enjoyed the
luxury of formal schooling.
Dorothea was illiterate, but she was a kind and nurturing woman
by nature. She worked as a maid before she married Gebhard. While
Gebhard was also uneducated, he nonetheless managed to be appointed
the citys master of waterworks as he was an experienced stonemason and
was reasonably good with sums.
In contrast to his wifes gentle nature, Gebhard was quite domineering
as a father, and was considered rather somewhat uncouth. Yet, he pro-
vided reasonably well for his family.
The Arrival ofCarl Gauss

Gebhard and his second wife had a son just over a year after their mar-
riage, on 25 April 1776. Carl Friedrich was born in the family home in
Brunswick on 30 April 1777, on the Wednesday eight days before the
Ascension. He was an only child of the second marriage, but was a half
brother to Gebhards eldest son Johann.
When a young Carl once quizzed his mother about his birthdate, she
could not recall the exact date. Later in life, Carl was able to calculate
it based on his mothers recollection of his birth before the Ascension.
At a young age, he used this small family mystery as an opportunity to
develop a formula for the day Easter arose for any given year. It did not
take long for his family to discover that the young Gauss was a math-
ematical prodigy.
Carl had great affection for his mother, and for her brother, his uncle
Johann Friedrich, but had a somewhat awkward relationship with his
half brother. Indeed, he did not know his brother Johann Georg very
well. More than eight years his senior, Johann struck out on his own as
a day laborer before Carls tenth birthday. Johann returned home some
years later, but an eye injury made him only of limited help to his father.
Instead, Johann enlisted in the army for almost a decade, and returned
to his family home to take over his fathers trade once his father died on
14 April 1808.
While Carl Friedrich grew up with a harsh and domineering father,
he enjoyed the better nature of his kind and devoted mother. In turn, he
doted on his mother all his life, until Dorotheas death at the remarkably
advanced age of 97, even through her infirmities and her affliction with
blindness in her last four years.
Carl harbored fond and vivid memories of his childhood. One of his
earliest memories was falling into the river and being saved at a very
young age. This terrifying memory did not taint his recollections other-
wise, though.
He also recalled that he taught himself to read by asking his family
members how to pronounce letters on the page. His ability to manipu-
late numbers became a favorite parlor trick among family friends. When
his father would pay his bricklaying workers, a three-year-old Carl once
impudently but accurately corrected his fathers calculations. While
access to school was out of the question for many children in his neigh-
borhood, his intellectual precociousness compelled his family to consider
his education.
In 1784, when young Carl was seven years of age, his father agreed to
let him enter nearby St. Katharines Volksschule, a peoples school for the
more motivated of the children of non-prosperous families. The school,
which adjoined St. Katharines Church, had a teacher named J.G.Buttner
who oversaw a dark and dank classroom of 200 children.
Young Gauss endured two years among those 200 classmates, but
managed to stand out nonetheless. When the teacher gave his students
an assignment he felt would keep them occupied for hours, Gauss almost
immediately announced the solution. The teacher felt it impossible that
Gauss could have so quickly added all the numbers from 1 to 100. Yet,
an eight-year-old Gauss reasoned his way to a solution.
Gauss had noticed that the first and last number in the sequence, 1
and 100, added to 101. So did the second and the second to last, 2 and
99, and, indeed, so do all 50 such pairs. Gauss proclaimed that 50 pairs
which each add each to 101 must then total 5050. While he may not
have been praised for his brilliance, he was at least spared the whip that
often accompanied the incorrect answers from lesser classmates.
Headmaster Buttner quickly realized Gauss needed a more sophisti-
cated curriculum. He ordered an advanced textbook for the boy, but pro-
fessed that there was little he could teach the young prodigy. Fortunately,
word got out in Brunswick about the boy wonder. Carls father relented
on the headmasters admonishments that Carl spend the evening study-
ing rather than completing chores, and allowed the neighbors boy,
Johann Christian Martin Bartels (17691836), eight years Carls senior,
and with a strong interest and competency in mathematics, to supple-
ment Carls education. By lamplight, Carl learned mathematics together
with the much older boy, and kept pace as Bartels absorbed such concepts
as the binomial theorem and infinite series.
Meanwhile, Bartels worked to find a patron for Carl as he pursued his
own studies in mathematics. His Collegium teacher, Eberhard August
Wilhelm Zimmermann (17 August 17434 July 1815), had studied
mathematics at the prestigious Gttingen University and was instructing
mathematics at the Collegium Carolinum in Brunswick. When Bartels
began classes with Zimmerman, he brought the abilities of the 11-year-
old Carl Gauss to his professors attention. By then, Zimmermann was
well respected by the local nobility, and had already been awarded the
distinction of Councilor in the region. Seven years later, he was further
bestowed a noble title by Duke Karl hette Wilhelm Ferdinand.
Zimmerman accepted the challenge of instructing the young prodigy.
Carl Gauss was given the run of the Collegium, despite his young age,
and spent almost all his free time at the school.
A few years later, the Duchess Ferdinand came across the young boy
reading a book that seemed most advanced for his age. Astonished, she
quizzed him on his studies, and was impressed by his knowledge of the
classics, of literature and of mathematics.
At the Duchess behest, the Duke sent an aide to fetch young Gauss.
The aide first demanded that Carls older brother accompany him to the
palace, but Johann Georg insisted it was for his young half brother Carl
for whom the Duke beckoned.
The Duke took under his wing a young working-class boy, one with
rough working-class edges who spoke Low German. Despite these social
handicaps, the Duke funded Carls regular attendance at the Collegium
Carolinum in 1792. Only 15 years old, Carl was already more intellectu-
ally advanced than most of the other students. In addition to the annual
stipend the Duke paid on behalf of Carl, the Duke also offered Carls
teacher Zimmerman expenses to oversee his education, for as long as
Gauss attended the local college.
Young Carl studied at the Collegium Carolinum for four years. He was
exposed to the Classics, to Greek and Latin and to the mathematics of Sir
Isaac Newton (25 December 164220 March 1726), Leonard Euler (15
April 170718 September 1783) and Joseph-Louis Lagrange (25 January
173610 April 1813). By his last year at the college, Gauss had become
intellectually captivated by the astronomical explorations of Newton,
and had even developed his method of least squares to tease trends from
cosmological observations subject to random errors. While also still a
teenager at the College, Gauss also became intrigued with prime num-
bers, a fascination he would continue soon upon his matriculation to the
University of Gttingen.
It was at the Collegium that Carl also developed the habit of intellec-
tual innovation primarily for his own curiositys sake. He only occasion-
ally felt the need to aggregate his ideas into papers, even though he soon
realized the need to record his results. He meticulously began to docu-
ment his mathematical innovations in a series of dated notebook entries
that he kept for his entire life.
On 21 August 1795, when Carl was 18 years old, the Duke ordered
an increase in the stipend to be paid to Carl so that Carl could begin
attending at the University. This sum covered tuition and all living
expenses. On 11 October, Gauss left his hometown for the 200-kilome-
ter trip to Gttingen, one of the nations most prestigious and accom-
plished universities. Four days after departing Brunswick, Gauss arrived
and was admitted as a mathematics student to Gttingen. Carl chose the
university because of its extensive mathematics library. He chose well and

remained the pride of Brunswick forever after.
The next spring, on 30 March 1796, Gauss published notice of his
first major discovery. He recorded that he found a constructible solution
to the 17-sided regular polygon problem that had perplexed mathemati-
cians for 2000 years. He later recalled how he awoke from a vacation in
Brunswick with the realization of a solution to the problem (zp1)/(z1)
= 0, which led to the solution to the constructible 17-gon.
Upon his discovery, Gauss published a notice of his result so that he
may lay prior claim within the scientific community. This he had done
rarely in his life because, for him, his exercise of mathematics was to
satisfy his own intellectual curiosity and solve his practical problems in
astronomy and geodesy. Not always would he fully flesh out his ideas into
a publishable form because, for him, completing the proof was either
obvious or unnecessary. And publication was expensive in both time and
money. Indeed, it would take Gauss almost a decade to publish the proof
of his result on the 17-gon. This pattern repeated itself many times over
his life. Almost invariably, his briefest assertion of myriad amazing dis-
coveries stood the test of more rigorous treatment, often at the hands
of others, and generally requiring hundreds of pages of advanced math-
ematics, and many decades later.
What is apparent in Gauss brilliance at an early age is that his life
was anything but conventional. That may be the source of his brilliance.
While lesser children of more affluent parents would enjoy a lifetime
of forced stimulation through the minds of tutors and professors, they
must always glimpse the world through someone elses eyes. Gauss knew
no such world, nor any such preconceptions. He conceived his intel-
lectual world anew, perhaps because he was often taught by those less
accomplished and talented than he was. His learning defied conventional
wisdom. This allowed him to look at fundamental problems without any
blinders or preconceptions and, for that matter, without anybody telling
him his brilliant and unique approaches could not work because, after
all, no great mind before him had solved the same problem. His scholarly
bravado and courage to take on and solve a two-millennia-old problem,
and, in doing so, unite and perhaps even invent three branches of math-
ematics, can be credited to his upbringing and lack of academic pedigree.
2
The Times ofCarl Friedrich Gauss
Gauss loved numbers. When he imagined geometric concepts and from

them developed what we would now call abstract algebra, he came to
shapes from the perspective that these new approaches would help him
better understand the nature of numbers. Ever since his elementary school
experience in which he successfully solved a problem for his teacher based
on the application of a numerical series, Gauss had numbers, integers
and shapes racing in his head. While he was already publishing academic
papers of high quality at the age of 18, Gauss had been interested in
arithmetic and geometric means for 4 years by then, and, by 17, had
explored the representation of average values through power series, and
the method of least squares. Gauss developed these concepts from a
position of great practicality. He used numbers, and especially their pat-
terns, to better understand practical problems. His choice of study at the
University of Gttingen was an ideal match for this intellectual curiosity.
The University of Gttingen, or, in German, Georg-August-Universitt
Gttingen, GAU for short, is one of Germanys most prestigious estab-
lishments for higher education. It was founded in 1734 by King George
II of Great Britain, who was also the Elector of the Kingdom of Hanover.
Gttingen began classes in 1737. The quality of the institution has

DOI10.1057/978-1-137-34137-2_2
placed its host city at the center of learning in Germany ever since. The
brilliant mathematicians Bernhard Riemann (17 September 182620
July 1866), David Hilbert (23 January 186214 February 1943), Peter
Gustav Lejeune Dirichlet (13 February 18055 May 1859) and John von
Neumann (28 December 19038 February 1957), and great physicists
such as Max Born (11 December 18825 January 1970), Julius Robert
Oppenheimer (22 April 190418 February 1967), Max Planck (23 April
18584 October 1947), Werner Karl Heisenberg (5 December 19011
February 1976), Enrico Fermi (29 September 190128 November 1954)
and Wolfgang Pauli (25 April 190015 December 1958) all studied or
taught there. So did the international banker and financier John Pierpont
J.P. Morgan (17 April 183731 March 1913). It was also the notorious
epicenter of Adolf Hitlers (20 April 188930 April 1945) Great Purge of
Jewish academics in 1933. Gttingen was an intellectual capital unpar-
alleled in the celebration of abstract thought since the early 1800s, or
perhaps since Carl Friedrich Gauss first studied there.
Those accepted to study at Gttingen were invariably gifted. But, few
came from such modest means as had Gauss, nor with such wealthy
patrons as Duke Ferdinand. When Gauss was admitted at Gttingen on
15 October 1795,1 at the age of 18, he did not yet know whether he
wished to study mathematics or philology. Gauss loved words almost as
much as he knew numbers.
Philology was a classical and well-appreciated discipline in the nine-
teenth century that divined language from the historical written record.
Philologists were Renaissance scholars who used their skills in history,
linguistics and literary criticism to solve literary and historical puzzles. It
was at that time a foundation for what might more broadly be described
as the humanities today. The disciplines goal to solve historical and liter-
ary puzzles played to Gauss curiosity in the same way as numbers did,
and drew upon Gauss extensive knowledge of many languages as had his
ability to draw upon many methodologies in mathematics.
Fortunately for modern science, mathematics won Gauss attention,
partly because the patronage he enjoyed allowed him to be less concerned
about tuition and eventual salaries, and more receptive to the study of
science, with all its economic impracticality. During his first year of
study, he mostly read books from the renowned Gttingen library on
the humanities, on philology and on travel. But, that first year sparked a
passion in mathematics when Gauss managed to devise his first solution
to a then intractable mathematical problem. He had become fascinated
in the problem of dividing a circle into 17 parts through the creation of a
17-sided polygon constructed only with Euclidean tools.
It is instructive to explore Gauss path through the construction of his
problem and solution as it tells us much about the brilliance of this 18
year old, on the development of the new field of complex algebra ever
since, and on the way Gauss thought, in geometric terms that would
become the hallmark of the greatest minds of statistics and econometrics.
The Greeks before the birth of Jesus Christ had been fascinated with
the geometries that could be constructed with a simple compass and
straightedge. Indeed, these early geometers had no number system yet.
These tools of the compass and straightedge were what Euclid (about
300 BC) employed to construct regular polygons. These regular polygons
have angles between apexes that are all equal, and sides that are the same
length, such as triangles, squares, hexagons and octagons.
The Greeks were fascinated by the properties of such polygons that
were contained within a circle. By calculating the area of regular polygons
of ever increasing number of sides, they could even approximate the area
of a circle and the number pi with great accuracy.
The Greeks quickly discovered that they could easily construct such
polygons with an even number of sides by forming isosceles triangles with
two equal sides in the space from the center of the circle to its circumfer-
ence. They could easily construct even-number-sided polygons within the
unit circle by further subdividing known polygons with an even number
of sides. Such exercises allowed the Greeks to construct extensive proofs
of the properties of lines, circles, triangles, squares and octagons.
While they did not actually develop a number system from the length
of the sides of these polygons, they were clearly dabbling in number the-
ory. We are reminded of this geometric interpretation when we think of
raising a number to the power of two as squaring the number. We can
now see these Greek geometers were on the verge of discovering alge-
bra, polynomials, roots of polynomials, negative numbers and imaginary
numbers. But, that leap in understanding would take almost two millen-
nia to solve.
For instance, consider the area of a square drawn from the apex F of a
semicircle of width AX and height AF=AX, and hence of area AX*AX.
The Greeks denoted this as the geometric mean of the lengths AX and AB
(Fig. 2.1):
If we denote the length of the longer ray AB as a, the length of the dis-
tance between X and B as x, and the length of the shorter rays AF, or AX
as b=ax, then a/x=x/(ax). The length x is then the geometric mean of
a and ax, and is also the root to the polynomial obtained from equating
the ratios a/x and x/(ax). Cross-multiplying, we can express these ratios
as x2a(ax). Then:
x is the root of x 2 + ax a 2 = 0.
This value of x, now more commonly expressed as the square root of

the product of two numbers a and b, was generated by the Greeks using
only the geometric comparisons of sides of polygons. In doing so, the
Greeks were solving the roots to common polynomials using geometric
analogues, but not yet with a formal algebra.
Fig. 2.1 The calculation of geometric means

The ancient Greeks had learned to construct various polygons from the
square, and the series of even-sided polygons that were multiples of the
four-sided figure and its successors. They could also do the same for the
triangle and its even-numbered multiples. Their first challenge, though,
was to form a pentagon.
Such a five-sided polygon had mystic charms, as had its relative, the
five-sided star. The pentagram was the mystic symbol of the Pythagorean
brotherhood. The Greeks showed that the length of the sides of such
regular polygons enclosed in a circle of unit radius could be expressed
with ratios of integers and their square roots (or geometric means). For
instance, a pentagon within a circle can be constructed as five identical
equilateral polygons much like five pieces of an evenly cut pie, with the
round edges squared-off. Such polygons might look as in Fig. 2.2.
We learn in high school trigonometry class that if we divide the 360
of the circle into five identical parts of 72 each, then the width of the
first such triangle enclosed in a unit circle is represented by the distance
(
from the origin to the point A, or cos(360/5)=cos(72)= 5 - 1 / 4. )
The Greeks knew how to construct a unit circle with a compass, and
they could find the length of the square root of 5 by observing that
its value was simply the geometric mean between 5 and 1. In fact, the
Greeks were able to show that they could use only a straightedge and
compass, or, equivalently, with the tools of addition, subtraction, ratios
and square roots, formed from the congruencies in triangles and formu-
Fig. 2.2 The pentagon in a unit circle

lation of geometric means, to construct polygons with n sides for n=3,

4, 5, 6, 10 and 15, and, of course, 8, 12 and 16 that follow naturally
from the square, the hexagon and the octagon. This realization became a
fourth assertion in addition to the Greeks three famous problems of trisect-
ing an angle, doubling a cube and squaring the circle. The latter problem
required the creation of a square with the same area as a given circle.
At the age of 18, Gauss proved that the first two of these assertions
of the three famous problems are impossible using only a compass and
straightedge. He also showed which n-sided regular polygons was con-
structible, that is, they could be constructed only with a compass and
straightedge, or, equivalently, with sides of a length that are the sum only
of ratios of integers or square roots (geometric means). Gauss determined
that constructability could occur only if the number of sides is an integer
prime number that can be expressed as 2m+1, where m is an integer.
Had the Greeks known Gauss insight, the world would have been
spared many person-years trying to construct 7-, 11- and 13-sided poly-
gons over the intervening two millennia. The smallest constructible poly-
gon that remained unconstructed by the Greeks or by those who followed
for more than two millennia was the 17-sided heptadecagonuntil an
18-year-old Gauss proved its construction, and, in turn, created a new
and incredibly important way to look at the correspondence between
polygons and the number system.
Gauss solution came in a flash of insight. He showed 7-, 11- and
13-sided regular polygons could not be constructed, and demonstrated
the constructability of the 17-sided regular polygon. In doing so, he cre-
ated whole new methods of mathematical analysis without which many
of our most profound technological achievements today would have been
impossible.
His shear excitement at his discovery also induced him to dedicate his
life to the study of mathematics, as opposed to his competing interests in
philology and the classics.
Gauss original insight was providential. He had realized that the
problems the Greeks wrestled with could often be expressed as roots to
equations of the form (xp1)/(x1)=0. This family of problems, for vari-
ous values of p, had intrigued scholars for a century. But, just as Albert
Einstein (14 March 187918 April 1955) had looked at the problem
which perplexed Ludvig Lorenz (18 January 18299 June 1891), and
Albert Abraham Michelson (19 December 18529 May 1931) and
Edward Williams Morley (29 January 183824 February 1923), among
others, and, by casting the nature of the space-time relationship in a dif-
ferent light, completely recast classical physics, Gauss awoke one morn-
ing while on holiday in Brunswick with a solution in mind to an equally
baffling problem. How he dealt with his first important discovery became
the template for his mathematical pragmatism over a lifetime. And his
often nonchalant confidence and intellectual dismissiveness that followed
also shed light on why some attribute to others the legitimate discoveries
he had made.
The Creation ofComplex Numbers

The pieces of this first puzzle a teenage Gauss solved were contemplated
well before he recast the problem so successfully. While the Greeks had
not developed a full-fledged real number system that included irrational
numbers, they were adept at geometrical constructs. While the real num-
ber system would take some time to be fully fleshed out, even the real
number system could not solve Gauss problem, though.
The followers of Pythagoras believed that all numbers should be either
positive whole numbers. Associated with such natural numbers is the
physical analogue of length. The Pythagoreans of the fifth century BC
also admitted the rationals that could be represented as the ratio of whole
numbers. This created a problem and some arithmetic heresy for the
Pythagoreans.
Consider the right isosceles triangle with two sides of equal length q
and a hypotenuse of length p. Then, we recall from Pythagoras theorem
that p2=2q2. Could the ratio p/q of the hypotenuse to one side of the
triangle be represented by a ratio of the two smallest whole numbers that
share no common factors? (See Fig. 2.3.)
The Pythagoreans relied on geometry in such proofs. At that time, it
was arithmetic heresy to conclude the existence of an irrational number
that could not be expressed as the ratio of two whole numbers.
Fig. 2.3 An isosceles triangle of hypotenuse p and adjacent and opposite

sides q
Here is the algebraically heretical dilemma. If the length of one side q

were an odd number, then twice its square must be even. Hence p2 must
be even as well. This implies that p itself must be even since an odd num-
ber squared is always odd. Yet, if p is even, it could be represented as 2r,
which implies 4r2 = 2q2, or 2r2=q2. Then, q must be even. However, p
and q cannot both be even if their ratio p/q has no common factors.
Some intellectually daring Pythagoreans realized this contradiction.
An isosceles triangle with unit sides q=1 must have a hypotenuse of a
length p that is the square root of 2. While the Pythagoreans who realized
this number must be an irrational violated the brotherhood, they none-
theless admitted the extension of the number system to the irrational
roots for some of the integers 3, 5, 6, 7, 8, 10, 11, 12, 13, 14, 15, all the
way to the whole number 17.
There remained two other aspects of the number system that the
Pythagoreans believed unimaginable. These were the existence of nega-
tive and imaginary numbers. Until 1545, no European mathematician
had postulated, or had the courage to postulate, their existence. The more
complex of these two concepts, the imaginary numbers were actually
described first.
Some had come tantalizingly close to discovering imaginary numbers.
While Europe was immersed in its Dark Ages, the scholars of Arabia were
the princes of science of their day. In Baghdad in the early ninth century,
the caliph al-Mamun was the patron of a group of learned men known
as the House of Wisdom. Al-Khwarizmi (780850) had developed solu-
tions to quadratic equations but restricted his solutions to those that
yielded positive numbers. The negative and imaginary roots for which we
are accustomed in high school were discarded as nonsensical.
Three centuries later, the Latin translation by Gerard of Cremona
(111487) of al-Khwarizmis Algebra came to the attention of Leonardo
da Pisa (11701250). Leonardo was asked to determine the roots of a
simple cubic equation x3+2x2+10x=20. This is a specific version of the
general form x3+ax2+bx+c=0, which can be shown to be reducible to
a simpler equation:
z 3 + pz + q = 0,
through a change of variables in which z = x + a/3. If we restrict the

parameters and solution to positive numbers, there are three possible ver-
sions of the equation to solve. A professor of Arithmetic and Geometry
at the University of Bologna, Scipione del Ferro (6 February 14655
November 1526) discovered how to solve these three versions, now
known as the depressed cubic equation.
In that era, professors held an almost mythical reputation. Their cachet
was to be able to discover solutions to problems posed by other pro-
fessors. These challenges and defenses earned the successful solvers their
professorships. Hence, these academic mystics often held close their solu-
tion methods. Meanwhile, their patrons considered these scientific mys-
tics exclusive property of their royal courts.
Del Ferro took his secret solutions to his grave in 1526. A notebook
that recorded his secrets was inherited by his daughter, Filippa, and her
husband Hannival Nave, his former student who assumed del Ferros
position at the university upon his death.
Scipione del Ferro had confided his secret solution to another one
of his students though, named Antonio Maria Fiore. With del Ferros
insights in hand, Fiore challenged another mathematician, Niccol
Tartaglia (149913 December 1557), to a contest to solve a set of cubic
equations. Having heard rumors of the existence of a solution to the

cubic equation, Tartaglia accepted the challenge and set out to discover
a general solution. Indeed, he discovered a more general solution to any
cubic equation, while his challenger had in possession only a solution to
a particular set of cubic equations. In the contest, which lasted only a
couple of hours, Tartaglia was able to solve all 30 of the problems posed
to him, while Fiore was unable to solve any of the more general cubic
equations Tartaglia had posed.
Gerolamo Cardano (24 September 150121 September 1576), one
of the three greatest scientific minds of the pre-Renaissance period, had
heard of Tartaglias triumph and invited Tartaglia to visit Milan under
the premise that he had arranged for Tartaglia a patron to fund his
work. Instead, upon his arrival in Milan, Tartaglia was asked to reveal
to Cardano the solution so Cardano could include it in his forthcoming
mathematical treatise. Tartaglia obliged, under the promise that Cardano
would not publish his own work until Tartaglia was afforded an opportu-
nity to publish the general solution to cubic equations.
With this tantalizing solution at hand, Cardano went on to further
extend and generalize the solution. Once he discovered that it was actu-
ally Scipione del Ferro who first discovered a restricted solution, Cardano
felt freed from his promise to Tartaglia and included his innovative solu-
tion to the general cubic equation in the treatise Ars Magna.
In his treatise, Cardano established a number of principles that would
prove useful to Gauss almost three centuries later. First, he demonstrated
in Chapter One of his book that equations can have multiple roots. To
then, some roots of equations were ignored as impossible because they
yielded nonsensical numbers less than zero. For instance, the roots of
x21 are +1 and 1, but contemporaries rejected the notion of a number
less than nothing.
Second, Cardano postulated in his Chapter XXXVII the existence of
imaginary numbers and complex numbers. He posed the question simi-
lar to the following: Find two numbers that sum to two, but for which
the product is also two. The correct answer is 1 + -1 and 1 - -1 . He
admitted that this expression had no physical significance, but he none-
theless proceeded to explore the implications of such complex numbers.
Cardanos two mathematical taboos actually both seemed to defy

Pythagorean common sense. Numbers were to represent physical
quantities one could grasp, literally and physically. One cannot hold
something of negative weight nor measure something of negative length.
In 1637, Ren Descartes (March 159611 February 1650), the father
of modern philosophy, for whom the Cartesian coordinate system was
named, published his Discours de la mthode pour bien conduire sa rai-
son, et chercher la vrit dans les sciences. In his Discourse on the Method
of Rightly Conducting Ones Reason and of Seeking Truth in the Sciences,
he solved the equation x3ax+b2 when a and b2 are both positive. He
noted that For any equation one can imagine as many roots as is degree
would suggest, but, in many cases no quantity exists which corresponds
to what one imagines.2 Roots that invoke the square root of a negative
number were labeled imaginary. Hence, the square root of 1 is desig-
nated as i.
It took almost another 50 years for someone to propose a physical
interpretation of negative numbers. In 1685, John Wallis (23 November
161628 October 1703), the English mathematician, the chief map-
maker and cryptographer for the British Parliament, published his book
Algebra. In his treatise, he offered an interpretation of negative numbers
as corresponding to the left-hand side of a line when the zero mark was
somewhere between the left and right extremes.
Indeed, a mapmaker was in a unique position to observe negative
numbers, especially the mapmaker to the British Parliament. Navigators
measured the 360 of longitude based on the orientation of the Sun at
specified times with reference to a time standard maintained at the Royal
Observatory in Greenwich, London, England. This location was defined
as the zero-degree meridian. Chronometers on ships then referenced the
difference between solar time and the time coordinated with Greenwich
Mean Time on their chronometers to determine their longitude. A posi-
tion on a map to the right of Greenwich defined a positive increase in
longitude and a new solar time relative to Greenwich Mean Time when
the sun reaches a defined point in the sky, while movements to the left
result in a decrease, or a negative change, in longitude and solar time
relative to Greenwich Mean Time. This description of positions on a line
based not on a distance but on a change in distance relative to the origin
naturally suggests a physical significance to negative numbers. We now

know Wallis insight as the real number line which spans both the posi-
tive and the negative directions.
In the same year that Wallis published his Algebra, which described
the role of negative numbers, an 18-year-old Abraham de Moivre (26
May 166727 November 1754) had sought refuge in England from the
religious persecution he experienced in France. Thirteen years after his
arrival, he had come to know and befriend Isaac Newton (25 December
164220 March 1726/7). In his conversations with Newton, he revealed
to Newton an interesting result based on Descartes imaginary number i.
De Moivre noted that:
( cos ( x ) + i * sin ( x ) ) = cos ( nx ) + i * sin ( nx ) .

n
The young Gauss would have knowledge of the utility of the real num-
ber line and of imaginary numbers. Like Wallis more than a century ear-
lier with his negative numbers, Gauss was the first to offer a geometric
intuition to complex numbers that created substance out of the imagi-
nary number line many still regarded as a mathematical oddity, despite
their pleasing properties.
The 18-year-old Gauss apparently did not know that the Norwegian
mathematician and mapmaker Caspar Wessel (8 June 174525 March
1818) had also offered such a geometric interpretation just a few years
earlier, in 1799. Like Wallis, Wessel was also a mapmaker who studied
directions, and hence vectors. It was a natural extension to consider the
real-imaginary coordinate system rather than the conventional real-real
coordinate system we all observe on two-dimensional maps and in the
ubiquitous x-y graphs. But, his paper, Om directionens analytiske betegn-
ing, which he presented to the Royal Danish Academy of Sciences and
Letters in 1797, went largely unnoticed and untranslated until 1897.
Buried in the Danish paper was the concept we use today to add vec-
tors. Wessel stated in his On the Analytical Representation of Direction
that:
Two straight lines are added if we unite them in such a way that the second
line begins where the first one ends and then pass a straight line from the
first to the last point of the united lines. This line is the sum of the united
lines.
Wessel also applied his notion of vectors and vector addition to the
complex plane. However, it was left to Gauss to bring the concept of the
complex plane to light in the academic world, and to offer a vivid geo-
metric interpretation with powerful application ever since. He did so as
an 18-year-old youth who was trying to solve a problem that perplexed
mathematicians for more than two millennia.
Gauss had not set out to legitimize imaginary numbers, nor to define
the complex plane. He merely discovered a practical intellectual frame-
work that would allow him to solve a multi-millennial dilemma. Indeed,
he would subsequently have discussions with others who recognized the
value of the new analytic geometry he discovered in 1796. But while
Gauss used his results for his own purposes, he did not publish them
until 1831. It was then that he proposed the new term complex number.
He described it thus:
If this subject has hitherto been considered from the wrong viewpoint and
thus enveloped in mystery and surrounded by darkness, it is largely an
unsuitable terminology which should be blamed. Had +1, 1 and -1 ,
instead of being called positive, negative and imaginary (or worse still,
impossible) unity, been given the names say, of direct, inverse and lateral
unity, there would hardly have been any scope for such obscurity.3
Gauss discovery offered the first bridge between algebra and analytic
geometry. By harkening back to the Pythagorean principle that geometric
figures be drawn only with a compass and a straightedge, he also rein-
forced his fascination with the geometric mean, a property that would
prove influential in his development of the least squares methodology.
To see his insight, consider the consequence of drawing vectors and
geometric figures on a complex plane. In such a representation, with the
algebra first proposed by Leonard Euler a half century earlier, and the
representation on the complex plane proposed by Caspar Wessel, the
horizontal axis is the traditional real number line, and the vertical axis
was in units of plus or minus the imaginary number i. In such a complex
number plane, a given point is then described by a real part a and an
imaginary part bi (Fig. 2.4).
The algebra of imaginary numbers had been fully explored by Euler
and others, but the geometric interpretation was novel. The complex
algebra had a number of nice properties. For instance, lets begin with the
simplest statement of exponential and trigonometric equivalency.
Recall de Moivres identity that was used by the great Leonhard Euler
(170783) to subsequently determine, in 1748, that eix=cos(x)+i * sin(x).
The 1965 Nobel Prize-winning physicist Richard Phillips Feynman (11
May 191815 February 1988) labeled Eulers formula the most remark-
able formula in mathematics.4 Euler had been exploring the infinite series
that represent the exponential and then the two trigonometric functions:

xn x2 x3
ex = =1+ x + + + for all x
n=0 n! 2! 3!
Fig. 2.4 The complex plane

He observed the similarity between the infinite sum above and those
of the sine and cosine functions:
( -1)
n

x3 x5
sin x = x 2 n +1 = x - + - for all x
n=0 ( 2n + 1)! 3! 5!
( -1) 2 n
n

x2 x4
cos x = x =1- + - for all x
n = 0 ( 2 n )! 2! 4!

He noted that the infinite series terms for eix would equal the sum of
the terms for cos(x)+isin(x). From this observation, he concluded Eulers
identity:
e ix = cos ( x ) + i sin ( x ) .

This result actually followed quite naturally from an assertion by a bril-

liant young mathematician named Roger Cotes in the early eighteenth
century. Cotes (10 July 16825 June 1716) was a scientific prodigy and
mathematician who worked closely with Newton in editing Newtons
Principia. The son of Robert Cotes, the rector of Burbage, and Grace
Cotes (ne Farmer), Roger studied at Trinity College, Cambridge, begin-
ning in 1699 and was taken under Newtons wing. Upon his gradua-
tion, he was given a Trinity Fellowship in 1707, and was appointed the
Plumian Professor of Astronomy.
Cotes made two observations that were subsequently refined by Euler
and by Gauss. First, in the area of mathematics, he noted in 1714 that:
ix = ln ( cos x + i sin ( x ) ) .

It is possible that Cotes failed to observe that sin(x) and cos(x) are peri-
odic functions that cycle continuously between the values of 1 and 1 as
x increases. When, in 1740, Euler instead expressed each side as an expo-
nential, he was left with his familiar Eulers formula, which he immedi-
ately recognized as necessarily periodic. Neither discoverers offered the
now familiar interpretation offered by Wessel and Gauss, even though the
interpretation is quite conventional today.
Interestingly, Cotes shared with Gauss a vocation in astronomy and,
like Gauss, was interested in how observation errors tend to regress with
increased observations, rather than multiply. His interest in predicting
the movement of planets, given observational error, was the motivation
for what would eventually result in the method of least squares.
With this history at hand, let us now explore Gauss insights. As
asserted by Gauss, a complex number can be represented as the sum of
a real component and an imaginary component representing the sum of
two vectors on the complex plane. This vector is the sum of the move-
ment in the real direction and imaginary direction. Thus they sum to
a+bi. The parameters a and b then represent distances along the real
horizontal axis and the imaginary vertical axis (Fig. 2.5).
In polar coordinates, the distance along the horizontal axis is just as we
find for the real plane:
Fig. 2.5 The unit circle on the complex plane

x = r cos ( Q )
y = r sin ( Q ) ,

where r is equal to 1in the case of the unit circle. In general, the real
parameters (x, y) of a circle follow the identical equation for a circle as in
the real plane:
r 2 = x 2 + y2 .
Notice, too, that this vector, described by a complex number z=x+iy,

can be expressed as z=r(cos()+icos())which equals rei, from Eulers
Formula. We then see a simple property of the multiplication of complex
numbers. Multiplying two complex numbers of polar length r1 and r2
and angles and results in a complex number (r1+r2)ei(+). This is
equivalent to the original ray scaled up by a length r2 and rotated by .
Another consequence of Gauss complex plane is that any position z
multiplied by the imaginary number i results in a rotation of the vector
z by one quadrant. For instance, consider a point z=a+bi. The product
i*z then yields ai+i2b=b+ai, which is equivalent to the 90 rotation
of the ray counterclockwise.
Within this unit circle on the complex plane are contained regular
polygons of a very simple form. Note that the expression z3=1 yields
the solution to the apexes of a triangle (below), while z4 = 1 yields a
square and z6=1 yields a hexagon. For instance, note that z3=1 can
be factored into (z1)*(z2+z+1), which yields the three roots z1=1,
(
z2= (-1 + i( 3) / 2 ) and z3=z2= -1 - i ( 3 ) / 2 ) ). For the square, z =1,
4
or (z21)(z2+1)=0, which yields roots 1, i, 1, i and the apexes below

within the unit circle.
We now have the tools to understand Gauss insight. A regular unit
k-polygon is simply a k-sided polygon with k unit radii to each apex Pj,
and k sides, beginning with the ray defining the first apex (1,0). Below are
examples of rays forming the apexes of a triangle, a square and a hexagon
(Fig. 2.6):
Fig. 2.6 Regular polygons in the unit circle on the complex plane
Notice that, for the triangle, the first apex is given by real and imagi-
nary coordinates (1,0), or z0=ei*0, the second apex is z1=ei*2/3 and the
third apex by z2=ei*4/3. Each apex is rotated by 120, or 2/3 radians.
Since complex number multiplication for a unit ray simply represents a
rotation, each apex is simply the square, or the cube, or the kth power of
the first apex. N rotations for an n-sided polygon is then given by zn=1
=en=cos(n)+isin(n). Then, this description of an n-sided regular
polygon developed by Gauss immediately yields De Moivres formula:
( cos ( Q ) + i sin ( Q ) )
n
= cos ( nQ ) + i sin ( nQ ) .

In fact, much of the mathematics required for Gauss to visualize reg-

ular polygons using a complex plane had already been discovered. His
miraculous innovation merely required his brilliant 18-year-old mind to
recast these observations geometrically in a powerful way that nobody
had seen before. Scholars and students alike have appreciated Gauss ele-
gant geometric interpretation ever since.
It may have been Gauss ignorance that allowed him to pursue and
realize his profound discovery. He was not so indoctrinated into what
is, and perhaps what could not be, to not explore his most fruitful path.
Instead, he became the first to show the confluence and creation of a
few different branches of mathematicsPythagorean geometry, complex
numbers and the roots of equations described by zn=1. By embracing
complex numbers, he also verified that an nth degree polynomial indeed
has n roots. If we accept such complex roots, the nth root of unity prob-
lem and its relationship to polygons are immediately apparent.
Gauss next task was to demonstrate that some of these roots can be
described using numbers represented by ratios of whole numbers or their
square roots, or the so-called constructible polygons that can be drawn
only with a compass and an unmarked straightedge. The Greeks had
known they could do so for polygons with 3, 4, 5, 6, 8, 10 and 12 sides.
Each of these are what we call a Fermat prime number, or a multiple of a
Fermat prime number. The next Fermat prime number in the sequence is
17, where a Fermat prime is given by:
n
Fn = 22 + 1
To prove that a 17-gon is constructible, Gauss had to show he could

calculate cos(2/17) using only whole numbers and addition, subtrac-
tion, multiplication, division and square roots. He showed, correctly,
that:
2p
16 cos = -1 + 17 + 34 - 2 17
17
+ 2 17 + 3 17 - 34 - 2 17 - 2 34 + 2 17 .

While it took Gauss a couple of years to write his dissertation into a trea-
tise that proved the assertion he made in 1796, and another three years to
rewrite it in the form of the published treatise Disquisitiones Arithmeticae,
in Latin, in 1801,5 he nonetheless had signaled to the mathematical
world his brilliance in solving a 2000-year-old problem.
In Gauss first year at the University of Gttingen, he was never fully
secure in his personal finances. When he first entered the Collegium in
Brunswick, his funding from the Duke was sufficient, but not permanent.
He was overjoyed when the Duke agreed to fund his first year of study
at Gttingen, but he remained concerned the funding would continue.
Having solved a 2000-year-old problem with an incredibly elegant and
profound solution, the 18-year-old Gauss mathematical credentials were
becoming established. He gained confidence he would be able to earn

the continued financial support of Duke Ferdinand. Gauss then went on
to complete his degree in mathematics at Gttingen, with the financial
support of his patron, Duke Ferdinand.
Children of wealthy families never felt such financial pressure. They
may feel a need to perform intellectually as a matter of pride, but not of
necessity. Gauss, though, felt a more pecuniary pressure to perform. He
was notorious for his hard work, as an antidote to economic insecurity,
which, when combined with his almost uncanny ability to see problems
in unique and geometrical ways, resulted in insights such as his construc-
tability solution to the 17-gon. And, with each success came a marginally
increased confidence in his future funding.
Fortunately, following Gauss first year at Gttingen, the Duke agreed
to fund his work to the completion of his thesis. Lesser minds may have
translated such financial security into reduced incentives to demonstrate
their brilliance. Gauss, though, was academically emboldened. He fol-
lowed up what he considered to be his greatest work with what others
who followed may believe were even more substantial contributions.
For instance, Gauss standardized the use of the imaginary number i
as a legitimate number that represents the geometric mean between +1
and 1, that is, i = 1 * ( -1) . And, in completing his doctoral disserta-
tion at one of Germanys greatest universities in 1799, at the age of 22,
his Disquisitiones Arithmeticae, dedicated to his patron Duke Frederick,
Gauss unified the contributions of the great mathematic minds of his
era, including Pierre de Fermat (17 August 160112 January 1665),
Leonhard Euler (15 April 170718 September 1783), Joseph-Louis
Lagrange (25 January 173610 April 1813) and Adrien-Marie Legendre
(18 September 175210 January 1833). And, he not only introduced
the foundations of a new type of complex analysis and many of its first
results. Gauss also established the field of number theory. In doing so, he
also made a number of assertions, and sometimes proofs that continue to
be validated today. But, just as only a handful of people could absorb the
unconventional and complex mathematics and physics of Albert Einstein
in 1905, few could absorb Gauss work in 1799.
Perhaps the book that 25-year-old Carl Gauss finally published years
after his Gttingen thesis might have been more quickly written and eas-
ily absorbed had he not written it in Latin. Indeed, his work was one of
the last major works among mathematicians to be written in Latin. The
language was one still studied by academics of all nations and hence his
papers could be read among a wide subset of a very narrow circle of elite
mathematicians. Soon thereafter, English would be adopted as the uni-
versal language of academicians.
Indeed, his treatise might have been even longer and more expansive,
had finances not stood in his way. It was the custom then that the inves-
tigator, or his patron, to pay to have their books published. To reduce
these costs, Gauss measured his contributions not by the expansiveness
of his ideas but by the economy of his brevity. His expositions were terse,
to the point that many lesser minds could not fill in the gaps Gauss left.
And, he had trimmed a chapter from the book to shorten it and reduce
its publication costs. When the Duke of Brunswick eventually discovered
Gauss fiscal plight, he offered to fund the completion of the book, which
was finally published in 1801, two years following the completion of his
dissertation.
The most brilliant mathematicians of Gauss day quickly understood
the contribution, though. Lagrange noted that the book immediately
placed Gauss within the highest echelon of mathematicians.
Notes
1. H.all, Tord, translated by Albert Froderberg, Carl Friedrich Gauss, MIT
Press, Cambridge, Massachusetts, 1970, p.21.
2. Merino, Orlando, A Short History of Complex Numbers, January, 2006,
http://www.math.uri.edu/~merino/spring06/mth562/ShortHistory
ComplexNumbers2006.pdf
3. Nahin, Paul J., An Imaginary Tale, Princeton University Press, Princeton, NJ,
1999, at p.61.
4. Feynman, Richard P. (1977). The Feynman Lectures on Physics, vol.
I.Addison-Wesley. pp.2210.
5. Carl Friedrich Gauss, Carl Friedrich, translated by Arthur A.Clarke,
Disquisitiones Arithmeticae, Yale University Press, 1965.
3
Carl Gauss Great Idea
With what he later considered as his most profound intellectual contri-

bution, the 17-sided regular polygon solution, at hand, Gauss began his
most practical explorations in support of a profession that would earn his
family a reliable income. In 1800, the Italian astronomer Giuseppe Piazzi
(16 July 174622 July 1826), a mathematician by training, had been
appointed to catalog celestial bodies in a compilation called the Palermo
Catalogue of Stars. On the first day of 1801, he claimed he discovered a
new planet, Ceres, in between Mars and Jupiter in what we now know as
the asteroid belt.
Smaller celestial objects often offered only a fleeting opportunity for obser-
vation. Comets, especially, were quite challenging because they were most
illuminated when they were near the sun, but were also most obscured by
their distance, of approximately the distance from the earth to the sun, and
by the brilliance of the sun itself. In addition, their paths are quite elliptical.
Indeed, even the planets have slightly elliptical orbits, with the circle simply
a special case of the ellipse, in which both axes converge to a central point.
The position of planets or stars relative to the sun has played a sig-
nificant role in scientific history at other times. In 1915, Albert Einstein
asserted in his general theory of relativity that gravity could bend light.

DOI10.1057/978-1-137-34137-2_3
No experimental proof could be concocted to substantiate his claim until

1919. Then, a total eclipse of the Sun allowed astronomers to observe
that the location of a star in the skyline near the eclipsed sun was dis-
placed by 1.75 seconds of arc over the location the star should have oth-
erwise been positioned. This deviation, which arose as the light of the star
was bent by the gravitational force of the sun, was as predicted perfectly
by Einsteins theory. The profound observation made scientific heroes of
Einstein, who predicted the deviation, and the astronomer Sir Arthur
Stanley Eddington (28 December 188222 November 1944), who, on
29 May 1919, made the observation that substantiated Einsteins general
theory of relativity insight.
Piazzi was hoping for an affirmation of similar significance. Following
his first sighting of what he thought was a planet on 1 January 1801,
Piazzi went on to observe Ceres 24 times over the next 41 days. But, as
Ceres neared the Sun, Piazzi lost track of it. The comets faintness made
the prospects of seeing it again very unlikely unless astronomers knew
precisely when and where to look.
Gauss came to the rescue. He took Piazzis observational data and pre-
dicted when and where Ceres would reappear. On 31 December 1801,
almost precisely one year after the first observation, the astronomers Baron
Franz Xaver von Zach (4 June 17542 September 1832) and Heinrich
Wilhelm Matthias Olbers (11 October 17582 March 1840) rediscov-
ered what would later be labeled as a large asteroid precisely where Gauss
predicted. The grateful Olbers allowed Gauss to name the next asteroid
he discovered.
Gauss took to the challenge of the prediction of Ceres reappearance
with an enthusiasm that would come to define his subsequent career.
An observation requires astronomers to note the azimuth, elevation and
range of a celestial body. Measurement and atmospheric distortions all
conspire to create some randomness in these observations. Gauss was able
to compute the six necessary parameters that describe an orbit from just
three sets of observations. In doing so, he also was the first to apply a new
method of his own creation, the method of least squares.
Gauss role in the rediscovery of Ceres has since been reconstructed
only by reference to his diaries following his death. In September and
October of 1801, very shortly after Piazzi published the data, he applied
his customary unconventional approach. He did not follow the path of

other astronomers at the time, who would hypothesize a certain orbit,
and then test their hypothesis against observations. Instead, Gauss took
the observations, subject to the random measurement errors, and used
them to construct the orbit in what we might now describe as reverse
engineering.
Gauss solved the problem in November of 1801. There was not even
an observatory in Brunswick at the time. Yet, a 24-year-old theoretical
mathematician suddenly became regarded as a brilliant astronomer with
the ability to predict the paths of orbiting bodies with only a handful of
observations. While Gauss asked that a 17-gon be carved on his tomb-
stone upon his death, his discovery that eluded geometers for millennia
was significant only to the most select handful of pure mathematicians.
On the other hand, Gauss immediately became the prophet for all those
who gaze at the skies. Before the invention of the light bulb, gazing at the
stars in the night sky was an almost universal activity for humans who
remained awake for more hours each day than for when there was light.
His prediction of Ceres reappearance was considered almost mystical.
Gauss discovery suddenly created many opportunities for him. He
was admitted to the Russian Academy of Sciences, and was offered an
academic position in St. Petersburg. The Duke wished to keep the home-
grown prodigy in Brunswick, though, and offered him an inducement to
remain in Brunswick. Ferdinand offered to build Gauss an astronomical
observatory and appoint Gauss its director. Another event also cemented
Gauss decision to remain in Brunswick.
Gauss mother had once worked as a maid for a family named Ritter.
Two Ritters, Friedrich Behrend and George Karl, were Gauss godfathers.
He had grown up playing in the Ritter home, and had each year received
a present from the Ritters. The domestic bliss of their home was com-
pelling for Gauss, in contrast to the harshness of his upbringing at his
fathers hands.
Upon Gauss return to Brunswick and his reacquaintance with the
Ritters, he met the daughter of Christian Ernst Osthoff (17421804)
and Johanna Maria Christine Osthoff (ne Ahrenholz) (17471821).
The father of Johanna Elizabeth Rosina Osthoff (8 May 1780?) was a
tanner and associate of the tanners Ritters, Gauss godfathers.
Johanna was the star of her parents eyes. She was an only child,
cheerful and kind, but rather unsophisticated. She offered Gauss some-
one he described in a letter as a perfect life companion. Gauss courted
Johanna for a year before he professed his undying love to her and asked
her to marry him. It took her four months and ten days to finally agree
to his request. She feared his fame and his worldly life would eclipse her
humble desires. Yet, less than a year later, on 9 October 1805, they mar-
ried at the same St. Katharines Church that adjoined the school annex
where he first impressed his teachers with his mathematical skills.
The young couple had a child less than a year later, on 21 August
1806. They christened their son Joseph on 24 August, at St. Katharines
Church.
Things were looking up for Gauss in 1806. Based on his astronomical
celebrity, the Duke had bought Gauss a state-of-the-art telescope and
Gauss had been instilled as Brunswicks resident astronomer and observa-
tory director. But, despite these joys, tragedy almost immediately beset
Brunswick and his patron. Gauss hometown became embroiled in the
Napoleonic Wars, and their Duke was enlisted as a combat general allied
with Prussia. An attack of his army by Napoleons forces caused the Duke
to receive a blinding wound on the battlefield. He was permitted to
retreat to Brunswick, but was disgraced as Napoleon overtook his town.
The Duke was driven into exile, and soon died, on 10 November 1806.
Meanwhile, Gauss had been working as the director of Brunswicks
observatory. When Napoleons regime tried to extract a war contribution
of 2000 francs from him, numerous scientific luminaries each sent the
sum to Gauss, which he promptly returned. With the loss of his beloved
patron, his financial pride bruised and his fear of Napoleons court well
founded, Gauss was miserable in Brunswick. Johanna was unhappy, too,
despite the arrival of a daughter, Wilhelmine, on 29 February 1808. Six
weeks later, Gauss father died in Brunswick. Gauss patron removed,
and with some jealousy among his fellow residents for his privileged sta-
tus within Napoleons court, Gauss eventually left Brunswick. The Gauss
family moved to Gttingen on 21 November 1807.
Yet, despite these sorrowful distractions and melancholy, Gauss
remained productive. In 1809, he published his Theoria Motus Corporum
Coelestium in Sectionibus Conicis Solem Ambientium,1 which presented his
method for describing the motion of orbiting bodies and his method of
least squares. With its publication, Gauss became a member of learned
societies around the world. In 1809 and 1810, his renown accelerated,
and he received numerous offers for professorships.
Meanwhile, he and Johanna had their third child, Ludwig, on 10
September 1809. He died less than six months later, on 1 March 1810.
Preceding him in death was Johanna, on 11 October 1809, as a conse-
quence of two difficult childbirths in a little more than a year.
Gauss was grief-stricken over the loss of his father, his patron, the
Duke, his wife and his son in less than four years, and remained bitter of
France over its treatment of Germany. Nonetheless, he vowed to remain
in Gttingen, to staff its observatory and oversee the construction of a
new state-of-the-art observatory. From his vantage point in Gttingen,
Gauss observed the Great Comet of 1811 and again successfully calcu-
lated its orbit using his method of least squares. One of the brightest
comets ever observed, it captivated the attention of citizens worldwide.
Some believed it portended to Napoleons invasion of Russia, and the
War of 1812 between the USA and Great Britain.
While the constructability of the 17-gon harkened Gauss arrival
among the mathematical elites, his method of least squares cemented
his position in the minds of practical scientists and astronomers. The
prediction of the movement of celestial bodies, and the study of geod-
esy, or the understanding of the applied mathematics of the shape and
orientation of the earth, was essential for the Age of Exploration within
which Gauss lived. Navigation between continents without the aid of
land sightings required mechanisms to correct the random measurement
errors of navigators.
Men of science, from Galileo to Cotes to Laplace, had offered ways
to tease accuracy out of observations subject to random error, by the
averaging of observations. Laplace had perhaps the best success when he
augmented the work of the physicist and mathematician Roger Joseph
Boscovich (18 May 171113 February 1787) in the method of least
absolute deviation to discern the true observation when observational
errors exist.
The term observational errors that we still use today suggests the root of the
original problem. These errors were not a mere scientific annoyance. Because
observations, and observatories, primarily facilitated oceanic navigation and

commerce, understanding and minimizing these errors became a matter of
life and death for explorers and mariners. Concerns over observational errors
multiplied in proportion to the magnitude and distribution of international
exploration, commerce and colonization, and dated back to the sixteenth
century and the earliest years of the Age of Exploration. European mari-
ners had word of the discoveries of Italian explorers Christopher Columbus
(145120 May 1506), and his explorations of Cuba and Central America,
and those who immediately followed, from John Cabot (14501500), who
explored what is now Canada, and Giovanni da Verrazzano (14851528),
who explored much of eastern North America. These first furays into a new
world caused an explosion of subsequent explorations as nations attempted
to first lay claim to land and resources, and then induced the exodus of
Europeans to the Americas throughout the seventeenth century.
Essential to successful explorations is the accurate determination of
location of the featureless sea. Mariners used the difference between the
position of the North Star and the indication of their ships compass, and
the location of the moon against the stars, or the Sun against their ships
chronometer, to try to discern their location. Each of these measurements
and devices was beset with random errors that were compounded by the
motion of the ship and the accuracy of a navigators readings. A navigator
had to decide whether to use the median or the average of multiple obser-
vations to try to reduce the effect of errors and more accurately estimate
the location of their ship.
This question is not at all trivial. For instance, one might take a set
of observations clustered around one answer, but find an observation
that deviated significantly from the cluster. Should that observation be
rejected as irrelevant? Are all data points equally relevant?
Even the earliest European astronomers understood the challenge.
Johannes Kepler (27 December 157115 November 1630), the noted
astronomer who developed the laws of planetary motion, once puzzled
over four measurements for an astronomical observation. In the end,
he chose some sort of weighted aggregate of these measures that cor-
responded neither to their average nor to their median. Clearly, he had
developed some methodology to discern the true observation from the
measurements riddled with random errors.
Often, when confronted with such dilemmas, his contemporaries used

their best judgment, likely also riddled with preconceived biases, to dis-
cern a true value. Galileo Galilei (15 February 15648 January 1642) was
the first to try to assert a scientific approach to the resolution of obser-
vational errors in his controversial 1632 book suppressed by the Roman
Catholic Church, Dialogue Concerning the Two Chief World Systems.2
Galileo proposed five principles with regard to the relationship between
measurements and the true number they represent, as applied to astro-
nomical observations. He stated:
1 . The observations represent one true number.

2. All observations are prone to errors related to the observer, the instru-
ments and atmospheric conditions.
3. These measurements are distributed symmetrically around the true
value, or the errors are symmetric about zero.
4. Large errors occur less frequently than small errors.
5. The most likely true measurement is the one that best fits the

observations.
It is the last point that created the greatest discussion. If one simply
aggregated the data to calculate its mean, positive errors would cancel out
negative errors, and large deviations would overwhelm small ones. Galileo
proposed the use of the sum of absolute errors to overcome some of this
concern. As such, positive deviations of observations from a hypothesis
of the true value would not cancel out negative ones. Then, the researcher
could propose a hypothesis that would minimize the sum of the absolute
value of errors.
Galileos approach is consistent with the concept of Occams Razor.
Named for William of Ockham (12871347), a Franciscan friar and
philosopher living in England. It is often stated as Among competing
hypotheses, the one with the fewest assumptions should be selected. All
else remaining the same, the measurement that best fits the data should
be accepted.
Yet, despite this logic, and perhaps because Galileo did not offer a full
solution to the dilemma, the simplest approach was to simply average the
observations. Roger Cotes, Sir Isaac Newtons contemporary and aide,
suggested that measurements that represent points could be likened to

the calculation of a center of mass for various weights placed on a ruler.
Using this calculation, this center of mass occurs at the average value of the
measurements weighted by their mass.
This solution, too, remained controversial. After all, measurements
were not the equivalent to the products of distance multiplied by points
of mass.
Pierre-Simon Laplace (23 March 17495 March 1827) was the first
to attempt to postulate a functional form from which errors might fol-
low that was more elaborate than the equal weighting approach that
Cotes and other averagers were implicitly using. Laplace was attempt-
ing to develop a probability density function for errors that would help
him determine which hypothesis would minimize observational errors.
He postulated a symmetrical distribution, as Galileo had proposed, and
adopted the exponential distribution we now call the Laplace Distribution.
Mathematically, such a probability density function is given as follows:
abs( x )
1
p( x) = e b
2b
where x is a given observation, is its true mean, abs(x) is the (posi-

tive) distance between an observation and the true mean and b is a mea-
sure of the spread of the symmetric distribution. Laplace succeeded in
producing a measure that had the basis properties Galileo postulated as
desirable. However, his function was one of convenience rather than one
that flowed directly from intuition.
Gauss was the first to begin applying a more thoughtful approach than
that formulated by Laplace. In his journals, which were not published
until after his death, he alluded to using his new method as early as 1794,
while he was still a student at the Collegium. Later, he applied his meth-
odology to determine the path of the Great Comet in 1811.
Gauss interest in the method of least squares flowed from his sense
of self. He considered himself an applied mathematician. That descrip-
tion sounds at odds with his first major foray into the academic world
based on his solution to the 17-gon. After all, there is little application
to a methodology that could allow one to construct a 17-gon with only

an unmarked straightedge and a compass. In fact, even such a construc-
tion would be exceedingly complex, as demonstrated by a subsequent
author who showed how such a 17-gon could indeed be constructed, a
century and more than a hundred pages later. But, from even his seem-
ingly theoretical result flowed an elegant confluence of a number of areas
of mathematics: Euclidean geometry, Cartesian number theory and the
complex number system. His synthesis is regarded as one of the most
elegant and useful in all of mathematics, and has contributed to greater
understanding in mathematics, physics and engineering than perhaps
any other result.
Gauss was, in essence, a practicing mathematician who immersed him-
self in research that could lead to innovations that would help solve the
practical problems of the time. Essential to science and commerce espe-
cially at that time was an understanding of the movement of celestial
bodies and an accurate measurement of the shape of the earth, or geod-
esy. While other academics of wealthier means could live their lives in
esoteric research as endowed professors, Gauss had to work to support his
research. His research became aligned with his livelihood, as an astrono-
mer and director of his observatories. These questions in astronomy and
geodesy were natural foci of his attention, and his method of least squares
was his personal tool of the trade that afforded him his livelihood.
It was Gauss interest in geodesy that first induced him to develop
his method of least squares, and introduced him to the world of applied
mathematics. Yet, the method he developed he considered so obvious
that he had not realized it was also so innovative. Nonetheless, he fully
appreciated its utility. He used it not only in his own work in geodesy,
but also to motivate his discussions in probability theory in June of 1798,
and, of course, in his calculations of the location of Ceres in 1801 and
1802. This was a period early in his professional career, but once he no
longer enjoyed the largesse of his benefactor. Gauss was trying to build
expertise in areas of practical knowledge for which he thought a liveli-
hood could be forthcoming.
Gauss was also geographically constrained. He had a very strong emo-
tional attachment to Brunswick and Gttingen. This was not because
he could not find employment elsewhere. After all, one of his two ini-
tial interests in college was philology. He was literate in a number of

languages, but, as the product of a simple working-class family, he was
very much attached to home.
In the waning years of the 1700s and the early years of the 1800s,
Gauss sought out opportunities to build upon his experiences with geod-
esy and astronomy. He participated in geographical surveys in his region
and purchased the tools of his new trade: a sextant, clock and telescope.
He taught himself a number of astronomical techniques, and, without
even knowing, invented still more. And, he maintained extensive discus-
sions with his associate Olbers on questions of geographic location and
astronomical observation. These were practical problems for which he
felt his patron, the Duke of Brunswick, would approve. Yet, the practical
matter of projecting sections of an irregular but roughly spherical Earth
on a two-dimensional map created interesting questions in conformal
mapping that had yet been treated sufficiently well. Practical problems
that were amenable to clever solutions were challenges Gauss could never
fail to accept.
In the summer of 1794 while attending the Collegium, Gauss had read
a book by Johann Heinrich Lambert (26 August 172825 September
1777). In fact, the young Gauss shared many interests with this Swiss
mathematician. Like Gauss, Lambert was interested in Euclidean
and non-Euclidean geometry, and the related issue of mapping three-
dimensional objects, like the Earth, on two-dimensional planes, as is
necessary to project an object on a surface of a sphere onto a flat two-
dimensional map.
Lambert was also an astronomer. In his 1765 volume one of Beytrge
zum Gebrauche der Mathematik und deren Anwendung, he wrote about
the sum of errors, a notion that intrigued young Gauss. Gauss continued
with his fascination of the work of the elder Lambert, and signed all three
of his volumes out of the Gttingen library the winter after he arrived.
From the bud of an idea, Gauss subsequently recorded in his diary, on 17
June 1798, that he has made discoveries in the calculus of probability. He
then referred directly to his method of least squares as a way to glean an
underlying functional form from a series of observations subject to ran-
dom errors. In subsequent correspondences, he stated he had embarked
upon the study to offer an explanation or how one might minimize the
sum of random errors in the measurement of an unknown function from

a large set of observations. He had in mind the creation of a set of tools
that would afford him an income as a surveyor and geodesist.
Clearly, his methodology was anticipating how one might describe an
elliptical function that would best represent the orbit of an orbiting body
based on a handful of its observations. The technique could also be used
to position various locations on the surface of the earth, in the three-
dimensional plane, based on references to observations of the location of
celestial bodies. Both applications interested Gauss because they solved
practical problems, for which Gauss anticipated he may earn a livelihood,
and because each invoked elliptical functions. Indeed, when time came
in 1801 to relocate Ceres once it reappeared from behind the Sun, Gauss
already had a very good understanding of his method of least squares,
even if he may have held the opinion the method was not particularly
obscure or difficult to derive.
Gauss became famous for his application of the technique, but infamy
soon followed. One of Gauss characteristics was that he was most slow
to publish results. Indeed, many of his most profound results were never
published until biographers or chroniclers discovered them in his notes
long after his death.
Gauss assertion that he had developed what we now know as the
method of least squares was not without controversy, though. In 1805,
Adrien-Marie Legendre (18 September 175210 January 1833) pub-
lished the first paper that explicitly described a method Gauss claimed he
had been using for years.3
The debate about priority is often a complicated one. While judging
by the notes in Gauss journal, there is little debate that he referred a
number of times to his use of the method of least squares well before
Legendres paper in 1805, Gauss work and correspondence with others
at the time are consistent with his claims.
Some of his lack of attention to publication came from his self-view
as a working mathematician. His livelihood came before his reputation-
building. A second aspect was that publication was expensive, especially
since he often wrote in Latin, and, during his career, Latin had fallen out
of favor. His books would then need to be translated, and he would have
to comb through them again to offer corrections.
One of these corrections was telling. In an article he published in 1799

on a method to determine the distance between two points on earth, he
noted in a correction to the editor that a translation was in error. He had
been describing a method he applied to observations used to estimate the
ellipse that runs through two points on the surface of the Earth. Gauss
spotted the error and quickly recalculated a solution using his own method
of least squares that he employed on a routine basis for such work. His
familiarity and facility with the least squared methodology explains how he
could so quickly calculate the motion of Ceres when asked two years later.
The greatest controversy in Gauss life occurred just a few years later,
though. Perhaps one mathematician competed more than any other in
the same realm as had Gauss at that time. Legendre was the son of a
wealthy family in Paris who was held in very high esteem in the French
academic circles for his work on geodesy, elliptical functions and the
movement of the planets and comets. In his Nouvelles Mthodes pour la
Dtermination des Orbites des Comtes in 1805, Legendre was the first to
describe in published form the method of least squares.
Upon hearing of the publication, Gauss congratulated Legendre for
his contribution, and politely pointed out that he himself had been using
the technique since 1794 or 1795 when he needed to fit an elliptical
curve based on a series of imprecise observations.
The controversy, which nearly rivaled the priority controversy between
Newton and Gottfried Wilhelm (von) Leibniz (1 July 164614 November
1716) over the discovery of calculus, quickly accelerated. Legendre point-
edly asserted that a discovery is not made until it is published. Gauss took
that statement as an attack against his personal integrity and credibility,
even though he admitted he thought the discovery was not particularly
important in its own right.
While Gauss produced significant evidence from colleagues who
corroborated that he had discussed his method with them years before
Legendre published his treatise, the debate continued until well past
Legendre died in 1733. Even today, modern commentators are divided
between to whom credit should be given, although most agree that Gauss
laid strong claim on the use of the technique first. Indeed, his application
of the technique brought Gauss his fame and defined his career following
the Ceres discovery.
The issue may nonetheless be settled. Gauss had already been completing
a major treatise on the subject when Legendre published his own. While
the translation from Latin, and the need for less affluent Gauss to raise
the funds for publication, delayed its appearance until 1809, when he
managed to publish his Theory of the Motion of Heavenly Bodies Moving
about the Sun in Conic Sections,4 Gauss clearly demonstrated a much more
extensive command of the method of least squares than Legendre had
described. What we know of the method, including the result that it mini-
mizes the sum of squared errors when errors follow a normal distribution,
flows from this publication by Gauss.
Perhaps part of Gauss indignation arose because of the immediate rec-
ognition Legendre received upon his publication. Meanwhile, Gauss had
never published his own method that so accurately predicted the reappear-
ance of Ceres, but obviously could not have made his prediction without
the application of such a technique. Certainly, his principle of probability
and of the normal distribution provided a much more extensive founda-
tion than the method Legendre derived, and cemented Gauss reputation.
In his treatment, Gauss began with the work of Laplace decades ear-
lier. He was the first to demonstrate that the probability density function
he derived was an evolution of Laplaces solution. Rather than the mini-
mization of absolute deviation, Gauss treatment minimized the sum of
squared errors in estimation. From the premise that the arithmetic mean
of observations should provide an unbiased estimate of the true mean
parameter, Gauss then demonstrated that, if observation errors are nor-
mally distributed, his method of least squares provides the most likely
estimate of the true measurements. Our understanding of the nature of
errors was expanded in the two years following Gauss publication of his
method of least squares, to be described later. From these principles Gauss
formulated, Laplace completed the analyses we use today by proving the
central limit theorem, something that had stymied Laplace since 1783.
In 1810, following a close study of Gauss work, Laplace showed that
the central limit theorem offered a Bayesian (posterior) justification for
Gauss least squares methodology. If observations are combined, each of
which is an unbiased and independent observation drawn from a large
number of observations, then the least squares estimation represents the
maximum likelihood estimate and minimizes posterior errors, all with-
out any assumption with regard to the true distribution of errors. This
central limit theorem proved that the sum of a number of independent
random variables that are identically distributed will tend to a normal
distribution
Gauss further extended his model by showing that the least squares
approach to a linear regression is optimal if errors have zero mean and
are uncorrelated, with equal variances. This result is known as the Gauss-
Markov theorem. He also derived the now ubiquitous normal distribu-
tion from first principles.
Meanwhile, in the USA, Robert Adrain (30 September 177510
August 1843), considered to be the pre-eminent American mathemati-
cian of his day, formulated a similar but less broad analysis as had Gauss.
The Normal Distribution

Let us return to the normal distribution that has underpinned finance
theory for more than half a century. The story of the normal distribution
invokes the same familiar names as Bernoulli, Euler, Laplace, De Moivre,
and, as in the case of the method of least squares, the final solver of the
puzzle, Carl Friedrich Gauss. It is also a story that was rooted in the needs
of astronomers and mariners, although it had less lofty beginnings also
in gambling.
While we typically associate the normal distribution with the dis-
tribution of non-systematic errors or the random walk in finance, its
beginnings were in probability theory, specifically the probability of
outcomes in simple gambles in the mid-seventeenth century. Antoine
Gombaud, Chevalier de Mr (160729 December 1684) was a French
writer who adopted for himself a noble title. He was also an amateur
mathematician with a fascination with the rolling of dice and other
games of chance. He enlisted two eminent mathematicians of the day,
Blaise Pascal (19 June 162319 August 1662) and Pierre de Fermat (17
August 160112 January 1665), to help solve the problems of prob-
ability he posed and, in doing so, helped lay the foundation for modern
probability theory.
In an effort to stem his gambling losses, Gombaud asked Pascal the

odds of having a single six-sided die come up with at least one six in four
rolls. The now familiar formula instead asks the probability of not rolling
any sixes in four rolls. Then, the probability of rolling at least one six is
then one minus the probability of rolling no sixes:
Pr ( at least one six in 4 rolls ) = 1 ( 5 / 6 ) = 0.5177.

4
Next, he asked the probability of rolling at double sixes at least once in

24 rolls, which is then:
Pr ( at least one pair of sixes in 24 rolls ) = 1 ( 35 / 36 ) = 0.4914.

24
This analysis was later generalized by Jacob Bernoulli (6 January,

165516 August 1706), who was a member of the famed Bernoulli fam-
ily of mathematicians and scientists and the developer of what we now
call the Bernoulli trial. Also known as a binomial trial, it determines the
probability of repetitions of a game of fair odds for which there can be
only one of two outcomes in each repetition: either success or failure. For
instance, the probability of double sixes in one roll is one out of thirty-six
possible outcomes. Then, p is the probability of a success, and q=1p
is the probability of a failure, such that p+q=1. Since there are but two
outcomes at each stage, the probability of various possible solutions over
repetitions of the game is known as a binomial trial, with the outcomes
given as:
n
P ( k successes in n rounds ) = p k (1 p )
nk
k
n

where the terms for n and k in brackets, k , is a binomial coefficient.
This coefficient, read aloud as n choose k, was calculated by Pascal, for
which he derived what is now called Pascals triangle to aid in its calcula-
tion. Jacob Bernoulli was able to approximate the binomial coefficient
well beyond the estimates provided by Pascal and Fermat, but was unable
to determine an approximation that was easy to compute. It was left to
De Moivre to calculate, in 1733, the probability of coming within d out-
comes half the time of n repetitions given even (p=0.5) odds as:
n
nn 1 4 2
d = e 2 d / n
2 2 2 n
Notice the immediate resemblance to the now familiar normal curve

that every student of statistics learns and which we will soon derive. These
early innovators had made progress, but none managed to complete the
circle in the creation of a logically consistent and intuitive method of
minimized deviations.
Just as mathematics converted finance from an art to a science only rela-
tively recently, the science of games of chance was only a newcomer to
the interest of scholars in probability. The first mathematical interest came
from early astronomers concerned about the random errors in their obser-
vations. As early as the second century BC, the Greek astronomer, geog-
rapher and mathematician Hipparchus of Nicaea (c.190c.120 BC), and
one of the founders of trigonometry, proposed that the midrange (or, the
median) of multiple observations should be considered the most correct.
By the sixteenth century, it is clear from the notes of Danish nobleman and
astronomer Tycho Brahe (14 December 154624 October 1601) that he
used some sort of error-adjusting algorithm to best represent his observa-
tions. The astronomers of his day seemed to each incorporate their best
guesses, averaging, or choice of a mean to determine the true location
of a celestial body based on their observations buffeted by random errors.
We had described earlier Galileos more systematic approach, which
suggests he believed the best method was one that minimized the sum of
absolute errors f(x):
n
min f ( x ) = min x xi
x x
i =1
It is well known that this minimization yields the median rather than
the average value of the set of observations xi. We had also noted earlier
that Cotes had argued for a center of mass calculation such that each
observation is weighted by its distance from the calculated center. Under
such a formulation, if each observation is given a weight wi, and these
weights sum up to one, then the center of observations x occurs such that:
w ( x x ) = 0.
i i
i =1
In such a formulation, we can solve for the central value x:
w x i i
x= i =1
n
.
xi
i =1
This expression reduces to a simple average when the weights are equal.
The issue of the appropriate adjustment for repeated observations that
contain a random component was most pressing. There was even testi-
mony to Parliament on the importance of resolving this issue.
Laplace turned his attention to the appropriate error distribution and
proposed a symmetric decay function for the probability weighting of
observations from the central tendency. He argued that the effect of a small
change in one direction or the other, when compared to the central ten-
dency, should equal the proportion of the change to that tendency. From an
argument of constant proportional change as one departs from the central
tendency, he derived the exponential decay function, which, in his formula-
tion, depended on the absolute distance of an observation from the central
tendency. The weighting, or probability assigned to a deviation, then decays
exponentially and symmetrically on either side of the central tendency.
Laplaces more elaborate work on the error function convinced few,
though. Daniel Bernoulli (8 February 170017 March 1782 ), the
nephew of Jacob Bernoulli, lent his considerable support in 1777 to
Cotes notion of the center of mass, or simple weighted averaging, under
the assumption that all errors are equally likely, despite the pleadings a
century earlier of Galileo who argued that small discrepancies are likely
more probable than large ones, and hence should hold more weight.
Bernoulli was also offended by the explicit notion of Laplace that errors
can occur over an infinite line. To Bernoulli, it was common sense that
possible errors should be finite or asymptotically declining in nature.
Yet, averaging, or choosing the median among observations, did not allow
astronomers to calculate the reappearance of Ceres in 1801. Gauss, in advo-
cating for a least squares methodology and his eventual normal distribution,
noted that, as Galileo claimed, small errors should be more likely than large
ones, and the errors should occur symmetrically about the true central ten-
dency. In addition, the most likely occurrences, in a probabilistic sense, ought
to coincide with their average. From this, he concluded that departures from
the mean ought to follow an error curve that does not look significantly dif-
ferent from the approximation to the Bernoulli trial De Moivre had postu-
lated. Gauss asserted an error function (x) should be given by:
h
( x) =
2 2
eh x ,

where h is a precision constant that ensures the sum of these probabilities
along the real number line sum to 1. Note that, if the true mean is given
by 0, and the standard deviation is given by 1 / 2h , the expression
reduces to our familiar one for the normal distribution.
To see how Gauss arrived at this conclusion, let us revisit his goal. He
wished to discover a probability distribution function that reaches a maxi-
mum when the observation x equals the true mean . The joint probabil-
ity density for n observations of x is then given by the following product:
n

x : = ( xi )
1
Gauss wanted his distribution to peak when the mean of the set of obser-
vations coincides with the true mean . He had developed a maximum
likelihood methodology to determine the mean. Differentiating the product
with respect to the true mean and setting the derivative to zero then gives:
n
( xi : )
0 = (x : )
i =1 ( xi : )


Let zi=xi, and ( x : ) = ( x : ) / ( xi : ) . Then, if the mean of
i
the observations coincide with the true mean:
n n
0 = zi and 0 = ( zi ) .
i =1 i =1
Then, is proportional to z, or:
d / dz
= kz and d = kzdz.

Integrating both sides of the equation and solving gives:

2
( x )

( x u ) = Ce

where k=1/2, and where we note that the exponent in the integrand
must be negative to ensure the integral remains finite over the entire
range of values for x.
Finally, we can determine the arbitrary constant C by noting that the
sum of all probabilities must be equal to one:
2
1 ( x )

2
1 = Ce dx.

This normalization requires that
1
( ( x ) / )
2
h 1
C= , ( x) = e 2
.
2
From this result, we can now determine the probability of finding

observations over arbitrary intervals (a, b):
b 1 x / 2
1 ( ( ) )
Prob ( a < x < b ) = e 2
dx.
2 a
We have already determined that this normal probability distribution

function peaks when x=. Next, we interpret the term .
Reverting back to the term z for errors vis--vis the mean, the variance
of z, Var(z)=E(zE(z))2. Then,
1
( z / )
2
1
Var ( z ) = z e
2 2
dx.
2
Let w=z/( 2 ). Then,

2 2
Var ( z ) = we
w2
dx.

Next, let u=w and v=(1/2)exp(w2). Then,
2 2 w w2 1 w2

Var ( z ) =
2 e 2 e dw .
+

The expression in square brackets must be evaluated at the limits .

However, the application of LHospitals rule and imposition of the limits
show that this expression reduces to zero. Then,
2 2 1 w2

Var ( z ) = e dw .
2

The solution to this Gaussian integral then yields:
2 2
Var ( z ) = = 2 .
2
The variance of the error terms is then given by 2. The familiar normal
distribution was derived based on Gauss premises that the distribution
maximum, the average and the median of the probability density func-
tion he derived all occur at the true mean . He also showed that his dis-
tribution has a variance of 2 and illustrated it has the familiar bell shape
we now know. Purists still call it the Gaussian distribution (Fig. 3.1).
The next innovation came at the hands of Laplace. Over the years,
Laplace had closely followed Gauss maturation as a mathematician, and
had remained one of his greatest supporters. Laplace had even intervened
to have Frances science academy award Gauss their highest honor, and
ensured that Napoleons Army treated Gauss well as it rampaged through
Europe, Brunswick included. When the nasty row over priority erupted
between Gauss and Legendre, Laplace tried to smooth it over. And, when
Gauss definitive treatment of the method of least squares was finally
printed in 1809, Laplace heralded its contribution and set about study-
ing its results. From there flowed one of the most important innovations
in statistic: the central limit theorem. Laplace first described it in his
1812 Thorie analytique des probabilits, very shortly after Gauss publica-
tion of his unifying and extensive work in 1809.
To understand the significance of the central limit theorem, it is help-
ful to note a characteristic of the mean and variance we just derived. As
you recall, the mean is simply the expected value of a random variable,
Fig. 3.1 The Gaussian distribution

while the variance is a measure of the squared distance of various points

on the probability distribution function to the mean. That is,
= E(X )

= Var ( X ) = E ( X 2 ) 2 .
2

These are called moments because, like the moments of inertia relative
to a center of mass, they are measures of the distance of various points
from the central tendency, weighted by their probability, or frequency, or,
in the case of physical objects, their mass. In statistics, it is often easier
to work with a moment-generating function to determine these various
parameters as moments. Then, the mean of a random variable, or the first
moment, is simply the first derivative of the moment-generating func-
tion, and the variance the second derivative, less the mean-squared, or
2, and so on. Specifically, the moment-generating function is given by:
( )
M ( t ) = E etX = etx f ( x ) .
xS
Most, but not all, random variables have such moment-generating

functions. The well-behaved random variables have them. Let there be
a set of independent and identically distributed (i.i.d.) random variables
with, for simplicity, a zero mean and a variance (or second moment) 2
with moment-generating functions. Then, the sum of the i.i.d. random
variables is:
n
Sn = X i . Define Z n = Sn / n x2 . Then the various means are given
by: i =1
n
t
( )
n
M Sn ( t ) = M xn ( t ) and M Z n ( t ) = M xn .
n
x
We can rewrite an arbitrary moment function Mx(s) as follows through

a Taylors theorem expansion:
1
M x ( s ) = M x ( 0 ) + sM x ( 0 ) + s 2 M x ( 0 ) + s ,
2
where s/s2 converges to zero as s goes to zero. It is simple to see that

Mx(0)=1, by definition, and, since the first moment is zero, and the sec-
ond moment M x ( 0 ) equals the variance x2 . Then:
1
M x ( s ) = 1 + s 2 x2 + s .
2
It is easy to show, through LHospitals rule, that s/s2 goes to zero as s

goes to zero. Then, n x2 s / s 2 also goes to zero as n goes to infinity. If we
let s = t / n x2 , we see:
n
n t
2

1 t 2
+ n s
M Zn ( t ) = 1 + x2 + s = 1 + 2 .
2 x n n

From the property of the exponential function that:
n
a
lim 1 + n = e a .

n
n
Then we have:
n
t
2

+ n s
lim M Z n ( t ) = lim 1 + 2
2
= et / 2 .
n n
n

This corresponds to the moment-generating function for the standard

Gaussian distribution. It shows that as n grows, the distribution of means
of i.i.d. random variables follows a normal distribution, even if their
underlying distributions are non-normal.
Recall that De Moivre had decades earlier established the result that
the distribution of repeated draws described by Bernoullis binomial
formula converged also to a formula that looks strikingly like Gauss
normal. While Simon de Laplace was the first to combine this grow-
ing chorus that the sum of draws from various distributions approach
a normal distribution, it was left to a Russian mathematician Pafnuty
Lvovich Chebyshev (4 May 182126 November 1894) and his students
Andrey (Andrei) Andreyevich Markov (14 June 185620 July 1922) and
Aleksandr Mikhailovich Lyapunov (6 June 18573 November 1918)
to provide rigorous proofs of the central limit theorem. As a conse-
quence, the central limit theorem is variously called the Laplace-Markov-
Lyapunov theorem.
Notes
1. GAUSS, Carl Friedrich (17771855). Theoria motus corporum coeles-
tium in sectionibus conicis solem ambientium. Hamburg: Friedrich
Perthes and I.H.Besser, 1809.
2. Galilei, Galileo (1632), Dialogue Concerning the Two Chief World
System, translated by Stillman Drake. Berkeley, CA: University of
California Press, 1953.
3. Legendre, Adrien-Marie (1805), Nouvelles mthodes pour la dtermi-
nation des orbites des comtes [New Methods for the Determination of
the Orbits of Comets] (in French), Paris: F.Didot.
4. Gauss, Carl Friedrich, (1809), Theoria Motus Corporum Coelestium
in sectionibus conicis solem ambientium (Theorie der Bewegung der
Himmelskrper, die Sonne in Kegelschnitten umkreisen), Theory of
the Motion of Heavenly Bodies Moving about the Sun in Conic Sections
(English translation by C.H.Davis), reprinted 1963, Dover, NewYork.
4
The Later Years andLegacy ofCarl
Friedrich Gauss
At first, Gauss considered his work on the method of least squares to be

relatively inconsequential and obvious. He developed his method as a
practical solution to problems of observational error in astronomy and
geodesy so that he may streamline his calculations and better earn a living
for himself and his family. To him, they were a means to a larger end. As a
consequence, he did not see any pressing need to quickly publish his tech-
nique. Instead, he worked only slowly toward the publication of his collec-
tion of algebraic results, his method of least squares included, until 1809.
However, once Legendre published a similar but much less complete
analysis a few years before him, and subsequently challenged Gauss for
priority, Gauss became quite preoccupied with the priority controversy.
This controversy with Legendre lasted for decades.
The controversy explains two different approaches to the dissemination
of results, and of recognition for their respective contributions. Gauss,
the paupers son, did academic battle with Legendre, the patricians son.
Gauss lack of financial resources certainly prevented him from publish-
ing to the same extent as some of his contemporaries. Gauss also had to
maintain employment to provide for his family.

DOI10.1057/978-1-137-34137-2_4
Following the publication of his treatise on algebra, Gauss devoted

considerable time designing and building his observatory. Despite the
demands of his appointment as the director of the observatory, Gauss
continued to publish work that sprung from his solutions to pressing
astronomical problems. Beginning in 1816, he published the most thor-
ough treatment to date on hypergeometric functions, his Disquisitiones
generales circa seriem infinitam, an analysis of the method of integration
and its approximations, Methodus nova integralium valores per approxima-
tionem inveniendi, and additional work on the foundations of statistics
and the properties of various estimators, Bestimmung der Genauigkeit der
Beobachtungen, one of the first discussions of statistical estimators. As
time permitted, he also broadened his research. For instance, his Theoria
attractionis corporum sphaeroidicorum ellipticorum homogeneorum metho-
dus nova tractate developed the exploration called potential theory that is
very important in applied and theoretical mathematics and physics alike.
Meanwhile, he found new applications to the results he gleaned in his
geodesic work for various state and national entities.
His increasing interest in geodesy, and increasing demand for his ser-
vices, caused Gauss to even further divide his interests, and perhaps delay
some of his theoretical contributions to mathematics. He was commis-
sioned with a geodesic survey between his province of Hanover and a
portion of Denmark. He would supervise other surveyors by day and
then perform the necessary calculations at night. To facilitate his work,
he even invented a device, called a heliotrope, which could concentrate
light to form highly visible targets for very long range surveying. His
device has been used consistently since his invention until the develop-
ment of the global positioning system (GPS) surveying techniques at the
end of the twentieth century. While his method required a clear view of
the sun, it revolutionized the utility in performing surveys over very long
distances using the triangulation method.
Despite his important work conducting geodesic surveys over long dis-
tances, by 1830 Gauss was nonetheless able to publish almost a hundred
academic papers from his first introductions to astronomy and geodesy.
His work was increasingly recognized for its outstanding scholarship. For
instance, his Theoria Attractionis Corporum Sphaeroidicorum Ellipticorum
Homogeneorum Methodo Nova Tractata secured him the Copenhagen
University Prize in 1822. There, he began his work on a technique of

broad application today, called conformal mapping. Meanwhile, he was
preparing additional work on his method of least squares, first in his
1823 Theoria combinationis observationum erroribus minimis obnoxiae,
and a supplement published five years later.
Among pure mathematicians, Gauss is perhaps best known for his
development of non-Euclidean geometry. Just like his proof of construct-
ible polygons in 1795, after two millennia of research in vain by others,
Gauss was perplexed by the inability to prove Euclids fifth postulate.
Over the intervening millennia, no other mathematician had been able
to prove the simple statement in Euclids Elements:
If a line segment intersects two straight lines forming two interior angles
on the same side that sum to less than two right angles, then the two lines,
if extended indefinitely, meet on that side on which the angles sum to less
than two right angles.
This postulate seemed intuitively obvious to most Euclidean geom-

eters. Also known as the parallel postulate, it was a foundation of axiom-
atic two-dimensional geometry. A roughly equivalent statement is the
triangle postulate that the sum of angles in a triangle must add up to
180, or pi radians. Yet, Euclids fifth postulate could not be proven based
on the four postulates that preceded it.
Gauss established that the parallel postulate could only be proven if
other aspects of Euclidean geometry are discardedhence the applica-
tion of the term non-Euclidean geometry to the theories that flowed out
of the relaxation of the four postulates.
The abandonment of the principles of Euclidean geometry also gave
Gauss yet another pause not to publish his work. He was afraid of the con-
troversy that would result should one disprove a logical tenet of Euclidean
geometry. After decades of defensiveness over his challenge to Legendres
priority claim in the method of least squared, Gauss was reticent to foment
additional conflict. But, as others also came to the conclusion Gauss had
held secretly, and in his detailed journals, for decades, Gauss offered faint
praise for the work of others. Yet, he would often marginalize their work
somewhat by referencing his own personal discoveries, published or not,
in these areas since his first years as a student of mathematics.
Gauss also originated important work in differential geometry. In the

two-dimensional world of Euclidean geometry, the notion of curvature
was relatively basic. However, Gauss explorations in the ellipses of astron-
omy and the hyperbolas of geodesy required him to explore measures of
curvature along planes that slice spherical, conical, elliptic or hyperbolic
surfaces. The slice of one of these planes through a three-dimensional
curved surface could be characterized by the degree of curvature that
is observed at such intersections. Gauss characterized such intersections
based on the maximum and minimum curvature radii that occur along
the intersection. The product of these two radii is called the Gaussian
curvature. Characterization of such curvatures created the important
field of differential geometry.
Notwithstanding his fundamentally important work in other areas,
Gauss regarded his contribution to the creation of fundamental lemmas
in differential geometry to be some of his most remarkable work. His
most widely known contribution was a book he wrote in 1828, entitled
Disquisitiones generales circa superficies curvas, which flowed directly from
practical problems in his geodesy work.
While Gauss was gaining fame and attention in this period, his personal
life was challenging. After the death of his father, he allowed his beloved
but sickly mother to move in with the family in 1817. Her care created
familial challenges as it offered one more reason for Gauss to remain in
Gttingen, near Brunswick. Meanwhile, his second wife Minna wished
Carl would accept a job offered him at the university in Berlin. Gauss,
always reticent to move from his home, kept his family in Gttingen.
There his second wife died, in 1831, and his mother died in 1839.
While his family may have preferred otherwise, the academic envi-
ronment of Gttingen was certainly a rewarding one, even if his var-
ied assignments prevented Gauss from fully immersing himself in but
one strand of scholarship. In 1831, the same year his second wife died,
Wilhelm Eduard Weber (24 October 180423 June 1891), a young
physicist, arrived at the university in Gttingen, partly because of Gauss
endorsements. Gauss had published in the physics literature in applica-
tion of a principle he developed called the principle of least constraint.
His paper ber ein neues allgemeines Grundgesetz der Mechanik, followed
by his Principia generalia theoriae figurae fluidorum in statu aequilibrii,
described the geometry of attractive forces, and had helped create an

important new field in physics called potential theory. Just as Einstein
had united some of the fundamental forces in physics, Gauss potential
theory and his method of least squares had helped science explain some
of the most fundamental observations in the natural world.
Weber and Gauss mutually stimulated their shared interests in mag-
netism. Gauss was initially interested in magnetism as a geodesist who
understood the nature of the magnetic poles of the earth. Together,
Weber and Gauss invented the electromagnetic telegraph. Later in life,
Webers exploration of the interaction between electricity and magnetism
both implied a common speed of transmission consistent with the speed
of light. From this measure, he and Rudolf Hermann Arndt Kohlrausch
(6 November 1809, Gttingen8 March 1858), a co-author and another
Gttingen physicist, denoted this speed by c, a symbol which is uni-
versally used by physicists for the speed of light ever since. Still today
the measure of magnetic strength is called the weber. The great physicist
James Clerk Maxwell (13 June 18315 November 1879), the contempo-
rary of Weber and Gauss, based his unifying theory of the equivalence of
electricity and magnetism on Webers observation of the speed of light.
Maxwells equations represent the foundation of much of physics since.
Gauss and Weber began working on magnetism together because of
Gauss geodesy work. In 1832, Friedrich Wilhelm Heinrich Alexander
von Humboldt (14 September 17696 May 1859), an influential Prussian
geographer, explorer and philosopher, had sought Gauss assistance in
measuring the field across the earth arising from the magnetic pole. From
this work, Gauss wrote three important papers on terrestrial magne-
tism. His explorations generated a number of scholarly papers, includ-
ing Intensitas vis magneticae terrestris ad mensuram absolutam revocata in
1832, Allgemeine Theorie des Erdmagnetismus in 1839 and his Allgemeine
Lehrstze in Beziehung auf die im verkehrten Verhltnisse des Quadrats der
Entfernung wirkenden Anziehungs- und Abstossungskrfte.
The second of these papers proved that a globe can have only two
magnetic poles, and used work by Laplace, his colleague, to calculate
the position of the magnetic south pole. These papers made substan-
tial contributions to our understanding of not only terrestrial mag-
netic fields but also field theory. For instance, in this body of research,
Gauss described, without proof, an important concept in physics, called

Dirichlets principle, which establishes a principle to minimize energy
functionals. This work was in line with Gauss other significant contribu-
tions to potential theory.
As Gauss continued his research into terrestrial magnetism, he speci-
fied that his new magnetic observatory be built with only non-magnetic
materials. The greater accuracy and theory he brought to this study
caused him to revise substantially what was known about the variation
of the earths magnetic field, called magnetic declination, as first mapped
by Humboldt. Gauss improvements greatly improved navigation by
compass.
Meanwhile, Weber, Gauss collaborator, with whom he developed a
telegraph that could function at a distance of one mile, became immersed
in political turmoil in Gttingen. Gauss was conservative, and held
strong views consistent with his nationalist pride, but had well learned to
keep his views quiet as he had observed the fate that befell his patron, the
Duke of Brunswick. The younger Webers outspoken opposition to a new
constitution in the Kingdom of Hannover favored Ernest Augustus. The
Gttingen Seven, which also included the fairy-tale writers the Brothers
Grimm (Wilhelm Carl Grimm [24 February 178616 December 1859]
and Jacob Ludwig Carl Grimm [4 January 178520 September 1863]),
opposed the new King of Hannovers meddling in the Constitution and
refused to take oath to it. The university relieved these seven of their aca-
demic positions. Their courage set in motion a popular liberal sentiment
in Germany that eventually resulted in their liberal republic.
A dozen years after the demonstrations of Weber and his six colleagues,
Weber was reinstated in Gttingen, where he resumed his geomagnetic
work with Gauss.
By the time Weber returned, Gauss was assuming a position of a some-
what eccentric and detached observatory director and occasional lecturer.
For Gauss, all politics was local, and he found few practical problems of
mathematical interest undeserving of exploration.
While Gauss himself never documented his interest in social sciences,
his contemporaries related that he was interested in such problems beyond
the strictures of science. For instance, he showed an interest in the theory
of insurance, what we might called actuarial studies today, on the opti-
mum number of jurors, and the statistical properties of infant mortality.
These latter applications of mathematics to issues of humanity preoc-

cupied Gauss later years. Following his Golden Jubilee lecture in 1849
celebrating his 50th year following his 1799 diploma, Gauss worked to
demonstrate how mortality modifies actuarial tables.
A few years before his Jubilee lecture, the University of Gttingen had
approached Gauss to solicit his help in ensuring the solvency of the pen-
sion fund that assisted widows of Gttingen professors. At that time,
an increase in the number of widows gave pause for concern about the
funds financial viability. The fund received contributions from existing
employees, and earned an income from investment of the corpus, net of
investment fees. The size of the pensions depended on the interaction of
these incomes and expenses, on the number of widows drawing from the
pension and on the expected number of future claimants. All but the last
of these factors was reasonably well understood.
For instance, as he saw his colleagues die, he became concerned about
the pensions left to them as funded by the University. He believed the
Gttingen University widows fund was insufficiently endowed. While
he had led a relatively simple financial life to that date, he became inter-
ested in financial affairs. Indeed, he also became fascinated in investment,
and parlayed his mathematical acumen into a small fortune through his
investment in bonds.
Gauss combined the expected increase in the number of professors,
and hence their pension premiums, and used recent data and published
mortality tables to estimate the adequacy of the fund. After six years
of work, from 1845 to 1851, Gauss came to the surprising conclusion
that the University could actually increase pension payments to widows.
However, he also pointed out that a smaller membership would create
smaller future liabilities, even given reasonable assumptions about both
financial and demographic growth rates.
In 1855, Gauss attended the ceremonial opening of a new rail link
between Gttingen and Hanover. Shortly after that public event, his
health began to fail. He died peacefully in his sleep on 23 February 1855,
at the age of 77.
Clearly, Gauss knew numbers, even when tabulated in thalers. When
he died, his salary was 1000 thalers per year, but his wealth was 170,000
thalers.
It took decades to fully understand Gauss brilliance. Almost 40 years

after his death, his meticulous journals were discovered. In those journals
were hundreds of ideas of great mathematical significance that he never
published, compared to the couple of hundred important ideas which he
had published. He was known to avoid publication until his ideas were
fully developed and complete. In those journals were notes that estab-
lished he had discovered some of the most important results of modern
mathematics that had since been credited to others, such as Legendres
method of least squares, Cauchys fundamental theorem of complex anal-
ysis, quaternions of Hamilton and work by the eminent mathematicians
Abel and Jacobi.
Had Gauss been afforded more time to document his thoughts, it has
been estimated that mathematical sciences, and related fields, might have
developed half a century later. Imagine if his work, which led to the dis-
coveries of the pre-eminent thinkers of our day, such as Albert Einstein,
could have inspired others so much sooner. Had that been the case, there
may not have been a prominent Albert Einstein, and scientific, social
scientific and financial history might have been dramatically different.
Gauss summed up his unusual approach in a letter to his close friend and
non-Euclidean geometry colleague, Jnos Bolyai (15 December 180227
January 1860):1
It is not knowledge, but the act of learning, not possession but the act of
getting there, which grants the greatest enjoyment. When I have clarified
and exhausted a subject, then I turn away from it, in order to go into dark-
ness again I imagine the world conqueror must feel thus, who, after one
kingdom is scarcely conquered, stretches out his arms for others.
Note
1. https://math.dartmouth.edu/archive/m5w00/public_html/quotes.
html, accessed 18 January 2016.
Part 2
From Least Squares to Eugenics
Mathematicians from Euclid on played with numbers for practical rea-

sons. The Greeks wanted to understand and construct geometric shapes.
Newton sought to understand the movement of stars and planets, in the
large, and the forces of interaction of objects in the small. The Bernoulli
and Euler sought to understand forces of nature and the workings of
chance. By the seventeenth and eighteenth centuries, mathematicians
turned their attention also to pure mathematics, with no obvious appli-
cation but the satisfaction of human curiosity. Even so, mathematicians
epitomized by Gauss used increasingly complex and abstract mathemat-
ics in an attempt to better understand the paths of celestial bodies. These
tools had yet been applied beyond the physical sciences.
In the physical sciences, there exists a pecking order. The pure math-
ematicians develop intuitions of which only some find practical appli-
cation among the applied mathematicians. There is a strong overlap
between the applied mathematicians and the theoretical physicists. Next
on the pecking order are the experimental physicists, theoretical chem-
ists, experimental chemists, and so down the line. As one moves down the
pecking order, the mathematical sophistication necessary to solve their
various problems declines as mathematical beauty gives way to human
practicality.
It is a leap of methodology, then, for the techniques of Gauss to find

such rapid application in biology, first, and then the social sciences. It
should not be surprising to discover that this dispersion of applied math-
ematical techniques across the disciplines began with an individual who
spanned multiple disciplines himself.
5
The Early Life ofFrancis Galton
If Gauss lacked pedigree, Francis Sacheverel Galton certainly did not.

The Galton name originated in Dorset in the sixteenth century, a
county on the southwest shores of England on the English Channel.
Over the next five generations, members of the family migrated north-
west to the adjoining county of Somerset. There, in 1669, John Galton,
the son of Hubert, married Bridget Lacey, the daughter of John Lacey.
This couple John and Bridgett Galton had two children, but only the
younger son, Samuel John Galton (16711743), survived. Samuel John
married Sarah Button (8 April 168217 April 1753), the daughter of
Robert Button and Edith Batt, on 4 September 1703, and they lived their
entire lives in Somerset. There, they had three sons and four daughters.
Their only surviving son was Samuel Galton (171979). He migrated to
Warwickshire, two counties to the northeast, and raised a family with
Mary Farmer, whom he had married in 1746.
Samuel and Lucy Galton were Quakers. Despite their religious
vow to nonviolence, Samuel owned a gun manufacturing factory in
Birmingham, which was then still part of Warwickshire. They had five
children together, but only one son. Their heir to the family business was
Samuel John Galton (18 June 175319 June 1832).

DOI10.1057/978-1-137-34137-2_5
Samuel John Galton married Lucy Barclay (22 March 175716

November 1817) on 7 October 1777in Hartford, England. Lucys father
was a Scotsman, Robert Barclay (17 November 17328 April 1797),
while her mother Lucy was born in 1737in London, England. Already,
the Barclay family was well on its way in amassing a banking empire that
still exists to this day.
Young Samuel was provided with a first-rate education. He attended
the Warrington Academy not long after Joseph Priestley (24 March
17338 February 1804), the British philosopher, theologian, dissenting
clergyman and educator, had converted the Academy to one of liberal
education rather than of one relying on the classics. Priestley advocated
for a practical education that included new fields of study such as history
and philosophy, and instruction in commerce. Young Samuel benefited
from this new style of education.
In 1773, Samuel Jr. became the manager of the Steelhouse Lane Gun
Works. Like many Quakers, Samuel Jr. was intellectually curious and
hosted meetings of a local scientific circle, the Lunar Society. He was
also one of the most successful self-made men within the local scientific
society (Fig. 5.1).
The father and son Samuel Sr. and Samuel Jr. were active members
of the Society of Friends. By 1790, as England began to arm itself in
preparation of war with Europe, and the eventual Napoleonic Wars, the
Society of Friends began to question the Galtons involvement in gun-
making. Samuel Jr. pointed out to his Friends that the jobs and invest-
ment he generated provided for the consumption that fueled the local
economy. He also continued to reject the claim that his gun manufac-
turing promoted violence, even though he was, by then, the largest gun
provider for the British government. At the same time, the Galtons had
harbored Joseph Priestley during the Priestley Riots of 1791 as a mob was
growing by the day in reaction to the civil rights and education programs
advocated by Priestley and the Galtons.
The Society of Friends refused to abate their assault on the Galtons
livelihood. Next, they challenged the Galtons over their participation
in slave trading. This forced the family out of their gun business. The
Galtons rehabilitated their relationship with the Quakers by retiring to
banking in 1804. By the time their son Samuel Tertius Galton (23 March
Pedigree Chart for

Sir Francis Sacheverel Galton
Samuel John Galton John Galton
b: 1671 in Birmingham, b: 1650 in Galton Manor,
Samuel Galton m: 04 Sep 1703 in Taunton,
b: 1719 d: 1743 in Somerset Bridget Lacey
m: 1746 b: 1643 in Loxton Manor,
d: 29 Jun 1799 in Birmingham,
Warwickshire, England Robert Button
Sarah BUTTON
b: 08 Apr 1682 in Loxton Manor, b:
Samuel John Galton Bedminster, Somerset
b: 18 Jun 1753 in Birmingham, d: 17 Apr 1753 in Taunton Edith Batt
Warwickshire, England Magdalen, Somerset b:
m: 07 Oct 1777 in Hertford,
Hartford, England Joseph Farmer
d: 19 Jun 1832 in Birmingham,
Warwickshire, England b: Abt. 1686
Mary Farmer
m:
b: 1718 in Oldbury Hall, Oldbury, d: 1741
Atherstone, Castle Bromwich,
Birmingham, West Midlands,
d: 29 Jun 1777 in Birmingham, Sarah Abrahams
Warwickshire, England
b: Abt. 1690 in Bromsgrove,
Samuel Tertius Galton Worcester
b: 23 Mar 1783 in Duddeston, d: 1733
Birmingham, England
m: 30 Mar 1807 in Breadsall,
Derbyshire, England Robert Barclay
d: 30 Mar 1844 in Hastings, b: 17 Nov 1732 in Fetterose,
Sussex, England Kincardineshire, Scotland
m:
Lucy Barclay d: 08 Apr 1797 in Kincardine,
Aberdeenshire, Scotland
b: 22 Mar 1757 in Bushmill,
Middlesex, England
d: 16 Nov 1817
Lucy Barclay
b: 1737 in Cheapside, London,
England
d: 1757 in Winchmore Hill,
Sir Francis Sacheverel Galton Middlesex, England
b: 16 Feb 1822 in Birmingham,
Warwickshire, England
m: 01 Aug 1853 in
Peterborough, Cambridgeshire, William Darwin
England
d: 17 Jan 1911 in Grayshott b: 27 Jul 1655 in St Andrews
Robert Darwin Holborn, London, England
House, Surrey, England
b: 12 Aug 1682 in Elston Hall, m:
Elston, Balderton, Southwell, d: 28 Aug 1682 in England
Nottinghamshire, England
m: 01 Jan 1723 in Balderton, Anne Waring
d: 20 Nov 1754 in Elston, b: 1662 in Elston Hall, Elston,
Erasmus Darwin Nottinghamshire
b: 12 Dec 1731 in Elston Hall, d: 23 May 1722 in Elston,
Elston, Nottinghamshire, Nottinghamshire, England
England
m: 06 Mar 1781 in Elizabeth Hill
Radbourne,Derby,England
d: 18 Apr 1802 in Breadsall, b: 18 Dec 1702 in Lincolnshire,
Derbyshire, England; Age: 70 England
d: 26 Apr 1797 in Elston,
Frances Ann Violetta Darwin
b: 28 May 1783 in Radbourne
Hall, Radbourne, Derbyshire,
England
d: 12 Feb 1874 in Warwick, David Colyear
Warwickshire, England b: 1655 in Brabant, Meuse,
Sir Charles, 2nd Earl of
Portmore KT MP Colyear m:
d: 02 Jan 1730 in Weybridge,
b: 27 Aug 1700 in Portmore,
Weybridge, Surrey, England.
m: 1747 Catherine Sedley
d: 05 Jul 1785 in Upper Harley
Street, St. Marylebone, b: 21 Dec 1657 in Tunbridge
Elizabeth Chandos Colyear Wells, Kent, England
Middlesex, England
b: 1747 in , , , England d: 26 Oct 1717 in Bath,
d: 05 Feb 1832 in , , , England Somerset, England
Elizabeth COLLIER
(COLYEAR)
b: 1713
d:
Fig. 5.1 The ancestry of Francis Galton
178330 March 1844) took over the family business in 1815, the family
had become firmly established as bankers.
Samuel Galton Jr. died in 1832 a wealthy man, with a large fortune
estimated at 300,000. By then, his son Samuel Tertius, a well-educated
graduate of Cambridge University, had increasingly lived a life of nobility.
He left to others the management of the Galton businesses, and instead

devoted himself to the study of economics and his interests in lesser sci-
entific pursuits.
On 30 March 1807, Samuel Tertius married Francis Anne Violetta
Darwin, the daughter of a fellow Lunar Society member Erasmus Darwin
(12 December 173118 April 1802), their family physician. Erasmus
was a philosopher, slave trade abolitionist and a member of the Darwin-
Wedgwood family, of high-quality pottery fame. This was a union of two
families of high social status.
Samuel and Violetta lived in a large house in an exclusive area of
Birmingham, in The Larches, the former home of Joseph Priestley. Samuel
Galton and Erasmus Darwin had established the Lunar Society. Indeed,
within this Lunar Society was a large number of cross-marriages between
Darwins, Wedgwoods, Barclays and Galtons. For instance, another of
Erasmus children was Robert Darwin (17661848), the father of Charles
Darwin.
Samuel Tertius marriage to Violetta required him to break from the
Quakers. The family of Erasmus Darwin were resolute followers of the
Church of England, and the patriarch of the family held great sway.
Erasmus, the grandfather of Charles Darwin, was a brilliant physician in
his own right who had developed his own theory of evolution based on
acquired characteristics, which influenced the creation of the eugenics
movement a half century later. He was also a Fellow of the Royal Society
(FRS). On both the Darwin and Galton sides of the family were intellec-
tuals who immersed themselves in the scientific, moral and social studies
of the day.
Certainly, Samuel Tertius enjoyed significant intellectual stimulation
within his enlarged family. With a wealth that allowed him to devote
time to his intellectual pursuits, he shared his fathers interest in track-
ing all things with elaborate tables and color-coded charts. In the early
nineteenth century, the Great Mind David Ricardo (18 April 177211
September 1823) was gaining fame as a self-taught economist through
his treatises on the value of money and bullion. Samuel, too, weighed
into the debate with his 1813 book A Chart Exhibiting the Relationship
Between the Amount of Bank of England Notes in Circulation, the Rate
of Foreign Exchanges, and the Prices of Gold and Silver Bullion and of
Wheat, Accompanied with Explanatory Observations. His contribution to

economics was only shortly after Ricardos groundbreaking and highly
influential pamphlet The High Price of Bullion, a Proof of the Depreciation
of Bank Notes. In Galtons exposition, he observed and explained how one
line on a chart is correlated with another, an argument that one of his
sons would subsequently develop to great effect.
The Arrival ofFrancis Galton

Samuel and Violetta had a string of four girls together, followed by three
boys. Their youngest, Francis Sacheveral Galton, was born on 16 February
1822. By then, his four sisters were in or nearing their teenage years.
Francis was very much the baby of a most successful and comfort-
able family. He was especially close to the third eldest of his sisters. She
suffered from a back condition that kept her confined to a couch in her
room for much of the day. There, she nurtured, played with and educated
her young baby brother. By the age of four, Francis could read and write,
add and multiply. A year later, he had absorbed Homers Illiad.
Francis intellectual intensity shaped him into a socially uncomfort-
able and solitary child, which made his eventual attendance in grammar
school somewhat difficult. First, he attended a local school, and then, by
his tenth birthday, he was sent to a boarding school in Boulogne. After a
year of unhappiness, though, he returned home to attend a private school
much more to his liking, under the tutelage of Reverend Atwood.
At the private grammar school, Francis thrived. Then, at the age of
13, he began to attend King Edwards Grammar School in Birmingham.
There, he would endure a brutal, corporal form of classics education for
a little more than two years. Then, at the young age of 15, he began a
medical education at Birminghams hospital as his father pursued what-
ever could be done to ensure Francis followed in his grandfather Erasmus
footsteps.
The year 1838 was an important one for Francis. Barely 16 years old,
he was at one moment celebrating the beginning of the Victorian era in
England, and commencing his medical education at a highly respectable
London institution. As a young medical student, he was at first repulsed
by the suffering, but soon garnered a detached scientific perspective.

The next year found himself studying medicine at the renowned Kings
College Medical School in London.
Galton thrived in the program but still sought more esoteric scientific
pursuits. In England at the time, one was not eligible for graduation until
the age of 21. His early entry into medical studies meant he had a year
to fill before he could receive his credentials. He, and his half cousin,
consulted about his academic future. Charles Darwin had been biding
time visiting London upon the return from his circumnavigation of the
world as the documenting botanist on the HMS Beagle. They concocted
a plan. Darwin felt, and Galton agreed, that a year studying mathematics
at Cambridge might help Galton augment his analytic skills.
Galton enjoyed Trinity College at Cambridge perhaps more than was
conducive to his learning. He did not thrive intellectually, but he main-
tained his academic progress sufficiently to remain there, and delay the
completion of his medical education. While at Cambridge, though, his
dear father Samuel Tertius died from a steadily worsening asthma. On 23
October 1844, Francis was left fatherless, but far from penniless.
Earlier that year, in February, Galton had become a member of the
Freemasons, a fraternal organization of men who are devoted to collec-
tively doing things together in their world, and individually doing things
within their own minds. Dating back to the Middle Ages, the masons are
dedicated to continuous social and individual growth.
At the time of his joining of the freemasons, and his certificate in
1845, Galton was attempting to complete his studies at Cambridge with
honors. However, the stress of his schooling, the loss of his father and
other pressures in his life caused him to suffer a nervous breakdown. He
briefly resumed his medical studies, but abandoned them too. In 1847,
Cambridge University awarded him his degree with no requirement for
further study.
While he had promised his father he would complete his medical
studies, Galton had a rather lackluster mathematics degree in hand, and
an inheritance that meant he would not need to ever work to support
himself. Galton reneged on his compact with his deceased father, and
indulged his penchant to travel.
Perhaps imbued with his half cousins love for exploration, Galton
took to adventures of his own. He sought new experiences, first in Egypt,
and then throughout the Middle East, accompanied by a servant and by
friends he met there, or whom would join him from England. He eventu-
ally bored of his adventures, though, and returned to the life of country
gentry in England.
Soon, though, he again yearned to travel, and set out to travel even
more extensively. Much of the latter half of the 1840s would be his age
of exploration of Africa. Upon his return in the early 1850s, he was
celebrated for his adventures. His writings and subsequent speeches to
learned societies on his African travels won him respect in Londons intel-
lectual community and the major award from the Royal Geographical
Society that David Livingston, of Dr. Livingston, I presume notoriety,
had just won some time earlier for his own explorations of Africa.
His reputation as a noted adventurer cemented, Galton traveled his
circles in London and beyond, often as the toast of the party. On one
occasion, in the Christmas holiday season of 1852, he attended a party
at his neighbors home and met his future wife, Louisa Butler, the daugh-
ter of George Butler (5 July 177430 April 1853), a well-known math-
ematician from Cambridge, and sister of other Cambridge students and
alumni. Galton fit well into the family. Francis and Louisa were married
on the 1 August 1853.
A marriage-blissful Francis set about to work on a book of his adven-
tures in Africa. His publication became a popular read, and more awards
were bestowed upon him. Barely 32 years old, Francis had achieved as
much fame as a man of leisure could earn. He augmented his fame with
additional highly successful books, and with a lecture series. By 1856,
he was appointed a Fellow to the Royal Geographical Society. From his
learned base, he gained the friendship of Englands most influential think-
ers of the day. Among the dozens of intellectuals he came to know was
Herbert Simon, the father of Social Darwinism, and the individual who
coined the phrase survival of the fittest to so compactly, and perhaps erro-
neously, as a description of the contribution of Galtons cousin, Charles
Darwin. This troika of Galton, Darwin and Simon collectively began
to revolutionize humankinds thought on evolutionary destiny from the
perspective of both biology and society.
6
The Times ofFrancis Galton
Lambert Adolphe Jacques Quetelet (22 February 179617 February

1874) was a contemporary of Gauss who also directed an observatory, in
Brussels, Belgium, 300 miles to the west of Gttingen. Born in Ghent,
then part of Napoleons French Republic, to a city agent, Franois-
Augustin- Jacques-Henri Quetelet, and Anne Franoise Vandervelde,
Adolphe lost his father when he was only seven years old. He channeled
that loss into his studies.
Like Gauss, who was 20 years Quetelet senior, Quetelet was math-
ematically precocious. He began to teach mathematics by the age of 19,
and graduated with his PhD 4 years later, from the University of Ghent.
Also, like Gauss, he was interested in the theory of curves.
A young person of limited means who did not stray far from his
geographical heritage, Adolphe, also as had Gauss, sought to build an
observatory in a nearby center of his province. He moved to Brussels,
assembled his observatory, and became a respected member of his nations
Royal Academy, and in the nearby Royal Netherlands Academy of Arts
and Sciences. Over his career, he mastered the tools necessary to direct
an observatory, but he also sought to apply these tools to social issues in

DOI10.1057/978-1-137-34137-2_6
what he preferred to call social physics, through his application of the

normal distribution and the method of least squares to social issues.
While Gauss used the normal distribution as a way to minimize the
effect of errors on astronomical observations, Quetelet recognized that
social variables were exceedingly complex and imperfect in their mea-
surement. He sought to use the statistical techniques of scientists to bet-
ter describe and understand such issues as crime, suicide and marriage
rates. In doing so, he positioned himself squarely within an emerging
discussion of nature versus nurture. In his era, social philosophers of the
day were arguing that the decisions of women and men were a natural
exercise of free will, and Quetelet argued that we are influenced in our
decisions. As a consequence, our actions might thus be predicted as a
function of the forces that impinge on our lives.
Quetelets most significant statement on the debate over free will was
his 1835 Treatise on Man, Sur lhomme et le dveloppement de ses facults,
ou Essai de physique sociale, published just a dozen years after Gauss fully
described the linear regression model and the normal distribution. There,
Quetelet formulated the concept of social physics and the measurement
of characteristics that describe the average man. For instance, our cur-
rent measure of the body mass index, as a representation of our combina-
tion of height and weight, was developed by Quetelet.
Quetelet observed that common social parameters and astronomi-
cal errors seemed to be distributed as a normal distribution, just as it
describes the errors in astronomical observations. When Isidore Auguste
Marie Franois Xavier Comte (19 January 17985 September 1857), a
contemporary of his, heard of Quetelets social physics, Auguste Comte
instead coined the term sociology to explore such influences, characteriza-
tions and relationships among members of society to distinguish his more
philosophical approach to Quetelets more quantitative methodology.
In his various social explorations, Quetelet developed correlations
between such physical observables as age, gender, education and alcohol
consumption on the rate of crime. This exploration resulted in a chap-
ter Of the Development of the Propensity to Crime in his Treatise of
Man. In the Treatise, he also asserted that the variations of measureable
human characteristics about the average follows Gauss normal distribu-
tion. He observed that such a normal variation offers the variability in
human characteristics that would permit natural or artificial selection to

function. Quetelets concept even provided an inspiration for Darwins
explorations in natural selection. It also acted as the motivation for one of
the most colorful characters in nineteenth-century social sciences.
This was also an era in which hard sciences began to inspire new social
sciences, and this social dimension was increasingly stimulating the pub-
lics interest. Quetelet had begun a new discussion in biology, and the
Galton/Darwin pair were ready to further it. Meanwhile, Francis Galton
was thriving in the 1850s and 1860s England when the island was at the
peak of Victorian geopolitical and intellectual conquest.
Having settled into a house Francis Galton bought only a short distance
from Londons Hyde Park, the couple continued to entertain Londons
intellectual elite. By then homebound, Galton turned his adventures to
mathematics. First, he sought to make more scientific the state of under-
standing of European meteorology. He solicited from weather experts
across Europe thrice-daily weather observations, which he then meticu-
lously plotted for the month of December 1861. From the data, he was
the first to observe that wind patterns revolve clockwise around lows, and
counterclockwise around high-pressure zones. He labeled these patterns
cyclones and anti-cyclones, terms that have stuck since.
Galtons faith in a more scientific approach to weather predictions of
that era caused him to criticize the official weather forecaster of the time,
Admiral Fitzroy. Soon, there was a chorus of public criticism of Fitzroys
forecasts, which caused the Admiral to take his own life. Galton was
immediately drafted to head what would become the UK Meteorological
Office. From his new position, Galton began to cultivate for himself a
reputation as a mathematical and scientific genius.
By the fall of 1860, just a few months after his cousin finally pub-
lished The Origin of Species, Galton witnessed a gathering at Cambridge
which changed the perspective of many in the room, including Galtons,
and the scientific world to follow. Already, Galton had been influenced
by Herbert Simons influential idea of social evolution. The pessimism
of such luminaries in the first half of the century as Thomas Robert
Malthus was supplanted by a grander and more optimistic design, even
if the concept of natural selection was immediately often, and still is,
misunderstood.
In Galtons fantasy, though, was a notion of eugenics, by which human-

ity would be improved by carefully designed selection. Galton used his
position and his writing to advocate for a new form of human breeding,
just as animal husbandry had done for centuries, but with the goal of
incorporating desirable intellectual skills, in addition to physical char-
acteristics, into future bloodlines, and, more controversially, preventing
other less desirable characteristics from perpetuating. Seventy years later,
the Nazi movement proposed the culling of what they deem as negative
human characteristics to accelerate the process of artificial selection.
Galtons enthusiasm to further develop how natural variability in
human characteristics could be tapped to improve the human race
demanded of him greater scientific rigor. He discovered some of the nec-
essary rigor from the work of Quetelet of Belgium. Quetelet had dem-
onstrated from extensive observations of height and girth that human
measurements seem to follow a distribution that looked much like the
familiar bell-shaped curve Gauss had derived. Galton was emboldened
by this new tool of statistical biometrics, and began to apply statistical
measures to intelligence.
Just as students today ask professors whether grades are curved, Galton
categorized measures of grade scores in the UK and declared that they
indeed seem to follow some such curve, even if any formal concept of
goodness of fit did not yet exist. He published what was still, to then,
anecdotal evidence in a book called Hereditary Genius.1 His book gener-
ated both supporters and detractors. In the former camp, though, was
his cousin, Charles Darwin. Charles wrote a most complimentary letter
to Francis, and Galton used the praise as inspiration for a more formal
scientific treatment of the conclusions he had quickly drawn.
Galton recognized that he would have to shore up his conclusions that
various influences determine desired human characteristics. To do so, he
employed the same meticulous drawing of tables and graphs as his father
had demonstrated to him almost half a century earlier. He began with an
experiment in which he gave friends sweet peas of various sizes to grow.
He then asked them to return the peas they grow. He plotted the weight
of the mother peas to those of the offspring, and verified his intuition
that the weight of the parent peas is a relatively reliable determinant of
the weight of the offspring seed. Yet, he discovered that parent peas that
were larger than average did not produce offspring that were larger yet.
Nor would smaller parent seeds produce offspring that were smaller yet.
Instead, he established that the weight of offspring seed vary from the
mean, on average by only one-third of the deviation from the mean of
the weight of the parent seed.
In interpreting this peculiar relationship, Galton said that offspring
regress to describe this tendency toward the mean, and coined such an
analytic description a regression. The one-third rate was described as the
regression coefficient. Some sort of natural process then appeared to
Galton to dampen extremes and causes offspring to regress toward the
mean.
Galton argued that his technique could actually be used to compare
many such interactions. Of course, there is no problem with units when
on both axes is a measure of height. The slope of a line that compares one
axis to another is a ratio without units, or, if one prefers, a rate of inches
to inches. In other circumstances, one might posit that rainfall might
influence a crop yield, or, in the finance literature, increased risk might
command a greater return, as in the capital asset pricing model (CAPM).
In these cases, the correlation between one variable and another might
better be described by some sort of correlation coefficient rather than a
unitless slope.
It was this statistical extension that Galton set out to establish using his
regression model adapted from Gauss ordinary least squares methodol-
ogy. To create the data for his analyses, he established the Anthropometric
Laboratory in nearby South Kensington to solicit subjects who would be
willing to be measured in a multitude of ways. In his lab, Galton and his
researchers established the first extensive database of human measure-
ments and qualities, and even pioneered such lifelong markers as the use
of fingerprints.
To some, Galtons audaciousness and academic entrepreneurship were
little more than self-aggrandizement, at best, and derivative at worse.
Others heralded him as a genius. There was one certainty, though. Galton
always walked along the cliff of controversy. Despite his confidence that
he was an exceptional polymath, he was in fact not particularly skilled
mathematically.
Galton did not have the mathematical or calculation tools to employ

Gauss methods. Nor did he have the facility of Gauss intuition.
Nonetheless, he intuited some mathematical relationships of his own.
He argued that the dependence of one generational variable and another
should be proportional to the relative variability, or, more correctly, its
square root, the standard deviation, of measurements in one generation
relative to another. He postulated from his observations that a line cor-
relating two variables becomes flatter as the variability of the measure on
the vertical axis becomes smaller relative to the variability of the mea-
sure on the horizontal axis. If y is the vertical measure, x the horizontal
measure, and Sx and Sy their respective standard deviations, then Galton
postulated the relationship between the variables as:
y = r ( sx / sy ) ,

where r is the slope of the graph when the two variables are plotted
against each other.
While Galtons analysis was incomplete and non-rigorous, he none-
theless provided a lasting intuition, beyond his coining of the expression
regression. He correctly observed that the relative variability of two fac-
tors was an important determinant to the scale of their relative graphical
depictions, and hence the slope of the regression line. He would leave to
one of his laboratory assistants, his prodigy Karl Pearson, to formalize,
and hence legitimize his intuition.
Note
1. Galton, F., Hereditary Genius, Macmillan, London, 1869.
7
The Later Life andLegacy ofSir Francis
Galton
Galton remained preoccupied by his work and by his need to ensure

he remained at the center of intellectual thought, however controversial,
within the London social scientific circles at the time. He spent little time
at home, and he and Louisa failed to have children together.
In their later years, and increasingly challenged by health problems,
he and Louisa finally had an opportunity to travel, often seeking cleans-
ing spas and sanitariums to improve their health. On one such trip in
the summer of 1897, Louisa became nauseous and began to suffer from
severe diarrhea. She died in her hotel room in France in August of 1897.
Following the death of his wife, Galton embarked on ambitious travel
for much of the rest of his life. In 1908, he published his autobiography,
and was knighted Sir Francis Galton by King Edward in 1909. He lived
to the age of 88, and died on 17 January 1911. Upon his death, he left his
estate to endow the Galton Professorship in Eugenics at the University
of London.
During his life, Galton was bestowed with many honors. These include
the Founders Medal in 1853, which is the highest award given by the
Royal Geographical Society, the Silver Medal of the French Geographical

DOI10.1057/978-1-137-34137-2_7
Society in 1854, and was elected a member of the Athenaeum Club in

1855. Five years later, in 1860, he was made an FRS.
In 1886, he earned the Gold Medal of the Royal Society, and was
named Officier de lInstruction Publique of France in 1891. He secured
the DCL at Oxford in 1894, and an DSc (Honorary) from Cambridge in
1895. In 1901, he won the Huxley Medal, offered by the Anthropological
Institute and, in 1902, he was elected Honorary Fellow of Trinity College,
Cambridge. In that same year, he rejoiced when he learned the Royal
Society awarded him the Darwin Medal, in honor of his cousin. In 1808,
he earned the Linnean Society of Londons Darwin-Wallace Medal, and
he won the Copley Medal of the Royal Society the year before he died.
While Galton was recognized with many accolades in his lifetime, his
greater legacy may have been the creation of his lab and the establishment
of the study of eugenics. One of his appointments at the lab complete
the mathematics that Galton could not, and helped immortalize Galton
ever since. The first person to occupy his Galton Chair of Eugenics at
the University College of London was his prodigy, Karl Pearson. Pearson
documented Galtons life and contributions in three books written in
1914, 1924 and 1930, and provided rigor to much of Galtons intuition.
Much of Galtons work we now know from the publications of Pearson.
8
The Early Life ofKarl Pearson
One might contrast the life of Gauss with that of Galton. Gauss humble
beginnings might suggest he had everything to prove. Yet, over his life-
time, and despite his place as perhaps one of the three most accomplished
mathematicians of all time, he took far too little time documenting and
publishing his contributions. His brilliance was understated in his own
lifetime.
On the contrary, Sir Francis Galton was born to the purest of pedigrees
and privilege. The cousin of Charles Darwin and a member of a family
of famous physicians, well-healed bankers and prominent theologians,
Galton was a bigger than life personality from an equally impressive fam-
ily. He had little hed need to earn, but spent a lifetime trying to establish
and enhance his reputation. His brilliance was equally overstated, as per-
haps were the accolades he received. Yet, he left a prodigy, Karl Pearson,
for whom he endowed an academic chair and hence a livelihood. Pearson
spent his career filling in the academic blanks Galton had left.
While Galton cultivated a perception that he was a polymath, his
prodigy certainly was.

DOI10.1057/978-1-137-34137-2_8
The heritage of Karl Pearson was distinctly of Yorkshire roots. His

father, William Pearson, Queens Council (QC) (1822?), grew up in the
North Riding of Yorkshire, in northwest England. His family were farm-
ers, but William left the region in a dispute over farmland. He departed
for the University of Edinburgh in Scotland to the north, where he com-
pleted a degree in law with distinction. He arrived in London prepared
to establish himself as a barrister. In service to the courts of London, he
eventually obtained the highest status of barristers in England, a member
of the QC within the Inner Temple of the Royal Courts of Justice.
In London he also met his future wife Fanny Smith. Her father Thomas
was a master mariner from Kingston upon Hull in the Eastern Riding of
Yorkshire and had come from a long line of seafarers. He had lost his
fathers ship on one journey and decided to relocate as a ships pilot to the
calmer waters of the River Thames in London.
Fanny was kind and literate, but not educated. The family life at home
was considered somewhat harsh and disciplined, but it was financially
comfortable. Like the family of Francis Galton, the Pearsons, too, were
Dissenters and of the Quaker faith.
The Arrival ofCarl Pearson

William and Fanny had two sons, the second whom was born on 27
March 1857 and was given the name Carl. Carls primary relationship
with his parents was through his mother. The young boy grew up in a
household with a stoic and stern father who arrived home late, prepared
his next days briefs until midnight and left for work early in the morn-
ing. His interactions with both his wife and children were primarily over
the holidays, and they were not warm. Carl and his older brother Arthur
worried on behalf of their mother (Fig. 8.1).
Carl was educated both at home and at a small local school, with addi-
tional supplemental lessons offered by tutors. Then, at the age of nine, his
family moved to Bloomsbury and Carl and Arthur were able to attend the
highly regarded University College London School. This experimental school
offered the finest and most contemporary education theories to a limited
number of young students. Carl remained at the school until the age of 16.
Pedigree Chart for

Carl Pearson
Thomas Pearson
b: Abt. 1746
m:
d: 18 Dec 1831
Thomas Pearson
b: 1797 in Crambe, Yorkshire,
England
m: 1818 in Yorkshire, England Elizabeth Hopkinson
d: May 1859 in Yorkshire, England b: Abt. 1748
d: 05 Jun 1831
William Pearson
b: 28 Oct 1822 in Crambe,
Yorkshire, England
m: 29 Dec 1853 in Stepney,
Middlesex, England Richard Blacksmith Beilby
d: 15 Oct 1907 in Hampstead, b: 18 Feb 1766 in Crambe,
Middlesex, England Yorkshire, England
m: 17 Aug 1790 in North Grimston,
Yorkshire, England
Elizabeth Beilby d: 16 Aug 1816 in North Grimston,
b: 1800 in Yorkshire, England Yorkshire, England
d: May 1882
Ann Wray
b: 1776
d:
Carl Pearson
b: 27 Mar 1857 in Islington,
Middlesex, England
m: 30 Jun 1890 Smith
d: 27 Apr 1936 in Capel, England b:
m:
d:
Thomas Smith
b: 1782
Fanny Smith m:
b: 30 May 1827 in Hull d: 1863
d: 1905
Fig. 8.1 The ancestry of Carl Pearson
By then, his brother had received a scholarship in the study of the clas-
sics at Trinity College, Cambridge. Carls father wanted at least one of
his children to study mathematics, so he secured a Cambridge Wrangler
to prepare Carl for the Tripos entrance exam. Wranglers are those who
receive the highest honors in their third year studies at Cambridge. This
honor of Mathematics Wrangler connotes a graduate of intellectual
supremacy. Carl was sent to the town of Hitchin, near Cambridge, for
five months of intensive mathematical tutoring by a Wrangler in early
1874. Unhappy in Hitchin, he left that summer to be tutored in math-
ematics at Merton Hall, Cambridge, by a cadre of tutors which included
legendary Wrangler John Routh.
Edward John Routh FRS (20 January 18317 June 1907) was con-
sidered the best among Senior Wranglers in preparing students for the
exam. Born in Quebec, Canada, to a well-established family whose
fathers ancestors also originated in Yorkshire, Routh studied mathemat-
ics at the University of London before he continued on at the Peterhouse
in Cambridge. He, too, was prepared by the senior wrangler maker
William Hopkins FRS (2 February 179313 October 1866). Routh
himself graduated as a Senior (signifying top) Wrangler, just ahead of
the brilliant Scottish mathematical physicist James Clerk Maxwell FRS
FRSE (13 June 18315 November 1879). Clearly, young Carl could not
be in better academic hands.
Routh instructed Carl in a mathematics that was heavily laden with
physics. Over the next nine months, Carl studied in preparation of the
exam, which permitted him a scholarship at Kings College in Cambridge.
He began his University studies on 9 October 1875.
Carl Pearson thrived in this intensive intellectual environment. As a
child he was somewhat frail and sickly, and he felt a lack of warmth, car-
ing and inclusiveness. Kings College believed in exercising the mind and
the body. Carls emotional and physical constitutions were strengthened,
and he thrived intellectually. He was also immersed in the Classics and
of the Romantic school. He graduated as Third Wrangler in 1879, which
translates to third in his class.
His academic success also earned him a Kings College Fellowship.
This lucrative scholarship allows the recipient up to seven years of fund-
ing, with no teaching expectations, to pursue his research agenda. The
scholarship recognized Carl Pearson as among the most distinguished
and promising university graduates in the nation.
Carl had yet to travel, though. He was not brought up in a wealthy
family as had Francis Galton, and Continental travel was not a luxury
his family could afford. His fellowship made more options available to
him. He had been studying mechanics and engineering, with the hope
of becoming an engineering physicist. Germany was the center of the
study of physics at the time, so he began to study German and traveled
to Heidelberg. While there, he was enticed by the theories of the great
philosophers, from Kant and Spinoza to John Locke.
While his exposure to philosophy cemented his desire to be a

Freethinker, he also found the lack of spirituality in the philosophy of
that era to be depressing. He decided to balance his idealistic philosophi-
cal yearnings with the positivistic study of science. However, he was also
humbled by the great mathematical physicists of his day, like James Clerk
Maxwell, and made a relatively short-lived decision to study international
law instead, likely from pressure from his oppressive father. Carl, by then
calling himself Karl after his Heidelberg experience, returned to England,
completed his law study, was admitted to the bar, but continued to study
mathematics on the side, much to his fathers consternation.
9
Karl Pearsons Great Idea
Almost immediately after he began, Karl gave up the practice of law. Yet,
the pressures for him to succeed were almost unrelenting. To free him
from the forces of familial conformation, he joined the intellectual circles
of London. He lectured locally at the intellectual clubs in Soho, includ-
ing the Men and Womens Club. While he considered himself a man of
numbers, others increasingly viewed him as a man of words.
From his engineering training, Karl was fascinated by the theory of
elasticity. This is a mathematically rigorous application of the principles
of physics and engineering that governs the bending of materials such as
bridge spans and beams and the forces as objects move through a viscous
medium. Karl also pursued an eclectic combination of studies that was
not only heavily influenced by the mathematics of the day. He was also
fascinated with the philosophy of science that imposed on its practitio-
ners the need to look at familiar problems in unfamiliar ways.
Karl Pearson was especially influenced by a mathematical physicist
and philosopher William Kingdon Clifford FRS (4 May 18453 March
1879), a brilliant non-Euclidean geometer who argued for the equiva-
lence of mass and energy and the notion of the curvature of space. The
intellectual explorations he began in his 1876 On the Space-Theory of

DOI10.1057/978-1-137-34137-2_9
Matter was completed by Albert Einstein in Einsteins general theory of

relativity in 1916.
When Clifford died before his last treatise could be completed, Pearson
continued Cliffords work. Pearson eventually published his theory in the
American Journal of Mathematics. Meanwhile, he continued to study at
Cambridge and Heidelberg, and he soon found a calling he could call
uniquely his own: mathematical statistics.
Pearsons path crossed Francis Galtons in his intellectual travels within
the London and Cambridge academic communities with Galtons encour-
agement. Pearson was offered a professorship at the University of London
to establish the first department in statistics, but, as a favor to Galton,
who was keen to see one of high prominence occupy the chair Galton
endowed, he also agreed to continue Galtons Eugenics Laboratory in
Galtons waning years. Many since have concluded that Pearson was
hence a Galton Eugenics evangelist.
Pearson kept his eugenics assignment and his statistics passion quite
separate, though, even if both helped pay the bills. Pearson was inter-
ested in the mathematics of statistics, and biometrics was an excellent
avenue for his theoretical explorations. While he did not so fully sub-
scribe to Galtons social extensions, he was gracious with regard to the
elder Galton, even if he did not consider himself an evangelical follower
of the Galton social philosophy. Others did, though.
In fact, their statistical explorations were quite different. Pearson
subscribed to the mathematical school established in the era of Gauss,
with statistical moments establishing measures of goodness of fit, just
as moments were used within the mathematics of elasticity. Meanwhile,
Galton was preoccupied with the establishment of correlations. Galtons
analysis was mathematically unsophisticated, while Pearsons was influ-
enced by engineering and physics. And Galton believed that all data con-
forms to the normal distribution, while Pearson believed that a variety of
distributions govern the various phenomena nature produces.
Pearson likely understood at the onset the importance and implica-
tions of the central limit theorem. As we have discussed, it describes the
distribution of a asymptotically large number observations from sym-
metrically distributed probability distributions. Our earlier proof of the
central limit theorem demonstrated that the resulting distribution or
means would be distributed normally. The intuition can be illustrated

by an example. Consider a distribution that is perhaps more unlike a
normal distribution than any other. Bernoulli and De Moivre analyzed
the binomial distribution such as might occur with the flipping of a coin.
Call tails zero and head one. If we continually flip the coin, we would
notice an approximately equal-peaked bimodal frequency distribution at
0 and 1.
What about the mean, though? The statistic for the mean will increas-
ingly be centered at as n rises, and will approach a normal distribu-
tion. The central limit theorem does not describe the distribution of coin
tosses. Rather it determines that the mean of repeated draws from a sym-
metric distribution will correspond to the distributions average, with a
predictable variance.
Hence, while the actual distributions were not normal, the mean of
repeated draws from these distributions was. Galton may have over-
reached if he claimed that all real-world biological and sociological data
is generated from normal distributions, even if their means may imply so.
He and his contemporary Adolphe Quetelet attached greater significance
to the normal distribution than was justified by asserting nature is inher-
ently normal.
Pearsons insight was different. He recognized that the normal distribu-
tion was derived from the law of errors, or deviations from the mean, not
from an omnipotent natural distribution that generated the observations in
the first place. Pearson became the father of modern statistics by recogniz-
ing that Gauss mean was a measure of central tendency, or a statistic, rather
than a process that regresses toward a normally distributed mean in itself.
This observation was significant. Pearson recognized that our scientific
perspective inescapably influences our characterization of natural laws.
At the age of 34, he wrote one of the most significant commentaries
in the philosophy of science, entitled The Grammar of Science.1 Decades
later, Albert Einstein assembled a group of applied mathematicians to
understand and discuss the implications of Pearsons book. These are the
importance of the frame of reference of the observer in the relativity of
motion, Pearsons equivalency of matter and energy, the non-existence
of the either, time as a fourth dimension and space as a non-Euclidean
geometry. These notions were central to Einsteins argument that a photon
can be both a particle and a wave, the Heisenbergs uncertainty principle,

and both Einsteins special and general theory of relativity.
We remember Pearson as a statistician, though. How he found his
path from a philosopher of science to the founder of statistics came from
his association with Walter Frank Raphael Weldon DSc FRS (15 March
1860Oxford, 13 April 1906), an influential Darwinian zoologist who
encouraged Pearson to apply his skills to statistics, and who established
the new journal Biometrika with Galton and Pearson. In fact, Pearson
and Weldon had been working together since 1891, but Weldon did not
introduce Pearson to Galton until 1894.
Weldon recognized a number of qualities in Pearson that would well
contribute to a new field of representing data through statistics. Pearson
was truly a creative polymath able to view problems in original ways,
even if he had lost his confidence in making significant contributions to
physics, ironically enough given his inspiration of Einstein, perhaps the
greatest physicist of all time. Second, Pearsons Gresham Lectures caught
the attention of Weldon. Weldon felt some of the concepts Pearson had
developed could be of great use to the study of evolution. Finally, Pearson
wanted to make his mark, and was convinced by Weldon that statistics
may be the best avenue.
At the time of the lectures, beginning in 1891, Pearson had been teach-
ing geometry to engineers in the Department of Mechanics and Applied
Mathematics at the University College London for half a dozen years. In
1890, he received an appointment as the Gresham Chair of Geometry
at Gresham College. As part of his appointment, Pearson offered a set of
public. In this series, he described his use of new non-Euclidean geom-
etry to problems of mechanics and statics, as would Einstein 14 years
later. In this series, he also described problems of statistics, of insurance,
and of other applications that could benefit from his form of analysis.
Always in search of novel ways to look at apparent problems, Pearson
was intellectually intrigued by Weldons work in Darwinian zoology.
Darwin proposed that natural selection be driven by natural variation,
and Galtons work on natural variation also interested Weldon. Pearson
became convinced that this concept of natural variation, and its implica-
tions, was a prime candidate for new statistical tools, with random varia-
tion the underlying force.
In Weldon, Pearson found the closest of friends, until Weldons death

in 1906. And, at the University College London, he found an intellectual
and academic home. To that point, Pearson had spent five years apply-
ing for academic jobs across England, to little avail, and even contem-
plated returning to law or moving to the USA.Eventually, he accepted an
offer to temporarily teach mathematics at Kings College, London, for a
year, in 1883, and then the Goldsmid Chair of Mechanism and Applied
Mathematics at University College London a year later. The University
College would remain his academic home, at many levels, as he established
their first Department of Structural Engineering in 1892, the Biometric
School a year later and the Drapers Biometric Laboratory in 1903, which
became the Department of Applied Statistics eight years later.
Pearsons influential Gresham Lectures at Gresham College within the
University of London was a bit of an intellectual diversion, in a num-
ber of ways. The Gresham Chairs were founded by Sir Thomas Gresham
(c.151921 November 1579), the English financier and founder of the
Royal Exchange in London. Appointments to these chairs included some
of the most prominent intellectuals in Englands intellectual history. The
chairs were confined to the study to astronomy, divinity, geometry, law,
music, physics and rhetoric. Pearsons lectures, and those of his guests,
including Weldon, were designed to educate the new professional class of
London: financiers, artisans and the like. Pearson had to distill complex
mathematical notions to make them more accessible and useful to appli-
cation of questions in commerce, insurance, finance and, hence, statis-
tics. From his lectures came the conclusion that statistics was not merely
a tool for sociologists like Galton, but a mathematical discipline of its
own right that could enlighten many other branches, from mathematics
to physics and astronomy, as well as biology, of course.
In the study of elasticities, Pearson was well familiar with the calcula-
tion of moments. His extension of his training to characterize not the
properties of materials but the characteristics of data caused him in 1892
to define the standard deviation, as the square root of variance as a mea-
sure of the spread of data observations. His goal was a set of measures
that could describe the spread and central tendencies of data, even when
they dont necessarily follow the normal distributions Galton prescribed
for all natural data.
Pearson was determined to construct measures, of variation, of central

tendency that could be used broadly to summarize large data sets, not
merely their means. From there, he also developed the histogram to sum-
marize continuous quantitative data.
From the method of moments, Pearson actually produced a number
of measures. The first moment, which, as discussed earlier, is equivalent
to the definition of a center of gravity, was applied to data to gener-
ate the mean, or its central cluster. The second moment, equivalent to
the moment of inertia, measured its variance, and the square root the
standard deviation. He also described the degree to which a distribution
deviates from symmetry as his measure of skewness, and the flatness or
prominence of the distributions peak its kurtosis. In doing so, Pearson
was not providing an axiomatic approach to the specification of the data,
but rather was characterizing data based on some standardized defini-
tions. His statistical measures could thus be applied to any distribution.
Pearson also constructed measures by which such varied distributions
departed from the normal distribution. He once asked his students if one
could always represent data with a normal distribution. Of course, the
answer is no. He then constructed the notion of goodness of fit as a mea-
sure of deviations from a normal distribution. To do so, he constructed a
method of least moments in 1892.
Pearson was not the first to develop measures of goodness of fit.
Quetelet and Galton both recognized the imperfections of real data from
the normal ideal, especially given the smaller sample sizes from which
they worked. Wilhelm Lexis (17 July 183724 August 1914), an econo-
mist and father of demography, produced his Ratio L to measure such a
difference, while Francis Ysidro Edgeworth FBA (8 February 184513
February 1926), one of the first mathematical economists, developed a
measure of the degree to which the binomial distribution departs from
the normal distribution. These measures had an ad hoc nature to them,
though. Pearson added some rigor and structure to his measures, usually
based on moments. These methods evolved over his Gresham Lectures
such that, by the end of the series in May of 1894, the methodology of
statistics was established. He even followed these researches up much as
Gauss had done, by producing a series a lectures on the methods appro-
priate for actuaries.
He followed up this work in 1894 almost immediately with a num-

ber of new statistical measures that could assist Galton in his work on
correlations. Of the almost two dozen measures of correlation Pearson
developed, half are still employed today.
Pearson also began working in late 1896 on techniques helpful for
economists. He needed a measure of goodness of fit for asymmetric dis-
tributions. One such distribution was the gamma distribution, for which
he described the chi-square distribution for the goodness of fit for a fam-
ily of such gamma distributions. This culminated in Pearsons final aca-
demic paper, shortly after his 70th birthday. The chi-square measure is
one that can be employed when distributions do not conform to the
normal distribution.
Pearsons contributions primary focused on goodness of fit. Perhaps his
most lasting statistical contribution came from his epic 1896 paper to the
Philosophical Transactions of the Royal Society of London. Pearson proposed
a measure called the correlation coefficient constructed as the mean, or
moment, of a set of deviations of the data from the least squares mini-
mizing trend line, in both the horizontal and vertical direction. Pearson
proposed the measure for the correlation coefficient as:
n
xi yi
n
,
x =i
where x and y are the deviations between the predicted means and the
pairs of data. For instance, in the vertical direction, this would be:
( y y ) .
2
To understand the calculation of the goodness of fit measure, recall

that the parameters of the regression model are calculated as:
( x )( )
n
i x Yi Y
b= i =1
( x )
n 2
i x
i =1
a = Y bx,
where Y is assumed to be linearly related to x, or its transformation, and

the residual deviations from the regression line follow a normal distribu-
tion with consistent variance.
Then, Pearson calculated a product-moment correlation coefficient r
given by the sum of the product of deviations divided by the sum of the
squared errors:
( )
n
( x i x ) Yi Y
r= i =1
.
(Y Y )
n n 2
( x x)
2
i i
i =1 i =1

The related measure r2 is the share of total variance of Y that can be

explained by the regression representation of Y. Another way to describe
this relationship is by considering the total sum of squares in the depen-
dent variable Y compared to the independent variable X.
First, observe that the average value of y is given by summing all obser-
vations of the independent variable and dividing by the number of obser-
vations n:
1 n
y= yi .
n i =1

The total sum of squares then gives an expression that is proportional

to the variance of the independent variable:
SStot = ( yi y ) .
2
i
Meanwhile the explained portion of the variance is proportional to

the second moment generated by the estimated value f(xi) relative to the
mean, called the explained sum of squares from the regression:
SSreg = ( fi y ) .
2
And, the residual, or unexplained, sum of squares is given by:
SSres = ( yi fi ) .
2
Pearsons goodness of fit measure, often now called R2, is then given by:
SSres
R2 1 .
SStot

This framework for goodness of fit can also be employed for the deter-
mination of quality of other predictive models. The variation of this
goodness of fit measure is then called the coefficient of determination.
By Pearsons era, much of the history of the statistics to which a finance
student will be exposed in their first yearlong course in statistics was at
least partially established. Not yet fully explored was the least squares
linear regression model and its properties. Later we describe the linear
regression model and document the important extensions to finance that
were offered by Fisher, Hotelling, Frisch and others.
Note
1. Pearson, Karl, The Grammar of Science, Adam and Charles Black Publishers,
London, 1892.
10
The Later Life andLegacy ofKarl
Pearson
Carl Friedrich Gauss was a most unusual polymath. Considered one of

the greatest mathematical minds in history, it is possible that there could
have been born a dozen like him who went unnoticed throughout life.
Gauss grew out of the humblest of beginnings, demonstrated fantastic
resilience and rose to great accomplishments, but were it not the help of
a benefactor who saw something in young Gauss that no one else could
see, we might have never benefited from his brilliance. Gauss also rose
out of an era in which only the well-to-do could spend a lifetime study-
ing the most esoteric of subjects. Indeed, by some calculations, he never
published the majority of his ideas. He was busy maintaining a livelihood
for his family at a time when publication was both financially expensive
and time consuming.
On the other hand, Sir Francis Galton was born into a family that
verged on nobility. Certainly, they were the noble of the medical and
banking community, with family members that included Charles Darwin
and the Barclay and Wedgwood fortunes. Galton could easily practice a
life of leisure if he chose, and, to a large margin, he did. For him, fame
was a luxury he could easily afford. Indeed, he seemed to crave fame and
recognition, and worked to cultivate it. Every door was open to him, even

DOI10.1057/978-1-137-34137-2_10
some that should have remained shut, and would have been bolted shut
for men of lesser wealth like Gauss, or Pearson.
Galton paved a path for Pearson, and was perhaps even his academic
benefactor. Each recognized and rode on the others coattails. Certainly,
of the two, Pearson was the more academically brilliant. He also was
more driven to succeed as he realized that, unlike Galton, he would have
to earn each bit of his success.
Pearson could not afford the life of an adventurer as could Galton.
His brief forays in travel resulted in his awakening to the growing social-
ist movement on the continent, the writings of such individuals as John
Locke and Karl Marx, and the brilliant work of Europes leading math-
ematical physicists, mostly in Heidelberg and Gttingen at that time. He
could bring back to London the lofty ideas of these philosophers, but he
felt out of the league of their physicists. His admiration for them seemed
to cause him to forever change the spelling of his first name from Carl,
to the German version Karl, though, like another famous London intel-
lectual at the time, Karl Marx.
In 1885, Karl Pearson found an ideal outlet for his socialist thought,
his procreation ideals along the lines of eugenics, and his desire for poten-
tially feisty companionship. He founded The Men and Womens Club,
with the goal of attracting an equal number of men and women from the
middle and upper middle class who espoused progressive views on social-
ism, feminism and sexuality.
Then a 28-year-old bachelor, Pearson firmly believed that more
empowered and educated women were necessary for national advance-
ment. He gave a paper at the first of the groups monthly meetings near
Soho entitled The Womans Question, in which he espoused greater access
to education, politics and the professions for women, at the time when
the womans suffrage was increasingly discussed. Just 20 years earlier, the
great economist John Stuart Mill (20 May 18068 May 1873) had been
elected to Parliament partly based on his equally progressive views toward
womens right to vote.
Those who believed in womens suffrage were distinct from the suf-
fragettes who would use violent means to achieve the same desired goals.
The men attracted to Pearsons club were drawn from the prevailing liber-
ally oriented mens clubs for London professionals at the time. The vast
majority of the women attracted were single and were teachers or writers.
Only one of the women had attended university. Indeed, university was
quite inaccessible to women of middle-class families in that era.
This group of a couple of dozen men and women met in homes around
the Kensington area but, over the four-year life of the club, ultimately
failed to come to a meeting of the minds between the genders. While
the men favored a post-patriarchal society which empowered women
and which viewed sex in terms beyond procreation, or in the words of
Pearson, a physical pleasure like climbing a mountain, the men of
the group became increasingly fearful of the feminine energy they were
releasing, and as the discussions became stalemated, almost strictly along
gender lines. The club disbanded in 1889, four years after it began.
At the last meeting of the Men and Womens Club, in March of 1889,
Pearson placed his relationship with Francis Galtons ideas in perspec-
tive. He lamented about the dangers of using tools of exact science in
the realm of eugenics or economics. His prescience was profound. An
overemphasis of the powerful tools of the sciences would detract from
the humanity and complexity of real life. To try to attain mathematical
perfection within theories of human inexactness suggested to him math-
ematical zealotry for mathematics sake.
He concluded this personal philosophical exploration with a greater
sense of the need to use the tools of mathematical statistics to at least
inform the better construction of descriptive statistics. Indeed, Pearson
harbored hope that the discipline of science could instead act to improve
the social dialog and interactions to the point that individuals behaved
in a more rational way. If humans could be educated on the scientific
method, perhaps then their interactions could be more appropriately
explored by the tools of modern statistics. In the early part of the decade
of the 1890s, Pearson devoted himself to higher education reform so that
he may help guide the future of Londons great universities. This was a
period of upheaval among these institutions, and Pearson felt he could
play an important role within such reforms. But, his stakes were higher
than simple university reform. He was simultaneously devoted to social
reform.
It was this concept and ideal that motivated Pearsons Grammar of
Science series. And while one series does not make a revolution, Pearson
clearly devoted substantial emotional and intellectual energy to the

extension of the scientific method well beyond the traditional walls of
the Ivory Tower.
The Men and Womens Club was the spark for his period of personal
growth. This personal philosophical agenda was not the only lasting ben-
efit Pearson retained from the Club, however. He was also successful in
attracting the attention of his future wife Maria Sharpe (185130 June
1928) through the Club.
Unlike Pearson, who came from rural Yorkshire stock, and whose
father had escaped his heritage and become educated in law, for which
others challenged his true credentials later in life, Maria grew up within
intellectualism. Her mother came from a family that included the promi-
nent Unitarian minister Timothy Kenrick.
Kenrick was a Dissenter, a movement opposed to the influence of the
state on personal faith. While there were a number of dissenting factions
through to the nineteenth century, the remaining Dissenters include
Baptists, Congregationalists, Presbyterians, Quakers and Unitarians.
In particular, the Unitarians were followers of Socinianism, a following
that did not accept the Trinitarian doctrine of the Catholic Church. In
the eighteenth and nineteenth centuries, the Unitarian and the Quaker
movements were highly influential and well subscribed in the intellectual
circles in England, and among the founding fathers of the USA.They
subscribed to the doctrine of free will and rejected original sin. Timothy
Kenrick was Maria Sharpes maternal great-grandfather (Fig. 10.1).
Maria was not quite convinced of the worthiness of young Mr. Pearson
early in their interactions. While he was universally considered philo-
sophically brilliant among the group, he displayed condescension toward
women in the group, perhaps especially Maria Sharpe. While he argued
for equality, his Victorian upbringing, and perhaps even his patriarchally
overwhelming childhood, had convinced him that women were not
the intellectual equal of men. But while other women pursued Pearson,
Maria Sharpe did not. She sought his advice, and she was rebuffed. She
challenged his thoughts, and he became angry. Perhaps he respected her
willingness to stand up to him, because he finally proposed shortly after
the Men and Womens Club disbanded. Maria finally relented to his mar-
riage requests. They were married on 30 June 1890, the year after the
Men and Womens Club disbanded.
Pedigree Chart for

Maria Sharpe
William Sharpe
b: 27 Jun 1804 in Marylebone,
Middlesex, England
m: 1841
d: 20 May 1870 in Islington,
Middlesex, England
Maria Sharpe
b: 1851 in Islington, Middlesex,
England
m: 30 Jun 1890
Reid
d: 1928 in Hampstead, Middlesex,
England b:
m:
d:
Thomas Whitehead Reid
b: 08 Oct 1786 in Bristol,
Gloucestershire, England
m: 08 Sep 1813 in Exeter, Devon,
England Whitehead
d: 06 Mar 1845 in Hampstead, b:
Middlesex, England d:
Lucy Reid
b: 06 Jul 1814 in Whitechapel,
Middlesex, England
d: 1896 in Islington, Middlesex,
Timothy Kenrick
England
b: 26 Jan 1759 in Ruabon,
Denbighshire, Wales
m: 24 Feb 1786 in Exeter, Devon,
Mary Kenrick England
b: 05 May 1791 in Exeter, Devon, d: 22 Aug 1804 in Exeter, Devon,
England England
d: 1878 in Hampstead, Middlesex,
England Mary Waymouth
b:
d: 04 Nov 1792 in Exeter, Devon,
England
Fig. 10.1 The ancestry of Maria Sharpe
Marias concern that she would lose her independence in their relation-
ship was well founded. She soon found herself abandoning her feminist
researches and immersing herself in raising ideally eugenic children, host-
ing the parties one would expect of someone of Karl Pearsons stature
in London, and otherwise retreating to her own thoughts and marital
responsibilities.
Together, the Pearsons had three children, Sigrid Loetitia in 1892,
Egon in 1895 and Helga Sharpe in 1898. As we shall see, Egon went on
to become a renowned statistician in himself, if perhaps not in his own
right.
Karl Pearson remained the Galton Professor of Eugenics and the head
of the statistics program until his retirement in 1933. He died three years
later, on 27 April 1936. His wife had passed away before he did, on 30
June 1928.
Over his life, Pearson published dozens of papers, including a series of
18 papers in the Philosophical Transactions of the Royal Society, with the
title Mathematical Contributions to the Theory of Evolution, but with
different subtitles relating to evolution, eugenics, sociology, genetics and
anthropology. In these papers, he described his moments approach, the
chi-squared, correlation ratios, multiple regression, scedasticity, coeffi-
cient of variation and standard deviation. He also established the general
use of lowercase Greek letters to describe population parameters. Pearson
claimed to label the Gaussian distribution the normal curve, although
Gauss had already used the expression normal to denote the quality of his
method of least squares that used minimum distances of errors from the
predicted function. Such minimum distances, from a geometrical per-
spective, are denoted by a normal vector, or a line drawn orthogonally
at a 90 angle from the data point to the representative curve. Gauss
geometric perspective also explains the use of squared deviations because
the square root of a sum of squared deviations, in each direction, gives the
total distance of a point to the function.
Overall, Pearson published over 300 papers on theoretical and applied
statistics, social issues such as mental illness, scientific issues drawn from
astronomy, meteorology, civil engineering, and biology, anthropology
and sociology, and philosophical issues. He also worked on a four-volume
book on the life of Francis Galton.
Pearsons papers analyzed the correlation coefficient, his method of
moments, Pearsons system of continuous curves that was the precursor
to the concept of continuous probability distributions, the chi distance
and the P-value, the chi-squared test, a method of curve fitting by mini-
mizing chi distance (called principle component analysis), the coefficient
of racial likeness as a way to classify races based on the shape of their
skulls, and the establishment of foundations of hypothesis testing that
used p-values and was the precursor to type-I and type-II error analysis.
Pearson also co-founded and edited the journal Biometrika, and edited
it until he died, at which time his son Egon took over the editorial
responsibility. The journal arose because traditional biology journals were

unwilling to accept manuscripts of a statistical nature at that time.
Pearson was not without petty fault, though, as we shall see. He
jealously protected the reputation of Francis Galton, and he rejected
approaches by competing statisticians on sometimes petty, and often pro-
vincial, grounds. Ronald Fisher, the subject of our next section, was the
most unfortunate recipient of Pearsons negativity and sometimes con-
founding fickleness and prickliness.
Pearson was true to his ideals, though. Over his lifetime, he variously
received a number of awards. In 1896, he was elected FRS, followed
two years later with the awarding of the Darwin Medal. In 1911, he was
awarded the honorary degree of LLD from St. Andrews University, and,
in the same year, was given the DSc from University of London. In 1932,
he received the Rudolf Virchow medal by the Berliner Anthropologische
Gesellschaft.
But, he also rejected, on purely philosophical grounds, as an avowed
socialist, the two most significant awards, including the knighthood
accepted by both his predecessor, Francis Galton and, his successor,
Ronald Fisher. In 1920, Pearson refused the prestigious Order of the
British Empire, and, 1935, a knighthood.
He did not hold the same contempt for learned societies, though, and
accepted election to the Royal Society of Medicine, the Royal Society
of Edinburgh, the University College London, an Honorary Fellow of
Kings College Cambridge and a Member of the Actuaries Club.
Perhaps Pearsons most significant and intellectually revolutionary
contribution was not even in statistics. Many consider his The Grammar
of Science to be his most remarkable contribution. Even Vladimir Ilyich
Lenin and Albert Einstein offered high praise, with Lenin considering
his contribution a conscientious and scrupulous foe of materialism.
Meanwhile, Einstein used it to stimulate his own ideas about relativity
and the nature of matter and energy.
On Thursday, 5 March 1891, Pearson offered Lecture III in his
Gresham series, The Concepts of Science. It is there that he may have
provoked a scientific discussion that revolutionized physics. In his lec-
ture, he developed the concept of relativity. He argued that phenomena
may coexist in space, but an individual observer must be able to perceive
of them as apart if the events are distinguishable from each other. Space
and time thus offer an opportunity to distinguish for an observer events
that coexist. One aspect of the distinctness lies in space, and the other in
the sequence, or time.
Pearson was arguing that time is simply the dimension that allows us
to distinguish the sequence of various pictures of our physical reality as
objects shift in position. Sequence also allows us to distinguish between
cause and effect. The time dimension must then only be sufficient to dis-
tinguish the changes in position of the objects around us. Pearson argued
that space and time are merely modes of perception, and physics the sci-
ence that observes and governs these various modes.
These observations, which Pearson included in his Grammar of Science,
were most influential on a young Albert Einstein. In 1901, Einstein,
unable to secure an academic position because of his unconventionality,
was struggling to find work in Bern, Switzerland, as a tutor in mathematics
and physics. In 1901, Einstein placed an advertisement in the newspaper
offering his tutoring services in his apartment. A young Maurice Solovine
(18751958), a budding Romanian mathematics and philosophy stu-
dent, responded to the posting. Quickly, though, Einstein dispelled the
notion of tutoring in physics, when he uttered: It is not necessary to give
you lessons in physics, the discussion about the problems which we face
in physics today is much more interesting; simply come to me when you
wish, I am pleased to be able to talk to you.1
Instead, the pair began to indulge discussion of metaphysical issues
with Solovine. Solovine suggested that they form a group to discuss the
works of great philosophers of science. Soon, mathematician Conrad
Habicht (18761958) joined what soon became known as the Akademie
Olympia, or Olympia Academy.
These meetings in Einsteins apartment occurred from 1902 to 1904,
and also included Paul Habicht (18841948), the brother of Conrad
Habicht, Einsteins friend, the mechanical engineer Michele Besso
(18731955), his classmate Marcel Grossmann (18781936), the elec-
trical engineer Lucien Chavan (18681942), and Mileva Mari (19
December 18754 August 1948), a brilliant Serbian mathematics stu-
dent and Einstein's first wife, whom he married on 6 January 1903.
The first book Einstein recommended was Pearsons Grammar of

Science, followed by Ernst Machs (18 February 183819 February 1916)
Analyse der Empfindungen. The group also discussed Henri Poincars
Wissenschaft und Hypothese, A System of Logic by John Stuart Mill, David
Humes Treatise of Human Nature, and books as varied as Baruch Spinozas
Ethics and Miguel de Cervantes Don Quixote. Einstein later recalled that
these discussions were instrumental in Einsteins thinking and his Special
Theory of Relativity, published in 1905. His theory of that year was spe-
cial because it described the special case of the observation of motion
of objects moving at constant velocity based on the relative position of
different observers. A decade later, he published his General Theory of
Relativity that allowed these objects to change their velocitythat is,
accelerate or decelerate.
Clearly, Pearsons contribution of the importance of the observers per-
spective, and Machian physics, was instrumental in Einsteins thinking.
Mach argued that physics should be based on the observers perspective,
and should substitute the importance of relative motion for the less help-
ful concept of absolute space and time. He noted that such artifacts of
classic absolute space and time physics as inertia and centrifugal force
should instead be recast within a larger context. From Machs principle
and Pearsons emphasis on different observer frames flowed Einsteins
most profound theories. Einsteins extensions of Pearsons intuition cul-
minated his Special and General Theories of Relativity that completely
revolutionized modern physics.
Note
1. https://en.wikipedia.org/wiki/Maurice_Solovine, accessed 3 February 2016.
Part 3
The Formation of Modern Statistics
The innovation of the first social scientists, initiated by Quetelet and fur-
thered by Galton and Pearson, was certainly evolutionary, if not necessar-
ily revolutionary. Each suggested concepts and some helpful measures in
characterizing data, but none practiced the style of science increasingly
demanded in the rapidly expanding scientific age. Rather, they were prac-
titioners and engineers of issues often relevant to social science.
While these early intellects became increasingly adept at describing
the properties of basic statistical estimators, they had not yet struck upon
the need to establish the larger question of statistical validity for an entire
model. It would take a fresh and much more rigorous geometric approach
to provide the foundation for a new science of statistics. This scaffolding
was created by Ronald Aylmer Fisher on one side of the Atlantic, and
furthered and promoted by Harold Hotelling on the other side.
11
The Early Life ofRonald Aylmer Fisher
Ronald Fisher is remembered as the father of modern statistics. Ironically,

Fisher endured much of his life in the unfortunate shadow of Pearson.
The Fisher name found its way from humble beginnings. A century and
a half before Ronald Fisher was born, his great-great-great-grandfather
George Fisher (c.172585) migrated from his rural laborer livelihood in
Lincolnshire to Englands trade center of London. In the St. James dis-
trict, he set up shop first as a poultry seller. From their shop in Piccadilly,
the Fishers established a lineage of shopkeepers, with the business handed
down to each generation. First, John, the only child of George Fisher,
took over the business, and then his only child, George, named after his
grandfather, resumed the business.
By Georges birth in 1816, the Fisher family had garnered a level of
respect within their communities. George was a lay leader at his church,
and attained sufficient wealth and status to afford his children an oppor-
tunity to attend school. But while his firstborn son, George Jr., died
before the son could fully inherit the business, Georges second son John
(18161907) was summoned from medical school to resume the family
company.

DOI10.1057/978-1-137-34137-2_11
While John may have partially sacrificed the respect a medical career
could afford, he nonetheless benefited from other trappings of an
increasingly successful family. His father purchased on his behalf a life-
long Governorship at nearby Christs Hospital, and his position within
the Piccadilly business community afforded him the opportunity to
meet and then marry Emma Mortimer (1827), a daughter of Thomas
Jackson Mortimer (17811833) and Elizabeth Mavor (ne Elsworth)
(17651816).
Thomas Jackson Mortimer maintained and furthered a tradition of
gunmaking in his family that had dated back to 1753. In this respect,
Ronald Fisher shared a family foundation with Francis Galton. The
paternal great-grandfather of Galton and the maternal great-grandfather
of Fisher both ran gun manufacturing businesses.
The Mortimer shop at 34 St. James Street had been producing top-
quality guns. After his death in 1833, his wife Elizabeth and son Thomas
Elsworth Mortimer maintained the business for a couple of years in
London, but Thomas soon moved the business to Edinburgh. By 1836,
the family firm was recognized Gunmaker to His Majesty, King William
the IV.Fifteen years later, one of their guns was awarded the Prize Medal
at Londons Great Exhibition in 1851. The firm eventually was trans-
formed into Mortimer and Sons under the leadership of Thomas Jackson
Mortimers grandson, Thomas Alfred Clark Mortimer (Fig. 11.1).
The daughter of Thomas Jackson Mortimer, Emma, and her husband
from the neighborhood, John Fisher, appreciated education and had a
sufficiently comfortable life to afford the same for their children. John
and Emma lived above the growing poulterers shop in St. James and
assisted in the family business until the untimely death of George in
1855, following a slip and fall on an orange peel.1 John chose to pass the
business on to his younger brother and, at the age of 40, turned to the
life of a leisure gentleman of London. For the next 50 years, he reigned as
the patriarch of the family, first in London, until the age of 74, and then
in retirement in Norfolk until his death at the age of 90.
Before his retirement, though, John and Emma raised all but one of
their 13 children in the apartment above the poulterers shop. Of these
children, only five survived childhood. The eldest surviving son, George
Fisher, was born on 10 August 1843, while the youngest son, John Fisher,
Pedigree Chart for

Sir Ronald Aylmer Fisher D.Sc and F.R.S.
Edward Fisher
b: 1790 in England
m:
John Fisher
d:
b: 23 Jun 1816 in Thames Ditton,
Surrey, England
m:
Lucy
d: 1907
b:
d:
George Fisher
b: 10 Aug 1843
m:
Thomas Jackson Mortimer
d: 1920
b: 20 Nov 1781 in Wednesbury,
m: 26 Oct 1806 in Saint Bride
Emma Mortimer
d: 12 Dec 1833 in London, England
b: 13 May 1827 in Middlesex,
England.
d: England
Elizabeth Mavor Elsworth
b: 1765 in Chard, Somerset,
England
Sir Ronald Aylmer Fisher D.Sc d: 10 Mar 1816 in Chard, Somerset,
and F.R.S. England
b: 17 Feb 1890 in East Finchley,
m: 01 Apr 1917 in Upper Samuel Heath
d: 29 Jul 1962 in South Australia, b: Mar 1788 in Shaftesbury, Dorset,
England
Samuel Heath
m:
b: Aug 1818 in Finsbury, St Luke, d:
Middlesex, England
m: 08 Aug 1849 in St Mary,
MARY
Islington, England
d: 1900 in England b: 1786 in CAVERSWALL
STAFFORDSHIRE
d:
Katie Heath
b: 09 Dec 1856 in England
d: 21 Jun 1904 in Dartmouth,
Richard Herring Worth
Devon, England; Age: 49
b: 1795 in Plympton St. Mary
m: 11 Feb 1819 in Plymouth,
Elizabeth Worth
d: Jul 1838 in Stepney, London
b: 04 Mar 1824 in City of London,
Middlesex, England
d: 1900
Mary Elizabeth Alger
b: Abt. 1798 in Ashburton, Devon,
England
d: Jul 1878 in Stratton, Cornwall
Fig. 11.1 The ancestry of Ronald Fisher
was born 15 years later, on 20 May 1858. John Jr. was afforded the career
that was pre-empted for his father. He completed his medical education
at Kings College School and the associated St. Georges Hospital, where
he rose to House Surgeon. John Jr. died on 6 November 1918.
Meanwhile, while George maintained the merchant tradition, he did
so not by selling poultry. Rather, he established himself as a trader in fine
arts in partnership within the firm Robinson and Fisher. George Fishers
lan and sophistication afforded the firm a reputation as one of Londons
top fine arts auction houses.
Already well established and living a comfortable existence by the age

of 32, George Fisher married Katie Heath (184594??), a woman a dozen
years younger than him, and one of three daughters of Samuel Heath
(August 18181900), an attorney from a long line of attorneys by the
same name, and Samuels wife, Elizabeth Worth (4 March 18241900).
Samuel and Elizabeths only son, Alfred, broke the tradition of London
solicitors by migrating to Americas Wild West, where he became first the
sheriff and then the judge in Rawlins, Wyoming. Another of Georges
brothers was named a Wrangler at Cambridge University, and, not coin-
cidentally, married one of Katie Heaths two sisters, Dora.
Clearly, the members of the Fisher family demonstrated education,
brilliance and a certain flair for interesting lives. George, especially, grew
wealthy, as was demonstrated by his construction of a mansion on five
acres of parkland at the highest point in London, on Heath Hill. There,
Heath House, and Inverforth House was the residence for George, Katie
and their five children.
The courtly residence, in a garden on the hill in the heart of London,
could not have been more idyllic for a young boy. The residence had
ponds and boats, horses and tennis courts. Their family maintained a
working garden and even kept livestock in case they needed a supply
of food should infection plague London. Their home was chock-full of
history and culture, an interest in world travel and in medicine. Georges
home, and his children, represented the best of an extended Fisher family
that had found material comforts but also demonstrated the best intel-
lectual and cultural standards within the family. Theirs was a family only
a couple of generations free of a poulterers life, but which nonetheless
showed that humble beginnings need not constrain intellect and success.
The Arrival ofRonald Fisher

The Fishers were patriarchal families, and the hope was to pass this sense
and wealth on to sons. The first child of George and Katie, Geoffrey, was
born in 1876. A year later, Evelyn was born, followed a year after that
with a second son, Allan. This second son died as a very young child
of three, but was followed by Sibyl, Phyllis and Alwyn. Then, on 17
February 1890, the last child, a boy they named Ronald Aylmer Fisher,
was born.
In fact, Ronalds birth was a bit of a miracle. Katie had a difficult preg-
nancy followed by the heartbreaking birth of a stillborn boy. Moments
after this sad announcement, a second, smaller baby arrived. Ronald
began life as a surprise gift, and much younger than his three sisters, who
were all teenagers or young adults even before Ronald was old enough to
begin school. Ronald, more than others, also benefited from the increas-
ing comfort afforded the family.
Just as had Francis Galton, Ronald was doted upon by his older sisters,
and was instructed in the classics, learned to read at an early age and
found a fascination with mathematics even by the age of three. But, while
he was a precocious youngster, his very poor eyesight made it difficult for
him to read. Instead, his nannies, sisters and mother would read to him,
often on the subject of astronomy and geometry, something he could pic-
ture and imagine in his head. From this early introduction, he garnered
a lifelong interest in astronomy and in the mathematical reasoning that
was the basis of geometry, and a yearning for the establishment of the
new science of statistics. Even Ronalds poor eyesight became an asset. It
forced him to develop as a visual learner. He became adept at translating
mathematical concepts into geometric shapes in his head.
When Ronalds brother Alwyn, three years his senior, began to attend
day school in Hampstead Village, Ronald soon began to tagalong. While
he was much younger than the other pupils, his intellectual precocious-
ness and his physical neediness seemed universally endearing. He earned
special attention from Headmaster Greville, and his report card soon
reflected his brilliance. Despite his youthfulness by two or three years
compared to his classmates, he soon scored consistently at the top of his
class in science and mathematics.
By the age of 14, Ron was on his way to Harrow, one of the elite
preparatory colleges in England. His transition into independence and
adulthood arose for yet another reason that year. He lost his beloved
mother, Katie, at the early age of 49, following her quickly progressing
bout of peritonitis. Gone was his comfortable life on Heath Hill, his
doting mother, nurses and sisters, and his ability to excel in small classes.
He was thrust into an elite school with older boys, many of whom were
brilliant themselves. Yet, despite these hardships and his almost debili-
tatingly poor eyesight, he earned the schools highest prize, the Neeld
Medal, after only two years at the school. He excelled with the specialized
tutoring students at Harrow received, but, because tutoring was by lamp-
light in the evening, he absorbed subjects using geometric insights he
could picture in his head rather than on dimly lit pages that challenged
his poor eyesight. It was there that he demonstrated his uncanny ability
to picture the solution to complex problems.
Fortunately, Ronalds accomplishments secured him scholarships. Less
than two years following the death of his mother, his father was bank-
rupt, and the family could no longer afford Harrow. At the age of 16,
Ronald needed to rely on his innate intelligence by securing a series of
scholarships. Then, in October of 1909, at the age of 19, Ron was off to
Cambridge with a full scholarship.
At Cambridge, Ron was popular among his fellow students, but per-
haps not for the slightly disheveled nature of his clothes, or his somewhat
odd body shape. He was nicknamed Piggy, but seemed unoffended. His
classmates were astounded especially by his mathematical acumen, and
his ability to make up for months of lack of attention with hours or days
of intense study. He also demonstrated a strong interest in the new field
of genetics in his four-year stay at Cambridge.
This was a period of infancy in the study of genetics, pioneered only
four decades earlier by the work of the Augustinian friar Gregor Mendel
(20 July 18226 January 1884) and his study of the inheritance of genetic
characteristics in peas. Also not fully appreciated yet was the notion of
natural selection as pioneered by Francis Galtons cousin Charles Darwin.
But while Darwins theory remained debatable, Ronald Fisher saw the
profound link between his work, Mendels genetics, and the growing
influence of eugenics as championed by Galton.
By the time Fisher entered Cambridge, the new statistical journal
Biometrika Karl Pearson had founded was seven years old, and Galtons
legacy had been cemented with the dedication of the Galton Laboratory
at the University of London, headed by Karl Pearson. Fisher was well
subscribed to Galtons increasingly populist belief that humanity can be
improved through science. Statistics was the methodology that would test
and guide the success of the study of eugenics he formulated to improve
the genetic stock of humanity.
In 1910, Fisher had joined other eminent Cambridge University lumi-

naries such as the Great Mind John Maynard Keynes and Horace Darwin
(13 May 185122 September 1928), son of Charles Darwin, in the
newly formed Eugenics Society. Fisher had championed this philosophy
of eugenics at Cambridge, which offered a warm reception to the notion
of superior human breeding. Young Fisher was a key participant in the
creation of a eugenics society at Cambridge. In the fall of 1911, the first
meetings of the Cambridge University Eugenics Society were convened in
his room. Later that winter, the society attracted Major Leonard Darwin,
the youngest son of Charles Darwin, and the president of the Eugenics
Education Society of London, to come speak at Cambridge on eugen-
ics reform. The following summer, Fisher attended the first meeting, in
London, of the International Eugenics Congress. By the second annual
meeting of Cambridges eugenics society, Fisher was the lead speaker. The
following year, Fisher addressed the Eugenics Society of London, as a
23-year-old recent graduate of Cambridge.
In his speech in London, Fisher argued that the modern triple set of
tools of statistics, genetics and eugenics can help fulfill a promise that
mankind could enhance its skills commensurate with the forward march
of technology. Science and statistics can accelerate the otherwise plod-
ding progress of Mendelian genetics and experimental breeding to ensure
the demand for more able men could be met with a growing supply
guided by science. He also argued that these statistical tools can guide the
enhancement of classes that will most contribute to society.
Of course, this view was taken to great extreme in Adolf Hitlers (29
April 188930 April 1945) attempt to advance a master race of humans.
But, for the first third of the twentieth century, until everything went
terribly wrong, the notion that the productivity of humankind could be
advanced through science was at times controversial, but was also cham-
pioned by many of the worlds intellectuals. While various notions of
eugenics, such as the selective mating advocated by Plato to produce
a guardian class, had been pondered for millennia, it was the British
Eugenics Society and the Eugenics Education Society of London that
were first spearheading a philosophy of Galton that would soon spread
across the Atlantic Ocean and around the developed world. Fisher was a
young standard-bearer who was expected to continue the work of Galton
following Galtons death on 17 January 1911.
Fisher had a somewhat evolutionary insight into this eugenics move-

ment, however. He viewed his role as assisting in the synthesis of eugen-
ics, statistics and good science in a way that may elude the experts who
advocate within each of these disciplines but compete between them.
Fisher also recognized that there is a social aspect to eugenics. He saw
the enhancement of qualities designed to advance the individual to be in
conflict with the needs of society. For instance, he warned his colleagues
about the need of individuals to indulge in conspicuous consumption
to advance their own status, but at the expense of the overall needs of
society. He also argued that the goal ought not to allow humankind to
advance within our environment. Mankind has the twin responsibility to
allow the environment to advance through mankind. Here he was articu-
lating the dual importance of both nurture and nature.
In his youthful exuberance, Fisher may have also been one of its most
eugenically evangelistic proponents. He delighted the audience of his
talks by speaking of the responsibility of those who view themselves as
an exceptional class determined to produce for themselves exceptional
offspring. Few of his contemporaries could have imagined the trajectory
of the movement and the tragic conclusions to which it could lead.
Meanwhile, Fisher had completed his undergraduate studies at
Cambridge, published his first academic paper in mathematics in April
of 1912, at the age of 22, and earned the distinction of Wrangler with his
results on the Cambridge examinations. He then continued for another
year, of graduate studies at Cambridge, to study under the brilliant young
astrophysicist F.J.M.Stratton (16 October 18812 September 1960) on
the theory of errors that Gauss initiated a century earlier.
At the end of his year of graduate studies, Fisher had to navigate the
practical problem of employment. He had a fascination since he was a
child with agriculture, and traveled to the Canadian prairies to work on a
farm near Winnipeg, Manitoba. He returned at the end of the summer fit
and robust, but still without employment. He had hoped that his efforts
in eugenics would parlay itself into work in London, but he had failed
to yet win the support of the statistics kingmaker Karl Pearson, who, by
then, was running the Galton Laboratory at the University of London.
For half a dozen years, Fisher sought employment in statistics. He was
willing to work in the banking industry to pay the bills, but his employers
expected him to invest more in his wardrobe than he could afford so that
he may look a banker instead of the threads of a shabby statistician.
With the onset of the Great War in 1914, Fisher tried to volunteer for
active duty, but was rejected because of his extremely poor eyesight. He
tried his hand on occasion at teaching at preparatory colleges, but he did
not have a natural teachers empathy for his students, despite his obvious
academic brilliance. Meanwhile, to hedge his vocational bets, he simul-
taneously tried his hand at hobby farming. There he raised pigs and pur-
sued their horticulture with the keen eye of a statistician. He considered
as unsuccessful his efforts as a school teacher, but with his college chums
off at war, and his own academic success thwarted at each turn, he had
turned to farming and teaching to pay the bills.
The interest in eugenics, and his experiences working on the Canadian
farm, made Fisher interested in starting a farm of his own. Through his
college friends, he had come across a woman named Gudruna Guiness.
The granddaughter of Henry Grattan Guinness (11 August 183521 June
1910), a famous preacher of the Ulster Revival of 1859, and the great-
great-granddaughter of Arthur Guinness, the founder of the Guinness
brewery, Gudruna was a spirited young woman married to one of his col-
lege friends. Gudruna entertained Rons animal husbandry interests, and
offered her emotional support for his interest. They pursued this part-
time interest together, even as Gudruna fanned Rons interest in find-
ing a companion. She arranged to have him meet her 16-year-old sister,
Ruth Eileen Guinness (15 April 190015 January 1982), with whom the
much older Ron struck a romantic interest. Knowing the age difference
would be controversial, Ron and Eileen delayed their marriage until she
turned 17 years old.
Eileens father had died in 1915, and Eileen managed to hide from
her family her interest in Ron, and his interest in her, for another two
years. Just 11 days after her 17th birthday, Ron and Eileen married, near
Rons college work in Kent. They left that day to visit with Rons family
in Streatham, then moved to Bradfield to occupy a cottage, raise pigs and
produce, and permit Ron to teach at nearby Bradfield College.
Together, Eileen and Ron had a boy, named after Rons father, and
then, in 1920, as Rons family, and his sister-in-law moved to adjoining
cottages in the village of Markyate, and Ron and Eileen then had a girl,
named after Rons mother. They went on to have another boy, and six
girls together, one of whom died as a young child.
Meanwhile, Fisher had come to admire and respect the son of Charles
Darwin, Major Leonard Darwin (15 January 185026 March 1943), and
considered the Major a mentor. Eventually, as president of the Eugenics
Society, Darwin was able to offer Fisher a modest stipend to perform
statistical work for the Society. This afforded Fisher some time to devote
to his statistical interests, which parlayed into a paper on the use of the
correlation coefficient. However, when an academic quarrel erupted
between Darwin and Pearson, Fisher came to the defense of his mentor,
and somewhat alienated himself from Pearson, who could be prickly with
those whom he perceived as detractors. Unfortunately, this feud would
accelerate and come to define Fishers career.
Note
1. Box, Joan Fisher, R.A.Fisher The Life of a Scientist, John Wiley Publisher,
NewYork, 1978, at p.5.
12
The Times ofRonald Aylmer Fisher
By the time Fisher began to mature as a scholar, theories of evolution and

eugenics were already spawning a nascent literature in statistics. Charles
Darwin had argued that the natural variations of human qualities are
adaptive and evolve over time, while his cousin, Francis Galton, had
shown that variations are inherited. Pearson had concluded that such
subtleties could not be observed. But, Fisher subsequently produced
a paper that showed that such correlations could be observed, and, in
doing so, also established the field of biometric genetics. At the same
time, he introduced into the statistical vocabulary the term variance, and
produced the methodology analysis of variance. Clearly, Fishers observa-
tions were astute and his contribution profound. But he did so at odds
with the then established monarch of modern statistics, Karl Pearson.
One of Fishers explorations was to demonstrate how inheritance can
affect the correlation of various measures of humans such as height.
Fishers approach stemmed from his work on the theory of errors in
his study of astrophysics under Professor Stratton. He had emphasized
this concept of the use of variance, as the square of standard deviations,
because variance is always positive, and hence additive. His new analysis
of variance was highly effective in determining the factors that affect total

DOI10.1057/978-1-137-34137-2_12
variability in a way that we find familiar today. For instance, he showed

that Mendelian inheritance explains almost a third of the total variance of
the physical qualities he compared. He produced a groundbreaking paper
in 1916, The correlation to be expected between relatives on the supposition
of Mendelian inheritance,1 on the analysis of variance. He sent his results
to Pearson, and fully expected Pearson to share his academic interest. Of
course, as the editor of the premier journal in the subject, Biometrika,
Pearson had the ability to greatly accelerate Fishers academic status and
job prospects. But, he also had the power to stymie them.
Pearson refused to publish Fishers results. It would take two years for
Fisher to finally have one of the most important papers ever authored
in the field to be published, and only through the advocacy of Major
Darwin. The paper was presented to the Royal Society of Edinburgh in
the summer of 1918, and published in their Transactions in October.
Meanwhile, with the end of the Great War, Fisher became increasingly
worried about finding full-time employment. That fall, Fisher received
two offers. One was to work at the Galton Laboratory under Pearson,
but only if he taught a full teaching load and he permitted Pearson to
approve any research destined for publication. Perhaps Pearson recog-
nized he needed to keep friends close and adversaries even closer. Instead,
Fisher accepted a position at the Rothamsted Experimental Agricultural
Station to perform a yearlong statistical analysis of their data.
The tension between Pearson and Fisher was perhaps inevitable.
Statistics developed as a tool to support a discipline that was fundamen-
tally philosophical. The eugenics movement as developed by Galton was
more anecdotal than scientific. The rudimentary statistical intuition
Galton developed was not based on the first principles of calculus, alge-
bra and geometry that underpin mathematics and the sciences. Then,
under Galtons disciple, Karl Pearson, a number of statistical measures
were developed. But they still lacked the mathematical formality and rig-
orous proofs demanded of the hard sciences. There thus remained a gulf
between the hard sciences, to which Fisher aspired, and the Galtonian
biometrics. Fisher felt it impossible to establish statistics as a branch of
mathematics and science unless it established the necessary rigor. But, for
a young turk to suggest so was a figurative slap in the face of the statistical
godfather Pearson.
Pearson had recognized that the data observed within the biologi-
cal sphere failed to follow the familiar normal distribution commonly
observed in physics and assumed by early social and biological staisti-
cians such as Quetelet and Galton. Pearson sought to parameterize these
data distributions using his frequency curves, not only with the first and
second moments of mean and variance, but also with weightings of third
and fourth moments, as convenient. In the process, statistics had tempo-
rarily been diverted from more fully describing and deriving the proper-
ties of the normal distribution. By returning to the underpinnings of the
normal distribution, under the Laplacian and Gaussian observations of
the central limit theorem, Fisher was shoring up the foundation of mod-
ern statistics. But, clearly his approach was a dramatic departure from
Pearsons methodology.
Fisher was most clear on his concern that Pearsons description of dis-
tributions through various weighted moments may offer some simplicity,
but was entirely arbitrary. Gauss had derived his distribution based on
the optimization of a likelihood function. As had Gauss, Fisher began to
champion the maximum likelihood approach.
Fishers first volley into the Fisher-Pearson fray occurred when he
was only 22 years old. His approach was influenced by a paper pub-
lished in 1908 under the pseudonym Student. At that time, a chemist
named William Sealy Gossett was an employee of the firm Rons wifes
great-great-grandfather had started, the Guinness Brewing Company
of Dublin, Ireland. The company had instructed Gosset to analyze
farm productivity data for plots associated with the brewery. Gosset
had brought to the attention of his mentor, F.J.M. Stratton, some
results on the distribution of observations. In turn, Professor Stratton
brought these results to his young student, Fisher. In 1912, Fisher con-
tacted Gosset and showed Gossett that the results do not precisely fit
the normal distribution, but can be expressed as a modification of the
normal distribution that takes into account the finite sample size, as
opposed to the large, or infinitely sized, samples required by the central
limit theorem.
Fishers correction of Gossets Student t-distribution was relatively
minor, but it removed the ad hoc nature of Gossets proposal by provid-
ing a justification for the recasting. Gosset confided in his friend, Pearson,
whom he had come to know when he visited Pearsons lab for the aca-
demic year 190607 that Fisher had reworked his results. In a letter to
Pearson, he asked Pearson what he thought about Fishers correction.
Had Pearson fully comprehended and accepted the note from a
22-year-old graduate student in 1912, he might have offered a correction
in his journal to Gossets original publication of a paper on the Student
t-distribution. Pearson never published such a correction. Instead, Fisher
separately published On an Absolute Criterion for Fitting Frequency
Curves,2 in which he derived a maximum likelihood estimate of variance
when the sample size is small. In doing so, he constructed a now familiar
standard deviation estimate for a sample of size n that includes the now
equally common concept of degrees of freedom.
( x m)
2
s.d. ( x ) = .
n 1
Gosset published a subsequent paper on his Student t that included

Fishers observation of the appropriate correlation between samples drawn
from independent variables, called probable error of a correlation coeffi-
cient.3 By 1914, the 24-year-old Fisher had incorporated these correct
formulations into a paper that demonstrates the theoretical justification
of the Student distributions, and sent it for publication to Biometrika.
Pearson returned the paper to Fisher with a request that Fisher publish
some tables generated from his theoretical approach, and incorporate
into his analysis results from Pearsons ad hoc third and fourth moment
approach. Fisher made a somewhat lukewarm effort to barely incorporate
Pearsons demands. His logic was sound. Fishers results were based on
theory and fundamental principles, while Pearsons approach typically
did not.
To try to fit these square pegs into Pearsons round holes made no
methodological sense. Fishers approach was reminiscent of Gauss ele-
gant geometric interpretations of a new algebra. Pearson likely realized
that Fishers approach was sound, because he instructed his lab to begin
to employ Fishers methods. However, while he reluctantly conceded to

publish Fishers work in 1915, clearly he felt Fisher an upstart.
Yet, the nascent statistics discipline led by Pearson failed to publicly
recognize the intuition and accuracy of Fishers result, just as they had
neglected Gossets work. Disappointed, but initially undaunted, Fisher
continued with his approach, and derived the appropriate properties for
most of the statistics we now employ regularly, such as the coefficients
of regression, the correlation ratio, the partial correlation coefficient and
multiple correlations.
At the same time, Pearson began to discover the limitations of his ad
hoc approach. His curves simply could not fit certain circumstances.
Fisher offered Pearson an insight that would allow him to make some
progress, and Pearson and his colleagues made great advances following
Fishers suggestion, which culminated in a paper of their own in 1915. In
that paper from the Galton lab, the authors nonetheless suggested that
Fishers approach was flawed by insisting Fisher had employed a dubious
Bayesian argument, which Fisher had not.
Eventually, Pearson offered scant solace to Fisher by agreeing to pub-
lish Fishers superior approach, but only if Fisher would dedicate himself
to a few months of tedious calculations to construct the additional tables
Pearson requested. Fisher saw little sense, and had little ability to com-
plete these menial calculations absent the resources available to Pearson.
In addition, Pearson insinuated that scarce resources during wartime
might prevent the publication of Fishers paper, and Fisher should instead
look elsewhere.
Meanwhile, Fisher had further extended both his intuition and his
results to excellent effect. He showed that the skewed curves Pearson was
attempting to describe could be transformed rather simply into the nor-
mal distribution. His transformation would allow the proper tables to be
generated rather easily.
Nonetheless, Pearson continued to deny Fisher access to his Biometrika,
and continued to suggest in his papers and in private that Fishers
approach was in error. Even Major Darwin, Fishers esteemed colleague,
refused to intervene in opposition to the renowned Karl Pearson over the
young and grossly underappreciated Fisher.
The 29-year-old Fishers rejection of Pearsons offer of employment at

the Galton Lab in 1919 might have cemented the rivalry each scholar
sensed. Pearson of course could do so from a position of power, while
the much younger and academically less established Fisher suffered the
indignities with a sense of victimhood. By the time Fisher tried once
again to have Pearson publish some new results, in 1921, Pearson rejected
the paper rather tersely by stating he would prefer Fisher publish his work
elsewhere. Academic war was on.
Fishers most penetrating round was lobbed in 1922. Perhaps Pearsons
most significant contribution was in his determination of the chi-squared
distribution. Pearson had developed a test that is based on a null hypoth-
esis which states that the distribution of occurrences of events in a sample
is consistent with a postulated distribution. These mutually exclusive
events must sum to a probability of unity. For instance, a simple hypoth-
esis might be that rolls of a six-sided die are fair, or each side numbered
from 1 to 6 are equally likely.
Fisher showed that Pearsons analysis was fundamentally flawed
because it did not take properly into account the concept of degrees of
freedom. In 1922, the Journal of the Royal Statistical Society agreed to
publish Fishers more accurate recasting of the chi-squared distribution,
along with work by G.Udny Yule (18 February 187126 June 1951),
a highly respected British statistician, who had prepared a companion
paper which showed how Fishers superior approach remedied some seri-
ous problems in previous analyses.
Pearson, as the editor of Biometrika, thought he held the monopoly on
retort when he complained broadly and publicly to his readers that there
is a Don Quixote who was tilting at windmills in a high-stakes game that
will destroy either modern statistics or Fishers own reputation. From his
bully pulpit, Pearson defended himself, did not afford Fisher the same
luxury and held the editors of the Royal Statistical Society responsible
for the academic carnage. Fearful of a war between Goliaths, the Royal
Statistical Society refused young David a voice to defend himself against
Goliath.
A few years later, and after the retirement of Pearson, Fisher obtained
some personal vindication. Pearsons son, Egon S. Pearson (11 August
189521 June 1980), had taken over the lab following his father retire-
ment, and had published an article in Biometrika that generated results
dramatically contrary to his fathers prediction, and almost precisely what
Fisher had predicted. While few statisticians had the level of understand-
ing of either Egon Pearson or Fisher, and still fewer would take Fishers
side over Pearson, father or son, even if the evidence grossly favored
Fishers analyses, almost nobody wanted to enter the fray. Fishers vindi-
cation would be delayed for years.
While Fisher would not realize the success he deserved for many years,
he continued to work to recast modern statistics on a foundation as rig-
orous as would Gauss. In 1922, Fisher published the single most sig-
nificant statistical work since Gauss 1809 magnum opus. His On the
Mathematical Foundations of Theoretical Statistics established the vocabu-
lary of statistics employed ever since, and firmly cast its methodology
based on the principle of maximum likelihood. In this, and a subsequent
addition a couple of years later, Fisher described the goal of statistical
measuresto provide statistics that are as efficient as possible in sum-
marizing all available information. Based on that criteria, it was evident
that the measures he developed or improved were the standard to be
employed in all statistics going forward.
In addition to the cogent statements of various familiar measures and
his development of the new analysis of variance, Fisher also described the
now familiar F-test. Yet, as productive as he was, Fisher was producing
these great works not from a comfortable scholarly position aloft in the
ivory tower, but as a working statistician at an agricultural field station.
His work at Rothamsted was indeed his most significant.
Rothamsted was by no means the University of Londons Galton
Laboratory, but neither was it a rural backwater. It was there that Ronald
Fisher supervised a few assistants and budding statisticians in the orga-
nization and study of a massive amount of collected crop data, on the
surface, but also on the development of modern statistical theory. His
major treatise, published in 1922,4 and its extension in 1924 were a
tribute to Rothamsted and created the foundation for modern statistics.
And it was there that many notable statisticians followed in his found-
ing footsteps.
Notes
1. Fisher, R.A., The Correlation between Relatives on the Supposition of
Mendelian Inheritance, Philosophical Transactions of the Royal Society of
Edinburgh, Vol. 52, 1918, pp.399433.
2. Fisher, R.A., On an Absolute Criterion for Fitting Frequency Curves,
Statistical Science, Vol. 12, No. 1, February, 1997, pp.3941.
3. Student, Probable Error of a Correlation Coefficient, Biometrika, Vol. 6
No. 2/3, Sept. 1908, pp.302310.
4. Fisher, R.A., On the mathematical foundation of theoretical statistics,
Philosophical Transactions of the Royal Society, 1922, pp.309368.
13
Ronald Fishers Great Idea
While Pearson had spent a lifetime formulating statistics for such indi-
vidual predictors as a distributions mean and variance, and Fisher helped
improve Pearsons statistics, Fisher also offered a new and groundbreaking
insight into the overall power of statistical models. While at Rothamsted,
Fisher also refined a geometric interpretation of statistical measures that
dated back to Gauss, and integrated most of the statistical measures we
employ today.
To understand an insight Ronald Fisher originally had when he was
just a 19 years old, let us harken back to why Gauss referred to his
Gaussian distribution as the normal distribution. To a physicist or geo-
metrically trained mathematician, the term normal is synonymous with
orthogonality, or the angle 90. It is the direction from a given ray, plane
or hyperplane along which a vector can minimize the distance between a
given point off the plane to a point on the plane. This direction normal to
the plane is thus one of great geometric significance. This normal ray was
both the key to minimizing the sum of squared errors (SSE), or, likewise,
the square root of the sum of the deviation distance between an observa-
tion subject to measurement error, and the path which it is expected to
follow. This distance then represents the minimum of the root of the SSE.

DOI10.1057/978-1-137-34137-2_13
Fisher understood this geometric interpretation pioneered by Gauss,

and well studied by astronomers as the primary method to reconcile
error-prone observational data with postulated celestial paths. After all,
Fisher entered Cambridge to study astronomy, and continued his gradu-
ate studies in astronomy there, under Prof. Stratton, an expert in the
error-minimization technique pioneered by Gauss. Fishers poor eyesight
also required him to think of mathematical problems within a geometric
context so that he may visualize the solution. The method Fisher used
to then construct meaningful, rather than ad hoc, measures of statistical
concepts relied heavily on such geometric visualizations.
To understand his pioneering approach when others, most notably
Pearson, were producing measures which lacked any geometric inter-
pretation, consider the simple problem of fitting three data observations
y1, y2 and y3. These three points can be expressed as the point of a ray,
or, more generally, a vector, which begins at the origin (0,0,0) in the
Cartesian coordinate system, and ends at the point Y=(y1, y2 and y3).
Let us also postulate another vector also starting at the origin and
extending to a point X=(x1, x2, x3). The question is how far we need to
extend that vector, by a multiple << that can come as close to
the endpoint of the vector Y as possible. By doing so, we minimize the
error between the observations Y and a proposed function X that fits the
observed data.
Gauss demonstrated that we minimize this distance by minimizing
the SSE in each dimension. Let us define the deviation in each direction
as =(1, 2, 3), where i = yixi. The square root of the sum of these
squared errors 12 + 22 + 32 is then equivalent to the distance between the
tips of the vectors Y and X. Of course, the minimization of this distance
provides the same solution as this distance squared, so the SSE has a nice
geometric interpretation that it also minimizes
the total error represented
by the ray between the tips of Y and X= Y (Fig. 13.1).
Let us now place this geometry into a statistical context. We can state a
null hypothesis that there is no such postulated vector X that can approxi-
mate Y. This is equivalent to the statement that equals zero. If this null
hypothesis were true, (y1, y2, and y3)=(1, 2, 3). If we assume that these
errors are i.i.d. with a constant variance, then any vector from the origin
Fig. 13.1 The predicted cone of a hypothesis test
with the same length as Y would then create the same SSE.Such rays would
sweep a sphere with a radius equal to the square root of y12 + y22 + y32 .
Then, the accuracy of the alternative hypothesis that the underlying
expression is given by X is given by the chance that the observed ray Y
would fall as close to X relative to any such ray of the same length as Y.
This relative probability is given by the area swept out by rays of length Y
within the same distance between Y and X relative to all possible rays of
length Y, or the surface area of a conic slice around X as a share of the
entire surface of a sphere of radius X. This share can then be interpreted
as a test of the significance of .
Geometrically, this measure is proportional to the angle between the
ray Y and the ray X. The test of significance then compares the area of
the predicted cone compared to the entire area of the sphere. The value
of can then be stated based on this ratio of confidence. Fishers t-stat
performs that calculation of the relative areas.
We can also use Pythagoras theorem to analyze variances using this
same methodology. The square of the total length of the observational
vector, y12 + y22 + y32 , can be broken into two components, the regres-
sion sum of squares plus the SSE. Mathematically, the domain of the
observational vector is given by its dimensions that can vary, that is, the
number n individual observations. Then, the mean sum of squares per
o bservation is its sum of squares divided by n, the number of dimensions

of the vector. This dimension n Fisher labeled as the degree of freedom.
Fisher pioneered the importance of such degrees of freedom in
statistics. The observation vector then has n dimensions for n observa-
tions, and hence n degrees of freedom in the number of directions it
could vary. On the other hand, the estimation vector for a simple regres-
sion is a ray in one direction only, and hence can only vary in its length.
It has one degree of freedom. Finally, in the case of three dimensions,
the error vector represents the difference between the two, and can vary
in two dimensions along the plane defined by the observation and the
regression ray. It thus has two degrees of freedom. Their respective mean
squares are then their sum of squares divided by their degrees of freedom.
Fisher noted that, if the mean square of the postulated model is much
larger than the mean square of the error, then it is likely a better predictor
than the null hypothesis that there is no such predictor. The relative size
of this ratio is then given by Fishers F measure:
SR2 / nR
F= = ( nE / nR ) cot 2 ( ) ,
SE2 / nE

where the cotangent of the angle between the observational and the
regression vectors gives the ratio of the adjacent regression ray and the
opposite error ray. Fisher proposed that a transformation of this F-ratio,
given by what he labeled the z-test, as:
z = (1 / 2 ) log F ,

or the log of the square root of F, which is a function of the included

angle . Fisher also produced one more statistic for the regression. He
showed that the square root of the F-test, which again is then related to
the included angle , is distributed as Students t.
Finally, recall the correlation coefficient proposed by Galton and
refined by Pearson. Fisher also offered a geometric interpretation of the
deviations between observed and predicted values of one dependent
v ariable relative to the observed and predicted values of another inde-

pendent variable. These deviations y and x, respectively, then yield the
correlation coefficient:
r=
xy ,
x y
2 2

which, Fisher observed, is given by cos(). At each turn, the relevant sta-
tistics had been reduced to a firm geometric interpretation, just as Fisher
had learned to imagine since he was a child.
While at the Rothamsted Experimental Station, Fisher published his
results in his Statistical Methods for Research Workers, which he wrote over
two years beginning in 1922. His brilliant interpretation of modern sta-
tistics was not particularly well received in Britain, but it was embraced
in the USA, which was less allied with the influential Pearsons and the
journal Biometrika. More theoretical statisticians had remained wed to
the arbitrary multiple moments methodology of the statistical giant, and
editor of Biometrika. Meanwhile, young practitioners at first found the
theoretical foundations established by Fisher confusing and unnecessary.
His foundational approach nonetheless slowly gained appreciation and
academic traction. It is now universally appreciated for its rigor, inter-
pretation and significance in the development of measures of obvious
geometrical significance.
The Method ofLeast Squares

Fisher was also instrumental in transforming Gauss linear regression
method into the technique we rely upon today. In Gauss original for-
mulation, consider a problem in which there are three measurements at
a given point in time, ai, bi, ci and mi, and three coefficients p, q and r to
be discovered. We can frame the problem as:
mi = p * ai, + q * bi, + r * ci ,

where mi is considered the independent variable. Then, if each of these

measurements are subject to a measurement error vi, we can express the
above equation as:
vi = p * ai, + q * bi , +r * ci mi .

Then, Gauss least squares requires us to choose p, q and r to minimize

the squared error term:
n
min ( pai + qbi + dci mi ) .
2
p , q ,r
i =1
Suppressing the index, this produces a set of three first-order equations:
aap + abq + acr = am
bap + bbq + bcr = bm
cap + cbq + ccr = cm.
Gauss used various methods to solve for these systems of linear equa-
tions in his solutions to such problems as the reappearance of an asteroid.
Many mathematicians also developed favorite methods. However, the use
of matrices was not developed until Arthur Cayley (16 August 182126
January 1895). Cayley had defined the method of matrices in a German
journal article written in French in 1855.1 We now recognize the system
of equations and can solve the system with relative ease. In 1932, two
mathematicians employed Cayleys method to demonstrate how it might
be used as a notation to simplify the traditional linear regression solu-
tion discussed earlier. Herbert Westren Turnbull (31 August 18854 May
1961) and Alexander Craig Aitken (1 April 18953 November 1967)
produced a version of the now familiar expression for the solution of the
parameter matrix:2
= ( XX ) X y.
1

Fisher had derived close relatives to this now familiar form, but
without the much more compact matrix notation. Nonetheless, it was
Fisher who took this formulation of the linear regression model and
derived the various validity tests we use now in his Statistical Methods
handbook. These include the F-tests and t-tests, analysis of variance and
the R2 value.
A modern approach to Fishers results is described next. The method
of least squares as applied to the linear regression model has two compo-
nents. First, we show that the method provides an unbiased set of estima-
tors for a line that best fits a set of observed data. Second, we show that
this method produces its unbiased estimate of the linear parameters so
long as the errors are symmetric, with a mean of zero, and each obser-
vational error is independent of the next. They need not follow a more
formal distribution function.
Let us consider a vector of observation points y that linearly depend
on a set of independent variables X, which include the constant 1. Let
there be a vector of linear coefficients b such that, in the absence of any
observational errors,
y = Xb.
Let us now allow there to be observational errors so that an actual

observation yi may be symmetrically distributed around an unbiased
value. Then, these errors are given by:
y i X i b.
and the SSE, in matrix form, is given by:
SSE = ( y Xb )( y Xb ) .

Gauss determined the expression for the linear coefficients and demon-
strated that these coefficient estimates minimize the SSE.To see this, let
us differentiate the SSE with respect to the estimated coefficients and set
these terms to zero:
dS dS
( y Xb) ( y Xb)

0= SSE =
db db
dS
= ( yy bX y yXb + bX Xb) = 2 X y + 2 X X ,
db
where is the matrix of the estimates of coefficients evaluated at the

minimum. Then, we can solve for these linear coefficient estimates as:
= ( XX ) X y.
1
Let us now show that this estimate is unbiased. Let the vector of errors
be given by , with each error i assumed to have a mean of zero and a
variance i2 . Since these error terms are independent, the covariances
ij=0. Then, we can calculate the expected value of our estimates of the
coefficients:
( )
E = E(( X X ) X (( X + )
1
(
= + E ( X X ) X
1
)
= + ( X X ) X E ( )
1
= .
Next, we can discover the variance of the estimates for the coefficients.
These are given by:
( ) (
Var = E ) ( ) = E (( X X ) )( X X ) ))

1
X 1
X

(( )
= E X X )1 X X ( X X )
1
) = E (( X X ) X ) X ( X X ) )
1 2 1


(
= 2 E ( X X ) X X ( X X )
1 1
) = 2
( X X )
1
.

This derivation required us to specify little with regard to the pattern of

errors except that the mean error is zero and individual errors are uncor-
related with each other.
Fisher developed these tools to assist colleagues in their practical analy-
sis of the types of problems regularly faced by research stations such as
Rothamsted. It is likely that his sophistication was at first lost on his audi-
ence. However, over time, understanding spread, and Fisher is remem-
bered as the father of modern linear regressions and the associated tools
of F-tests, t-tests and the R-squared coefficient of determination. It took
one of his greatest allies in statistics, though, Harold Hotelling, to popu-
larize and help simplify his analysis and construct the now familiar con-
fidence intervals on the estimate of coefficients.
Notes
1. Cayley, Arthur, Remarques sur la notation des fonctions albebrai-
ques, Crelles Journal fur riene und angewandte Mathematik, Vol., L,
1855, pp.2820285.
2. Turnbull, H.W. and A.C. Aitken, An Introduction to the Theory of
Canonical Matrices, Blackie and Sons Ltd., London, 1932.
14
Later Life andLegacy ofRonald Fisher
There are but a few scholars in any discipline who are simultaneously
claimed by multiple disciplines as their own. The Great Mind John von
Neumann is one such scholar. The major award in computer science is a
tribute to his leadership and scholarship in the development of computers
and their programming. Physicists remember him for his contributions,
and the Manhattan Project relied on his expertise in chemical engineer-
ing. He was a disciple of David Hilbert and an extraordinary mathema-
ticians, and he was perhaps the most significant father of game theory
that added so much to so many disciplines. Finally, he is recognized as
one of the cleverest economists who also made significant contributions
to finance theory. Ronald Fisher shares with von Neumann this unique
characteristic of recognition by scholars from many disciplines.
Fisher remained a giant among colleagues at Rothamsted. He was cer-
tainly the brightest to have ever joined the illustrious institution, even
if many bright scholars followed in his footsteps there. None, however,
likely exceeded his degree of eccentricity, nor his ability to scare and
intimidate colleagues at one moment, and then smirk and joke with
them the next. He had more freedom at the Rothamsted Institute than
most in academics, and was only required to lend his incredible skill

DOI10.1057/978-1-137-34137-2_14
to problems of his choosing, as an academic bee flitting from flower to

flower. These may have been the best and most productive years of his
academic life.
Fisher inspired a generation of statistical scholars who joined
Rothamsted to work with him. These include Joseph Oscar Irwin (17
December 189827 July 1982), the British statistician who pioneered
the method of biological assays, John Wishart FRSE (28 November
189814 July 1956), the Scottish mathematician and agricultural stat-
istician, Frank Yates FRS (12 May 190217 June 1994), another pio-
neer of modern statistics, William Gemmell Cochran (15 July 1909,
Rutherglen29 March 1980), a prominent statistician who founded
many statistics departments in the USA, and John Ashworth Nelder (8
October 19247 August 2010), the British statistician who made con-
tributions to experimental design, analysis of variance, computational
statistics and statistical theory. But while Rothamsted, and its statisti-
cal progeny, established modern statistics, it also defined the agenda for
modern agricultural research stations worldwide.
Much of Fishers academic work was centered around his research
in agricultural economics at Rothamsted. From that perch, he almost
single-handedly developed the concept of a research institute devoted
to the creation of solutions to agricultural problems that would benefit
humanity. More than perhaps any single person, he helped fuel the coop-
erative extension movement that provided research aid and advice from
public universities to the agricultural communities, first in the UK, then
in the USA and around the world.
Meanwhile, Fisher was increasingly recognized as the emerging figure
in theoretical statistics, just as his predecessor and often antagonist, Karl
Pearson, was nearing retirement. When, in 1929, the opportunity to suc-
ceed Pearson at the University of London arose, Fisher could not refuse
the opportunity to accept the endowed Galton Chair. However, as with
every dimension of his relationship with Pearson, there were complica-
tions. Pearson had ensured that his genetic heir, his son Egon, would be
afforded the opportunity to assume some of his duties, while his schol-
arly heir, Fisher, assumed others. The balance the two successors initially
forged was a fragile one, fraught with difficulties.
The younger Pearson had retained administration of the worlds only

department devoted to statistics, while Fisher was given authority over
the Galton Laboratory, and all of Karl Pearsons former employees. Yet,
Fisher remained much more intellectually wed to statistical theory than
eugenics, and found tedious the administration he was expected to pro-
vide. For the next decade, he was intellectually moving in one direction
while the University administration was confining and directing him
in another. Meanwhile, Egon Pearson had much better skills in, and an
emotional advantage with, the university administration. Fisher found
little but frustration, and perhaps even cultivated some of his conflicts to
reinforce the tension he suffered. As he had done throughout his life, he
made his path more difficult than perhaps necessary.
Fisher maintained a particularly frosty relationship with Egon Pearsons
personally appointed colleague, Jerzy Neyman (16 April 18945 August
1981). As Karl Pearsons handpicked successor, Egon had inherited some
of his fathers combative personality, and almost all of his loyalties, and
enemies. In turn, upon his acceptance to replace his father upon Karl
Pearsons retirement as the professor of statistics at the University of
London in 1933, Egon promptly selected Neyman to be his colleague
and fellow statistics professor. The irony was not lost on Fisher, who is
now known as the father of modern statistics, that Fisher would be denied
a statistics teaching position at the then hotbed of statistical studies in the
world. Instead, Fisher was offered his perch at the Galton Laboratory, but
under the premise that he not be permitted to teach statistics. At a time
and place when loyalties were demanded, Neyman had to pick sides, and
the side he must pick was obvious.
This began a period of renewed feuding between the Pearson allies,
which was most of established British statistics, and Ronald Fisher.
Certainly, Egon was quite able, perhaps even more so than his father and
Karls narrow focus on curve parameterization through moments, and
Neyman was a true mathematician in the European tradition. In fact, the
team of Pearson and Neyman produced some excellent work. But, unlike
the criticism of Karl, Egon and Neyman actually took Fishers work and
filled in some of the gaps. In doing so, they provided even a firmer foun-
dation for Fisher, even as each of their developments further strengthened
and verified Fishers intuitions rather than negate them.
These were battles Fisher took to his grave. Neyman delicately removed
himself from the almost constant din of professional jealousies when he
moved to the University of California at Berkley shortly before World
War II.Nonetheless, Fisher remained embittered because of the margin-
alization he experienced.
Regardless, Fisher left the statistical and finance world with a series
of innovations beyond his elaboration and geometric justification of
Students t. We now regularly employ his chi-squared and F-tests, and
practicing statisticians use his definitions, from the meaning of probabil-
ity to the concepts of efficiency and consistency. Fisher also originated the
idea of hypothesis testing, and even recommended the adoption of the
95% confidence level that has become the de facto standard for much
hypothesis testing ever since. Even the F-test, which measures the degree
to which the variance from two populations are equal, originated with
Fisher. Yet, it was the Iowa State University statistician and mathema-
tician George Waddel Snedecor (20 October 188115 February 1974)
who actually formulated the appropriate distribution to describe the
extent to which the ratio of two variances approach unity. He named this
ratio of chi-square the F-test in honor of the brilliant Fisher who spent
time in Ames, Iowa, during one of his most productive and influential
visits to the USA.Actually, Fisher preferred other methods to compare
and analyze variances, and did not readily adopt the measure named in
his honor.
Nonetheless, Snedecor was instrumental in spreading the popularity
of Fisherian statistics in the USA.He wrote his own guide for research-
ers, his 1937 text Statistical Methods, that covered the same materials
as had Fishers Statistical Methods for Research Workers, but without the
cumbersome rhetoric, and with more examples that could guide practical
statisticians. Snedecors book sold hundreds of thousands of copies and
remained one of the most cited statistical treatises for decades following,
even though it added little if any to Fishers intuitions. In fact, Snedecor
quite wittingly became Fishers best ambassador in the world of statistics
and among US statisticians. His accessible approach was also instrumen-
tal in the formation of many departments of statistics of the type Fisher
had long advocated.
Beyond his relationship with Egon Pearson and Jerzy Neyman, and
while Fisher constantly quarreled with colleagues and administration
alike, he was universally appreciated by the students and assistants in
his laboratory. They found him intellectually generous, just as had his
colleagues at the experimental station. He fed young researchers ideas and
assisted them with their analyses. He was paternal, and often jocular, and
not particularly overbearing, despite a brilliance obvious to everybody.
He would even include them in his active social calendar conducted at
his home over weekends.
Fisher also enjoyed the important role as a eugenicist. He was the edi-
tor of the Annals of Eugenics, an academic trapping associated with his
Galton professorship. From that perch, he was able to keep his pulse on
the development of eugenics and statistical biology. But, while Pearson
used his position as editor of Biometrika to publish articles of his liking,
and submit to rigorous refereeing and delay those he did not, Fisher,
perhaps because he was too often subject to the arbitrariness of referees
unsympathetic to his novel approach, used the editorship as an opportu-
nity to expedite the publication of research. For that he was appreciated
by his colleagues and scholars.
The journal also afforded Fisher and his students an avenue to publish
their own work. Quickly, the Annals became a most progressive, respected
and highly regarded journal, with Fisher at the helm. In doing so, Fisher
helped forge both modern statistics and modern genetics.
Later in his career, Fisher became more intensely interested in issues
of biology. He was a genius in experimental design, and played an influ-
ential role in the resolution of many important agricultural and medical
issues of his day, from a statistical biological perspective. He was com-
missioned by the United States Department of Agriculture to provide
knowledge transfer to some large land-grant American public universi-
ties so that they may better enhance their statistical expertise and agri-
cultural effectiveness. In essence, these emerging statistical departments
were constructed in his mold. His reputation was also extending world-
wide through the late 1930s and the 1940s, throughout North America,
Europe, India and Australia.
Fisher and his Galton Laboratory also increasingly used their expertise
to assist in the rapid development of blood testing and serology that is
now broadly recognized within the medical community. The Rockefeller

Foundation was funding research in Europe to extend the Continents
intellectual capacity, and agreed to commission Fishers lab to begin work
on blood groups. Fisher had discovered two new antibodies through
their research, and had developed some important tests that assisted in
blood typing, and had petitioned to install equipment at the Galton
Laboratory to assist in these leading-edge efforts. At the same time, serol-
ogy became an intense national interest as Great Britain prepared for
war. The University of London administration responded by deciding to
move his lab to Cambridge so that it may be safer than its London loca-
tion, and as a part of an effort to reorient their programs to accommodate
wartime need.
Fisher opposed the move, and, in his typical fashion, strenuously ver-
balized his concerns. The laboratory was moved without his approval or
cooperation. Despite his concerns, the Galton Laboratorys blood work
continued, primarily at Cambridge, and the status of the laboratory was
increased significantly.
During these war years, it was eventually negotiated that Fisher and
his theoretical team would work out of Rothamsted. However, Fisher
was largely excluded from the war effort. He harbored opinions that the
slight may have been because of his association with eugenics, which
Hitler was applying in a most distorted manner as a justification for
ethnic cleansing. He thought perhaps that some of his associates may
have had Communist leanings. Or, his reputation at the University of
London as one who was difficult to administer may have induced these
well-positioned administrators to steer clear of him during the difficult
war years. Regardless, Fisher was left embittered by his treatment during
the war, even as his son, George, was training and fighting as an aviator
on behalf of England. But while some may have tried to contain Fishers
personality, they could not contain his vast contributions.
Evolutionary biologists now revere Fisher. He formulated the Fishers
principle that helped explain how various species divide their biological
resources between their sexes.
For most species, the ratio of males to females is one to one. In his 1930
book The Genetical Theory of Natural Selection,1 Fisher produced what is
probably the most recognized intellectual concept in evolutionary biology.
He created the concept of parental expenditure and investment to explain

that, for most species, this ratio of males to females will converge to unity.
Indeed, those that converge to another ratio are often called non-Fisherian
ever since his groundbreaking theory.
His reasoning is thus. Let us imagine a species which did not have
such a unitary ratio. In particular, let us assume males are less common.
Then such males would have better breeding opportunities than their
female counterparts and would produce more offspring per male than
per female. Parents predisposed to production of males would then have
more male grandchildren, and so on, which would increase the share of
males in the population until the ratio approaches unity. Should the ratio
overshoot and produce too many males, the system then begins to move
in the other direction and produce more females until equilibrium is
reestablished with a unitary ratio.
Another way to look at the same problem is from the investment per-
spective. A young organism of each sex of the species is the product of
an endowment of biological capital, and will require additional resource
capital to nurture it into independence. Once parental investment ceases,
equilibrium is reached when each sex has devoted to it the same amount
of such investment because each sex is responsible for half the supply of
biological resources for future generations. Natural selection then implies
that the devotion of resources to each sex be equal. If it is not, for instance,
if females required more resources, then, if the sexes were in equal bal-
ance, male production would be a more efficient avenue to reproduce.
From a natural selection perspective, then, more males would be pro-
duced as they would have greater reproductive value. Fisher observed
that, in bee colonies, for instance, there are many more males, but much
more resources are devoted to the survival of each of the rarer females.
And, in humans, since boys tend to die in infancy at a greater rate than
girls, there is a slight favoring of boys by birth in the population to even
out parental investment.
Evolutionary game theorists call this process an unbeatable, or a domi-
nant, strategy. This concept of parental investment has also been adopted
among ecologists.
Time has allowed various other disciplines to also eventually under-
stand and absorb Fishers highly advanced theories that were often well
ahead of the current understanding. As he aged, Fisher was increas-

ingly appreciated, but his later years were difficult years for Fisher. He
felt ostracized and rejected by his employers; he had become increas-
ingly estranged from his wife, Eileen, over their 25 years together; and he
then lost his son in active duty in World War II.Fisher was without his
laboratory, his only son and his wife. His remaining daughters were in
Kenya, Canada and Scotland. He sought solace through employment at
the genetics departments of Gonville and Caius College at Cambridge.
In April of 1943, Fisher became the Arthur Balfour Professor of Genetics,
with a promise from Cambridge that his research would be supported
appropriately.
The move meant giving up some of the trappings of the Galton
Laboratory, including its editorships. Fisher replaced this opportunity
through the creation of a new journal, Heredity.
By the end of the war, it was clear that Fisher would not be able to
build a serology laboratory and a first-rate research facility as he had come
to believe he could. He used the rather limited facilities available to him
to stimulate the research he could, but he increasingly realized his greater
contribution could be in levering the flow of accolades he received in the
early 1950s. In 1953, he was elected the president of the Royal Statistical
Society, and he used his high-profile academic pulpit to enhance the
important role of statistics within mathematics and the sciences.
He also traveled again to the USA and there continued to influence
statistical departments. At that time, there were two schools of thought
departments designed around important applied research problems, as
Fisher had practiced for much of his career since his days at the experi-
mental station. The other school of thought was advanced by the mathe-
matician and Great Mind Leonard Jimmie Savage (20 November 19171
November 1971), who was regarded as a genius in the philosophy and
foundations of statistics. In fact, while Fisher was critical and most vocal
of the perspective that statistics develop from the mathematical side rather
than from the applied research perspective, luminaries such as Savage
nonetheless considered Fisher a good mathematician in his own right.
Fisher remained in this pivotal role to his retirement and beyond. By
1953, Cambridge University was aware of his mandatory retirement age,
to occur in 1955. But, Fisher delayed and delayed. By 1957, he was still
holding on to an at least ceremonial position, as president of Gonville and

Caius College. He lodged on the campus under his own care well beyond
the point when he could easily care for himself. He was encouraged to
travel, and indeed spent the academic year of 195758 at Michigan State
University, from which he visited and lectured at some of the best statis-
tics departments in the country, many organized in his image. Then, in
1959, he was invited to the University of Adelaide to receive an honorary
PhD in science.
Fisher so loved the trip to Adelaide that he decided to stay. His children
had provided him with no grandchildren, yet, and were spread them-
selves from England to Kenya and India. To settle in Australia, where he
would be most comfortable, was not unreasonable at the time. But, once
he settled, it would be difficult to subsequently move as his age advanced.
He was offered a ceremonial position at St. Marks College, and lived as
a lodger with Mrs. Mayo. There he emotionally adopted and mentored
her family. He remained intellectually active by editing books and papers
he had authored, and finally felt relatively immune to the pettiness and
quarreling within the discipline and departments in England. He also
traveled to see his family, whom were finally providing him with grand-
children. These may have been the most fulfilling and happiest days of
his life.
By July of 1962, Fisher began suffering stomach problems. An X-ray
confirmed that he was suffering from a constricted colon. Surgery is
always difficult because of the risk of infection. Complications arose, and
Fisher passed away on 29 July 1962in the company of his doting nurses.
After a half century of contributions to the creation of modern statistics,
there was an outpouring of fondness and appreciation upon his passing.
In death, Fisher is remembered for his great contributions to the foun-
dation and intuition of statistics. No individual before or since, but per-
haps Gauss himself with regard to maximum likelihood estimates, least
squares, and the first and second moment (mean and variance) approach,
has provided a firmer foundation to statistics as had Fisher. For his work,
he was knighted by Queen Elizabeth II in 1952, elected to the Royal
Society in 1929, and won the Linnean Society of London Darwin-
Wallace Medal in 1958. In 1963, the annual R.A. Fisher Lectureship
Prize was inaugurated in the USA.There is a minor planet, 21451 Fisher,
named after him. And, his paper Gene Frequencies in a Cline Determined
by Selection and Diffusion was the first to use a computer to calculate a
solution in a biology paper.2
Fisher was well regarded late in life. He earned the Royal Medal from
the Royal Society in 1938, its Darwin Medal in 1948 and the Copley
Medal in 1955. The award was:
in recognition of his numerous and distinguished contributions to devel-

oping the theory and application of statistics for making quantitative a vast
field of biology.
He was a member of more than 20 academic societies and insti-

tutes. In 1934, he was elected to the American Academy of Arts and
Sciences, in 1941, to the American Philosophical Society and, in 1948,
to International Society of Haematology. Also in 1948, he was elected to
the USAs National Academy of Sciences, and, in 1960, to the Deutsche
Akademie der Naturforscher Leopoldina. He also earned honorary
degrees to Harvard University in 1936, the University of Calcutta in
1938, the University of London in 1946, the University of Glasgow in
1947, the University of Adelaide in 1959, the University of Leeds in
1961 and the Indian Statistical Institute in 1962. While perhaps few
students of finance know his name today, his legacy underpins almost all
of the statistics we now employ.
Perhaps Fishers greatest legacy may go well beyond the foundations of
modern statistics he so ably founded. He advocated for new departments
of statistics around the world. One great mind took his guidance to heed
perhaps more than any other. Next is the story of Harold Hotelling.
Notes
1. Fisher, R.A., The Genetical Theory of Natural Selection, Clarendon Press,
Oxford, 1930.
2. Fisher, R.A., Gene Frequencies in a Cline Determined by Selection and
Diffusion, Biometrics, Vol. 6, No. 4 (Dec., 1950), pp.353361.
15
The Early Life ofHarold Hotelling
While the names Gauss, Galton and Fisher may not be well known to
finance students of statistics, the name Hotelling often elicits at least
some acknowledgment. This is perhaps because he helped establish sta-
tistics, economics and econometrics from a distinctly American perspec-
tive. Fisher was experiencing resistance in England over his theories that
defied the powers that be in Britains statistical community. America was
more receptive. Its embracement of Fisherian statistics caused the center
of mass of the statistics world to migrate across the ocean. The primary
proponent was an American mathematician and economist whose ances-
tors made the same migration as founders of Americas first colonies.
The mother of Harold Hotelling, Lucy Amelia Rawson, was an off-
spring of one of the first Secretaries of the Massachusetts Bay Colony.
Edward Rawson (16 April 161527 August 1693) was born in the vil-
lage of Gillingham, Dorsetshire, England. His namesake, grandfather
Edward Rawson, was a wealthy silk and woolen merchant of Colnbrook,
west of London. When the grandfather died in 1603, he left two young
sons, Henry and David, to run the family business. David became a tai-
lor in London, and married Margaret Wilson, the daughter of Reverend

DOI10.1057/978-1-137-34137-2_15
William Wilson of Windsor. David died when their three children were
still very young. Their young son Edward was only two years old at the
time. His mother also died 11 years later, which left Edward in the care
of his extended family.
The Rawsons and the Wilsons lived comfortably, and young Edward was
hence well educated. When he married Rachel Perne, the Wilson and Perne
families were already establishing religious links to the Colonies. Edwards
wife, Rachel, was the daughter of Thomas Perne, and the niece of one of the
first settlers in Cambridge, Massachusetts, the Reverend Thomas Hooker.
Edwards maternal grandfather, the Reverend William Wilson of Merton
College, Oxford, had rose to Canon of St. Georges Chapel in Windsor.
Edwards uncle, Edmond Wilson, was a wealthy physician in London who
had donated 1000 pounds toward establishment of a Massachusetts Bay
Colony in 1633. Another uncle, Reverend John Wilson, immigrated to the
Colony and ministered over the First Church of Boston.
The young couple Edward and Rachel married in 1636, had a daughter
who they left with family in England and migrated to the Massachusetts
Bay. By 1637 they were settled in Newbury. At the remarkably young
age of 23, Edward was selected to be the Public Notary and Register for
Newbury, and was continually reelected to that position until 1647. His
willingness to accept increasing responsibilities led to his appointment as
the Secretary of the Massachusetts Bay Colony, a position which he held
for another 36 years (Fig. 15.1).
Together, Edward and Rachel Rawson had 12 children, of which
only 9 survived past childhood. One of their children, Rebecca Lawson
(23 May 1696?) was the heroine of the popular 1849 book by John
G.Whittier entitled Leaves from Margaret Smiths Journal in the Province
of Massachusetts Bay. While three of their sons eventually returned to
England, including Edward following his graduation from Harvard
College in 1653, two sons, William and the Reverend Grindal (23
January 1659), remained in the New World.
Born in Boston, William Rawson (21 May 165120 September 1726)
moved south, first toward Dorchester, and then to Braintree with his
wife Ann Glover (165329 July 1730). Together they had a son, William
Rawson (8 December 1682October 1769), who married Sarah Crosby
(27 July 16841734) on 26 October 1710, and settled in Mendon,
Pedigree Chart for

Thomas Rawson
Edward Rawson
b: 16 Apr 1615 in Gillingham,
Dorset, England
m: 1633 in Gillingham, Dorset,
England
William Rawson d: 27 Aug 1693 ; Y
b: 21 May 1651 in Boston, Suffolk,
Massachusetts, USA
m: 31 Jul 1673 in Boston,
Middlesex, Massachusetts, USA
d: 20 Sep 1726 in Braintree, Rachel Perne
Norfolk, Massachusetts, USA; Y b:
d: Oct 1677 in Boston, Suffolk,
Massachusetts, USA; Y
William Rawson Captain

b: 08 Dec 1682 in Boston,
m: 26 Oct 1710 in Billerica,
d: 07 Oct 1769 in Mendon, Nathaniel Glover
Worcester, Massachusetts, b: 30 Mar 1631 in Dorchester,
United States; Y Middlesex, Massachusetts
m: 1652 in Dorchester, Middlesex,
Massachusetts
Ann Glover d: 21 May 1657 in Dorchester,
b: 1653 in Dorchester, Middlesex, Middlesex, Massachusetts; Y
Massachusetts
d: 29 Jul 1730 in Braintree, Norfolk,
Mary Smith
b: 20 Jul 1630 in Foxteth Park,
Liverpool, England
d: 29 Jul 1703 in Barnstable,
William Rawson
b: 22 Feb 1711 in Billerica,
m: 13 May 1731 in Worcester,
Massachusetts, USA
d: 1790 ; Y Simon Crosby
b: 1608 in Holme-on-Spalding-Moor,
Yorkshire, England
m: 21 Apr 1634
d: 16 Jul 1639 in Cambridge,
Simon Crosby Middlesex, Massachusetts, USA; Y
b: 06 Aug 1637 in Cambridge,
m: 15 Jul 1659
d: 22 Jan 1725 in Billerica,
Middlesex, Massachusetts, USA; Y Anne Brigham
b: 1606 in Holme-on-Spalding-Moor,
Yorkshire, England
d: 11 Oct 1675 in Braintree, Norfolk,
Sarah Crosby
b: 27 Jul 1684 in Billerica,
d: 1734 in Billerica, Middlesex,
Richard Brackett
b: 16 Sep 1610 in Sudbury, Suffolk,
England
m: 1654 in Billerica, Middlesex,
Massachusetts, USA
Rachel Brackett d: 05 Mar 1691 in Braintree,
b: 03 Nov 1639 in Boston, Norfolk, Massachusetts, USA; Y
d: May 1748 ; Y
Alice Blower
Pern Rawson b: 30 Jun 1615 in Sudbury, Suffolk,
b: 24 Feb 1741 in Mendon, England
Worcester, Massachusetts, d: 03 Nov 1690 in Braintree,
United States Norfolk, Massachusetts, USA; Y
m: 04 Feb 1762 in Mendon, Thomas Cook
Worcester, Massachusetts,
United States b: 1689 in Mendon, Worcester,
d: Massachusetts, United States
m:
d:
Margaret Cook
b: 18 Dec 1711 in Mendon,
United States
d:
Mary Carey
b: 1693 in Mendon, Worcester,
Massachusetts, United States
d:
Thomas Rawson
b: 04 Dec 1776 in Mendon,
United States
m: 26 Oct 1804 in Attleboro, Bristol,
Massachusetts
d: 06 Nov 1866 in Cumberland,
Providence, Rhode Island,
United States; Y
Mary Molly Aldrich

b: 26 Aug 1743 in Mendon,
United States
d:
Fig. 15.1 The ancestry of the Rawson family

Worcester County, west of Boston. William, also a graduate of Harvard

College, Braintree, captained the local militia, fought in the French
and Indian Wars and became the towns first grammar school teacher.
Together, William and his wife Sarah had eight children, two of whom
died young, and to whom their firstborn William (22 February 171190)
they passed along the familys namesake.
The firstborn, William, also lived in Mendon until his death. There,
he married Margaret Cook (18 December 1711), and raised a son, Pern
Rawson (24 February 1741,) named after his uncle. Pern, too, remained
in Mendon, where he married Marry Molly Aldrich on 4 February 1762,
and had a son, Thomas (4 December 1776) in the year the USA declared
its independence.
Thomas migrated south, toward Rhode Island, as he became an adult.
He married Anna Follett (23 December 17825 December 1848) in
Attleboro, Massachusetts, on 26 October 1804, and they raised a son,
Pern Perry (22 January 18134 February 1907).
Perry began the familys migration westward to Wisconsin, where
their younger son, James Otis Rawson (2 August 184425 December
1911), was born. The grandfather of Addison Harold Hotelling, he
married his wife, Lucy Ann Baker (3 November 185010 May 1877), in
Wisconsin. Shortly after their marriage, James and Lucy had moved to
Iowa, where Lucy gave birth to an only daughter Lucy Amelia Rawson
(1 May 187523 March 1959). They also had three sons together before
mother Lucy died prematurely young.
It was this intersection in Iowa that the Hotelling and Rawson families
merged. Clair Albert Hotelling (22 June 18695 June 1944) was born in
Algona, Iowa, to Addison Hiram Hotelling and Ellen Tuttle. He was the
only boy in a family with three sisters.
His Hotelling family had perhaps somewhat less illustrious beginnings.
He could trace his American heritage back to the arrival of the indigent
son of Conrad Martense Houghtaling (16202 August 1641) and Maria
Pipearts (1625?). This very young couple married on 2 August 1641in
Amsterdam, Netherlands, when Conrad was 21 years old and Maria was
16. Their second son, Mathys Coenradt Houghtaling, was born in 1644
but found himself as a young boy in an almshouse, a charitable home for
the poor typically sponsored by a church or wealthy benefactor (Fig. 15.2).
Pedigree Chart for
Peter B. Houghtaling
Conrad Martense Houghtaling
b: 1620 in Netherlands
m: 02 Aug 1641 in Amsterdam,
Nederlands
d: 02 Aug 1641 in Amsterdam,
Mathys Coenradt Houghtaling Amsterdam, Noord-Holland,
Hooghteeling Netherlands; Y
b: 1644 in Holland, Reusel-de
Mierden, Noord-Brabant,
Netherlands Maria Pipearts
m: 1666 in Albany, Albany, New b: 1625 in Netherlands
York, USA d: 02 Aug 1641 in Netherlands; Y
d: 1706 in Coxsackie, Greene, New
York, USA; Y
Conrad Mathys Houghtaling

b: 1667 in Little Nine Part,
Dutchess, NY
m: 26 Aug 1688 in Albany, Albany, Hendrick Marselis
New York, United States b: 01 Nov 1625 in Beest
d: 1745 in Coxsackie, Greene, New Gelderland, Netherlands
York, United States; Y m: 1645
d: 01 Nov 1697 in Albany, Albany,
Maria Hendrikse Marselis New York, United States; Y
b: baptized 17 Mar 1647 in
Coxsackie, Greene, New York,
United States
d: 1706 in Coxsackie, Greene, New
15
York, USA; Y Tryn (Cathryn) Van Den Bergh

Willem Houghtaling b: 1623 in Netherlands or New York
d: 1649 ; Y
b: 17 Jan 1692 in Albany, Albany,
New York, USA
m: 09 Nov 1716 in Albany, Albany,
New York, USA
d: 1742 in Kingston, Ulster, New Tryntje Willemse VanSlyck
York, United States; Y b: 1667 in Coxsackie, Greene, New
York, United States
d: 1697 in Schenectady,
Pieter Houghtaling Schenectady, New York, United
b: 19 Oct 1718 in Albany, Albany, States; Y
New York, USA
m: 1747 in Albany, Albany, New
York, USA
d: 13 Nov 1770 in Albany, Albany, Helena "Lena" Zielle Uzille Uziele
New York, USA; Y b: 27 Mar 1696 in Kingston, Ulster,
New York, United States
Gerrit Hoogteeling d: 05 Jan 1756 in Schoharie,
Schoharie, New York, United
b: 26 May 1751 in Bethlehem, States; Y
Albany, New York, USA
m: 07 Mar 1779 in Albany, NY
DRCA
d: 1821 in Bethelhem, Albany Co. Annatje Becker
New York; Y b: 14 Jan 1728 in Albany, Albany,
New York, USA
d: 20 Sep 1841 in Albany, Albany,
Peter B. Houghtaling New York, USA; Y
b: 19 Jan 1790 in Bethlehem,
Albany, New York, United States
m: 25 Dec 1810 in Helderberg, New
The Early Life ofHarold Hotelling
York
d: 11 Mar 1857 ; Age: 66
Annatie Osterhout
b: 1740
d: 1793 ; Y
153
Fig. 15.2 The distant ancestry of Harold Hotelling

During this era of the early 1600s, the Dutch West India Company
was based on Amsterdam at the heart of one of the worlds wealthiest
nations, fueled by rapidly expanding world trade. The Dutch political
model was unlike some of their competing empires. They did not oppress
religion, and they relied on private enterprise as the vehicle for their colo-
nial ambitions.
The Dutch East India Company had sponsored the English explorer
Henry Hudson (c.15651611) to explore an easterly passage to Asia. He
was instructed to find a passage along the coast of Russia, which is now
called the Northern Passage. When his ship Halve Maen ran into ice,
he discarded his orders and instead turned his ship west to seek a route
through North America.
By 2 July 1609, Hudson had reached the Grand Banks, south of
Newfoundland, and had passed Nova Scotia a couple of weeks later. Over
the next month, the ship had navigated past Cape Cod, Massachusetts, and
traveled further south to the Chesapeake Bay. From there, Hudson turned
back north, past the Delaware River, and, on 11 September, began to sail up
the Hudson River adjacent to NewYork City. Before the end of September,
he had reached Albany, the present-day capital of NewYork State.
Hudson then returned to Europe. He first arrived in Dartmouth,
England, where he was arrested as authorities sought his logbook. Instead,
he passed the log to the Dutch ambassador so that the Dutch could lay
claim to his discoveries in the New World. The region from NewYork
City to Albany was subsequently settled by the Dutch as a commercial
avenue for the newly formed Dutch West India Company. The com-
panys goal was to establish farmland along the Hudson delta region to
feed their soldiers and workers. Nieuw Amsterdam was established after
its purchase from the indigent population for 60 guilders.
The Company sought settlers, who would be offered land, and patrons
who would earn trading privileges. A mix of the wealthy settlers and
cheap labor were sent to settle the region between NewYork and Albany.
Among them was Mathys Coenratsen Houghtaling (16441706), who,
in 1655, was an 11-year-old orphan living in an almshouse in Amsterdam.
He was sent to the New World in that year, eventually briefly settled first
in Coxsackie and then in the farming community of nearby Kinderhook,
where he shared a farm with his father-in-law, Hendrik Marseli. By the
late 1600s, he was established on his own farm, with his wife Maria
Hendrikse (17 March 16471706).
Their firstborn in marriage, Conrad Mathys Houghtaling (16671745),
married Tryntje Willemse Van Slyck (166797) in 1685in Albany, and
they had two sons before Tryntje died at the age of 30. Their second son,
Willem Houghtaling (17 January 16921742), remained for much of
his life in Albany, where he married Helena Uzille (27 March 16965
January 1756) on 9 November 1716. They had five children together in
Albany, including a second son Pieter (19 October 171813 November
1770), who also lived in Albany all his life and married a local woman
Annatje Becker in 1747.
The second child, and first son of Pieter and Annatje, Gerrit
Houghtaling (26 May 17511821), also lived in Albany for most of his
life, and married Annatie Osterhout (174093), with whom they shared
a son, Peter (19 January 179011 March 1857). Peter, too, remained
in the Albany County area, married Catherine LaGrange and had nine
children with her, including a first son William Helmus Houghtaling (16
February 18137 May 1887), their second child.
In the 1860s, the Hotellings, too, made their westward migration. The
son William Houghtaling moved to Iowa, with Mary Ann Yost (10 March
181630 June 1895), whom William had married on 12 March 1835,
and with seven children in tow. Their third child, and first son, Addison
Hiram Hotelling (22 March 184317 May 1896) had by then adopted
an Americanized version of the family name, and lived much of his life
in Iowa. It was there that he met Nellie Tuttle (7 August 18447 March
1929), and had five children together, including their second child, and
first son, Clair Alberto Hotelling (22 June 18695 June 1944).
The Arrival ofHarold Hotelling

Clair Hotelling and Lucy Rawson married on 26 June 1894in Bancroft,
Iowa. From there, they began a slow westward migration, first to Fulda,
Minnesota, where their first son, Addison Harold Hotelling (29
September 189526 December 1973), was born, and then on to Seattle,
Washington, by the first decade of the twentieth century (Fig. 15.3).
Pedigree Chart for

Peter B. Houghtaling
Addison Harold Hotelling b: 19 Jan 1790 in Bethlehem,
Albany, New York, United States
m: 25 Dec 1810 in Helderberg, New
York
William Helmus Houghtaling d: 11 Mar 1857 ; Age: 66
b: 16 Feb 1813 in Bethlehem,
Albany, New York, USA
m: 12 Mar 1835 in Schoharie, New
York, USA
d: 07 May 1887 in New Milford, Catherine LaGrange
Winnebago, Illinois, United States; b: 15 Dec 1789 in of New York
Y d: 02 Jan 1868 ; Y
Addison Hiram HOTELLING
b: 22 Mar 1843 in Kentucky, United
States
m: 13 Jun 1867 in Clear Lake,
Cerro Gordo, Iowa, United States Johannas Jost
d: 17 May 1896 in Algona, Kossuth, b: Abt. 1777 in Germany
Iowa, USA; Y m: Jul 1809 in Katholisch,
Feilbingert, Pfalz, Bavaria
d: 10 Jun 1857 in 5 Walkers
Mary Ann Yost Terrace, Cleveland Street, Bethnal
b: 10 Mar 1816 in Schoharie, Green; Y
Schoharie, New York, United States
d: 30 Jun 1895 in New Milfor,
Winnebago, Illinois, USA; Y
Elizabeth Giles
b: Abt. 1782 in Kintbury, Berkshire,
Clair Alberto HOTELLING England
d: Abt. 1846 ; Y
b: 22 Jun 1869 in Algona, Kossuth,
Iowa, USA
m: 26 Jun 1894 in Bancroft,
Kossuth, Iowa, United States Ira Tuttle Rev
d: 05 Jun 1944 in Los Angeles, b: 11 Feb 1792 in Connecticut, USA
California, USA; Y m: 21 Oct 1813
d: 18 Oct 1878 in Clear Lake, Cerro
Gordo, Iowa, USA; Y
Elon Augustus Tuttle
b: 07 Jan 1823 in Salisbury,
Herkimer, New York, USA
m: 09 Feb 1843 in Herkimer, New
York, United States Lucy B Brockett
d: 07 Jan 1908 in Clear Lake, Cerro b: 08 Dec 1793 in Southington,
Gordo, Iowa, USA; Y Hartford, Connecticut, USA
d: 18 Dec 1866 in Clear Lake, Cerro
Gordo, Iowa, United States; Y
Ellen Luvantia "Nellie" Tuttle
b: 07 Aug 1844 in Cortland,
Cortland, New York, United States
d: 07 Mar 1929 in Seattle, King, David Humphreyville
Washington, United States; Y b: 1780 in Windsor, Hartford,
Connecticut, United States
m: 1813 in New York, United States
d: Dec 1869 in Norway, Herkimer,
Orissa Caroline Humphreyville New York, United States; Y
b: 20 Jan 1823 in Norway, Herkimer,
New York, United States
d: 14 May 1880 in Clear Lake,
Cerro Gordo, Iowa, United States; Y
Mary Wood
b: 1796 in Massachusetts, United
States
d: 1850 in prob, New York, United
States; Y
Addison Harold Hotelling
b: 29 Sep 1895 in Fulda, Murray,
Minnesota, USA
m: 20 Dec 1920 Thomas Rawson
d: 26 Dec 1973 in Age: 78/100 East b: 04 Dec 1776 in Mendon,
Franklin Avenue, Chapel Hill, Worcester, Massachusetts, United
orange, North Carolina;residence; Y States
m: 26 Oct 1804 in Attleboro, Bristol,
Perne "Perry" Rawson Massachusetts
b: 22 Jan 1813 in Wrentham, d: 06 Nov 1866 in Cumberland,
Norfolk, Massachusetts Providence, Rhode Island, United
m: Woonsocket Falls, Rhode Island, States; Y
United States
d: 04 Feb 1907 in Iowa; Y Anna Follett
b: 23 Dec 1782 in Cumberland,
Providence, RI
d: 05 Dec 1848 in Wrentham,
Norfolk, Massachusetts, United
James Otis Rawson States; Y
b: 02 Aug 1844 in Lawrence, Essex,
Massachusetts, USA
m: 28 Sep 1868 in Ontarion,
Wisconsin
d: 25 Dec 1911 in Whittemore, Amelia Harris
Kossuth, Iowa, USA; Y b: Abt. 1810 in Rhode Island, USA
d: 14 Jan 1886 in Iowa; Y
Lucy Amelia Rawson Asa Baker

b: 01 May 1875 in Whittemore, b: 1779
Kossuth, Iowa, United States m:
d: 23 Mar 1959 in Los Angeles, Los d: 1847 ; Y
Angeles, California, United States;
Y Hiram BAKER
b: 06 Jun 1808 in Skowhegan,
Somerset, Maine, United States
m: Sep 1841 in Clarksville, Red
River Co, Republic of Texas, United
States Sarah Thompson
d: Mar 1853 in San Francisco b: 1783
County, California; Y d: 1821 ; Y
Lucy Ann Baker

b: 03 Nov 1850 in Louisana
d: 10 May 1877 in Algona
Wisconsin; Y John R. Cullum
b: 1803 in Connecticut or New York,
United States
m: 20 Apr 1820 in Stonington, New
London, Connecticut, USA
Caroline Eleanor CULLUM d: 1824 in New Orleans, LA; Y
b: 05 Jun 1821 in Stonington, New
London, Connecticut
d: 15 Feb 1906 in Weatherford,
Parker, Texas; Y Lucy Ann Brewster
b: 22 Sep 1801 in Stonington, New
London, Connecticut, United States
d: 16 Mar 1869 in Navarro, Texas,
United States; Y
Fig. 15.3 The immediate ancestry of Harold Hotelling

The convergence of the Hotelling and the Rawson families came about
through an unlikely path, but with farming in common. With a daughter
Marjorie (19 September 1904) just born, the family set out in 1905 for
Washington State and arrived by train in Seattle, with by then five chil-
dren in tow, Clair had been a hay merchant, which was an essential fuel
for the transportation segment of the supply chain as hay fed the horses
that moved the goods at the turn of the century before the widespread
use of automobiles and trucks. Ford began selling cars that were almost
immediately popular and affordable in 1903, and Clair began to realize
that the invention of the automobile may soon doom his comfortable
hay-selling business, and decided to seek opportunity in the West.
The family were strict observers of the Methodist tradition, and the chil-
dren were raised within the Church community in Seattle. Unfortunately
for his father, though, the family lost their business and savings with the
Recession of 1907, and Harold found himself preparing for college and
supporting himself through school at the University of Washington by
working odd jobs.
One such job at a local newspaper, the Puyallup Herald, caused him to
shift his interest from electricity and science to journalism. But with the
draft of the Great War, he had to suspend his college education briefly.
Despite his college studies, he was ordered to army camp, where he was
promptly kicked by a mule, which resulted in his discharge from the
army. When he returned to college, he found the journalism department
was in disarray, which made it difficult to resume his studies. He was able
to substitute courses in economics and thus completed an economic-rich
course of study. He then went on to study mathematics in Seattle and at
Princeton and Chicago.
Hotelling was most interested in mathematics. One of his most sub-
stantial influences when he resumed graduate studies in 1920, following
his BA graduation in 1919, was his mathematics professor Eric Temple
Bell (7 February 188321 December 1960). Trained at Stanford, the
University of Washington and Columbia University, Bell become rec-
ognized in mathematical theory, in particular the Bell series in number
theory, but also in his biographies of great mathematicians. Bell was
teaching at Washington when Harold was a student, and, throughout
his career, inspired dozens of mathematicians and economists not only
through his insights but also in his anecdotes and perspectives about the
mathematicians who preceded him, through a series of essays collected
in his work Men of Mathematics: The Lives and Achievements of the Great
Mathematicians from Zeno to Poincare.1 Bell inspired Hotellings interest
in mathematics in the year 1920.
Someone else also inspired Hotelling that year. On 20 December 1920,
Hotelling married Floy Tracy (31 December 18902 October 1932). Less
than three years later, they had a son together, Eric Bell Hotelling (12
May 19232 January 1991), named after his inspiring professor Eric Bell.
The couple had a daughter together as well, Murial (11 October 1925).
Unfortunately, neither of these children would enjoy their mothers care
and love beyond grammar school. Floy died short of her 32nd birthday.
Hotelling received his masters degree in mathematics in 1921 and had
hoped to attend Columbia with a fellowship to study for a PhD in econom-
ics, given his economics studies and his advanced mathematical training.
When his application to Columbia was rejected, he instead accepted a fellow-
ship to study additional mathematics at Princeton. There, he studied under
Oswald Veblen (24 June 188010 August 1960), the nephew of the famed
economist Thorstein Veblen (30 July 18573 Aug. 1929), and completed a
doctorate in mathematics on topology and differential geometry in 1924.
With a doctorate at hand, Hotelling found employment as a research
associate at the Food Research Institute of Stanford University. It was there
that he wrote his first two important papers, one on the mathematical
economics theory of depreciation, and another on correlation ratios aris-
ing from random data in statistics. His research interests in statistics was
piqued, and he became aware of Fishers work on the provision of rigor-
ous foundations to statistical concepts, his publication Statistical Methods
for Research Workers. He quickly became an American admirer of Ronald
Aylmer Fisher, even as Fisher struggled to gain respect in his home coun-
try of England. Hotelling had found a kindred spirit in Fisher, who also
pictured statistical concepts from a geometric perspective.
Note
1. Bell, Eric Temple, Men of Mathematics, Simon and Shuster, NewYork,
1937.
16
The Times ofHarold Hotelling
While at Stanford, Hotelling began teaching in both the areas of

mathematics and the burgeoning new theory of statistics. One can see
from the names of the courses he taught that he was developing his sta-
tistical insights through his pedagogy. His first offering was in the the-
ory of probability and in statistical inference, and by 192627, he was
also teaching differential geometry and topology. His expertise in this
emerging discipline of statistics led to his appointment as an Associate
Professor of Mathematics at Stanford by 1927. Clearly, he had made a
great impression at a relatively young age of 31 and at one of the best
schools in the West.
In that same year, he gave a badly needed and much appreciated nod
to Fisher. He had offered a very favorable review of Fishers Statistical
Methods for Research Workers, where he included the line, The authors
work is of revolutionary importance and should be far better known in
this country.1
His admiration of Fisher even inspired him to spend the summer
and fall semesters of 1929 with Fisher at his Rothamsted Agricultural
Experiment Research Station. From that experience, Hotelling became as

DOI10.1057/978-1-137-34137-2_16
enamored with statistics and Fisher as he had become with mathematics

and Bell. Through Fisher, he had become indoctrinated in the new rigor-
ous study of statistics and conversed with a number of young scholars
who would go on to enjoy careers almost as illustrious as Hotellings. He
was in a hotbed of ideas, and he would, as much as any, contribute more
than his share to this new and collective effort.
Upon his return to the USA, Hotelling studied and elaborated upon
the work on Gossets Students t-ratio, as explained and expanded by
Fisher, and, from these works, constructed the methodology of confi-
dence intervals that has remained the heart of statistical testing ever since.
His work, The Generalization of Students Ratio,2 published in 1931 also
marked his movement to Columbia University in NewYork City, and to
a Department of Economics. Barely through that first year, he devoted
much energy into developing the discipline of statistics on the American
side of the Atlantic Ocean, and began to thoroughly incorporate statisti-
cal tools into economics and finance.
Hotelling had an advantage in his generalization of Gossets work.
Fishers youthful elaboration, and gentle correction of the Student analy-
sis of 1908, immediately raised the ire of his nemesis, Karl Pearson, and
was the first shot in a war that was subsequently fought on many different
battlefronts.
The problem was that Fisher was entirely correct, and he knew it.
Gosset had worked with Pearson around the time he produced his paper,
and, as a practical statistician who experienced the academic largesse
of the great Pearson, his allegiances remained. He did not well under-
stand Fishers correction of his own work, but he deferred to Pearson
in Pearsons criticism of Fisher. And, while Fisher tried to remain above
the fray and correspond privately and publicly with Gosset and Pearson
over the Student t statistic, the debate occasionally turned nasty. Pearson
could be an academic bully, and had the grandest of bully pulpits, as the
editor of Biometrika. But, Fisher, with righteousness on his side, was not
willing to be the academic wallflower.
Unfortunately, Gosset found himself in the middle of a notorious
Pearson-Fisher feud. Gosset respected Fishers professor Stratton, and
believed that Fisher may have indeed added much to his analysis. On
the other hand, he admired and was thankful to Pearson. When Pearson
commented on the second edition of Fishers book in a 1929 review, he

claimed Fishers approach was misleading. When Gossett inquired of
Fisher whether Pearsons criticism had merit, Fisher responded some-
what frustratingly at first. He and Gosset then took a step back and had
a discourse that motivated Fisher to further shore up his mathemat-
ics, as the best defense against Pearson. Fisher discarded his rebuttal of
Pearsons academic jabs and instead worked to clarify his foundational
approach.
In two notes in Nature, Gosset and Fisher eventually took the high
road. Gosset wrote:
We should, all of us, however, be grateful to Dr. Fisher if he would show us

elsewhere on theoretical grounds what sort of modification of his tables we
require to make when the samples with which we are working are drawn
from (various) populations.
Fisher responded that he appreciated Gossets challenge that was free

from Billingsgate (meaning devoid of abusive language) (so that) oth-
ers (can) better understand where we stand.3 This intellectual challenge
helped motivate Fisher to produce the well-founded measures that now
constitute modern statistics. The dialog also motivated Hotelling to rep-
licate Fishers leadership in the infant science of statistics but on the other
side of the Atlantic Ocean.
Just as Fisher would hold court at Rothamsted, Hotelling was equally
generous with his intellect and with their home in Mountain Lakes,
New Jersey. From there, he hosted many gatherings of intellects from
the region, and, increasingly, from Europe in an era in which European
intellectuals were seeking refuge from the growing nationalistic move-
ment in Germany, ostensibly motivated by eugenics and by Hitlers Great
Purge in 1933. Hotelling and others at Columbia and at the New School
in NewYork were creating new disciplines and a new informal school of
intellectual refugees. Susanna and Harold, and the three sons and two
daughters they shared, found themselves sharing their home and their
intellectual values with Abraham Wald (31 October 190213 December
1950), the founder of a formal structure to integrate into the American
academic community many of the intellectual refugees from Europe.
Then, with the onset of World War II, Hotellings Methodist values
were further stimulated. He advocated for a war effort to defeat Hitler
through the creation of a Statistical Research Group at Columbia that
could apply scientific principles to such problems as the maximization of
the range of aircraft and of problems associated with the weather. He also
finally convinced Columbia University to establish one of the countrys
first departments dedicated to statistics. He wrote his argument in the
form of a paper entitled The Teaching of Statistics in which he concluded:
Should statistics be taught in the department of agriculture, anthropol-

ogy, astronomy, biology, business, economics, education, engineering,
medicine, physics, political science, psychology, or sociology, or in all these
departments? Should its teaching be entrusted to the department of math-
ematics, or to a separate department of statistics, and in either of these cases
should other departments be prohibited from offering duplicating courses
in statistics, as they are often inclined to do? [The question] to have
received too little of the attention of college and university administrative
officers is What sort of persons should be appointed to teach statistics?
Qualifications of a good teacher of statistics include, first and fore-
most, a thorough knowledge of the subject. This statement seems trivial,
but it has been ignored in such a way as to bring about the present unfor-
tunate situation. Mathematicians and others, who deplore the tendency of
Schools of Education to turn loose on the world teachers who have not
specialised in the subjects they are to teach, would do well to consider their
own tendency to entrust the teaching of statistics to persons who not only
have not specialised in the subject, but have no sound knowledge of it
whatever.4
To then, most disciplines relegated statistics to a supporting role rather

than a unified discipline that could develop on its own. Because much of
the earliest work was hidden within astronomy, or was applied to agri-
cultural studies, there was a reluctance for other disciplines as varied as
economics, medicine and political science to embrace its tools. It is inter-
esting that his complaints then are still often echoed today.
Ultimately, Hotelling failed to convince Columbia to create a separate
statistics department. However, the University of North Carolina was
willing to build an entire new program around him. He accepted the
challenge and left the academic year after the end of World War II to start
a program in Chapel Hill. There, he chaired his own new department
and was also offered the associate directorship of an Institute of Statistics.
From his position, he devoted energy once applied to his prolific research
to the administration of one of the top programs in statistics worldwide.
He remained at the University of North Carolina for the rest of his career
as the Kenan Professor of Statistics, from 1961 on, until the bestowment
of Professor Emeritus upon his retirement in 1966.
Notes
1. Hotelling, H., Review: Statistical Methods for Research Workers by
R A Fisher, J.Amer. Statist. Assoc. 22 (1927), 411412, at 412.
2. Hotelling, Harold. The generalization of students ratio. Annals of
Mathematical Statistics (Institute of Mathematical Statistics) 2 (3),
1931, pp.360378.
3. Fisher, R.A., in Nature, 17 August 1924.
4. http://www-groups.dcs.st-and.ac.uk/~history/Biographies/Hotelling.
html, accessed 25 February 2016.
17
Harold Hotellings Great Idea
Beyond his efforts to establish statistics as a rigorous study and as a tool

for modern finance, perhaps Hotellings most lasting legacy was in further
developing a notion first formulated by Carl Gauss, the method of maxi-
mum likelihood.
By the time Hotelling advanced the concept of maximum likelihood
estimation (MLE), he was already well known as a mathematical statisti-
cian. In 1925, he had written his first academic papers. One was on the
derivation of the F-statistic, while another was essential for the devel-
opment of modern finance. He defined the notion of depreciation as a
measure of the decrease in the discounted value of future returns. This
would be key for the development of fundamental analysis by John Burr
Williams (27 November 190015 September 1989), the father of the
discounted dividend model in 1938.
Gauss was of course the first to construct the minimized least squares
approach based on the premise that his approach then implies an error
distribution that is most likely to generate the desired minimized least
squares. His approach was further explored by Fisher, in collaboration
with Hotelling.

DOI10.1057/978-1-137-34137-2_17
The approach pioneered by Gauss determines the optimal parameter

for a given statistic such as a mean or variance. Typically, this estimate for
the mean statistic is denoted by a hat, that is, , while the estimate for
the standard deviation is given as . Let us first apply this technique to
the normal distribution. The probability f( ) of generating observed data
points (x1, , xn) given the true statistics and is then by:
( xi )
2
n
1
f ( x1 , xn : , ) = e 2 2
.
i =1 2
Notice that we can perform this maximum likelihood on either the

function or on the logarithm of the function since, from the chain rule,
maximization of a function corresponds to the maximization of a mono-
tonic transformation of the function such as the logarithm. Gauss took
the natural logarithm of the right-hand side to find:
( xi )
2
1
ln ( f ) = nln ( 2 ) nln ( ) .
2 2 2
Then, the estimate of is determined by differentiating ln(f) with

respect to and setting the derivative to 0:
ln ( f ) ( xi )
= =0
2
xi
Or = .
n
Gauss demonstrated that the maximum likelihood estimate for the mean
is the mean itself. In other words, the estimate is unbiased. In addition, by
differentiating with respect to the standard deviation, he showed that:
ln ( f ) n ( xi )
2
= + =0
3
( xi )
2
Or = .
n
Again, the estimate of variance is an unbiased estimate of the true
statistic.
Fisher had asserted a number of asymptotic properties of the method
of maximum likelihood as the sample size grows large, to infinity. As the
sample size increases, we find the estimates are:
1. Consistent: The sequence of estimates converges toward the true sta-

tistic as n rises.
2. Asymptotically normal: The distribution of the estimates converges to
the Gaussian distribution.
3. Efficient: These estimates converge to the theoretical (Cramer-Rao)
lower bound as sample size increases. This implies that no other con-
sistent estimator yields lower error than the MLE estimate.
4. Sufficient: A statistic is sufficient if the sample cannot give rise to
another statistic that yields more information.
Hotelling had become acquainted with Fishers work as he completed

his PhD on topology under Oswald Veblen and began work at Stanford
on the application of statistics. Fishers Statistical Methods for Research
Workers was the most eloquent and expansive blueprint for such field-
work at the time, and had been published only a couple of years earlier.
Given Hotellings PhD in mathematics, and especially in the geometri-
cally intuitive topology, there were few reviewers and adopters of Fishers
groundbreaking work who could appreciate Fishers contributions better
than could Hotellings.
While Hotellings review of Fishers work might have appeared overly
exuberant and effusive compared to his rather staid British counterparts
at the time, and perhaps because Hotelling had not been drawn into
the statistical feuds raging in London and Cambridge at the time that
divided people (mostly) into Pearsons camp, and (occasionally) into
Fishers camp, or more often neutrality, Hotellings review in 1927 of
Fishers handbook was perhaps one of the most probing and unbiased
considerations of Fishers contribution. Upon the publication of Fishers
second edition, Hotelling followed his rave review up with another that
exposed Fisher and his foundations to an even broader audience. Then,
with his visit to Rothamsted, Hotelling was able to appreciate even more
the brilliance of Fisher.
By the time Hotelling visited with Fisher, Fisher had already articulated
a theory of maximum likelihood based on his principles of consistency, effi-
ciency and asymptotic normality. Fisher was reviving a methodology that had
actually been initiated by Pearson. As you recall, Pearson was fond of describ-
ing relationships based on moments. In doing so, he postulated a likelihood
ratio, defined as the ratio of the distribution, or frequencies, of observed data
over the postulated frequencies from some sort of postulated estimation. By
changing the parameters of his estimates slightly, he could recalculate this
ratio. He employed a Taylors series expansion to explore this ratio as con-
stants are perturbed to discover the constants that yield the best fit.
Pearsons likelihood ratio approach was actually very close to the maxi-
mum likelihood technique more fully described later by Fisher, but Pearson
did not take his results far enough to realize the generality of his approach.
Early in his career, Fisher corresponded with Pearson to advocate an
approach based on the minimization of various aggregate error measure-
ments, but Pearson panned the idea and noted he had gone down such a
fruitless path years earlier. Fisher took this as a challenge to place the method
of maximum likelihood on a firm theoretical foundation. His work, if suc-
cessful, in combination with this geometrical foundation he applied to other
concepts, would place statistics upon a most firm foundation.
Fishers efforts received scant support in England, but he found a kin-
dred spirit in Hotelling. Even before Hotellings visit in 1929, the two
began to correspond. Their letters continued, as did Hotellings writings.
In 1930, in Transactions of the American Mathematical Society, Hotelling
presented The Consistency and Ultimate Distribution of Optimum Statistics;
Hotelling presented to a more receptive world, and with greater success,
concepts that Fisher had been struggling to produce.
In the paper, Hotelling lent some support to Fishers notion of asymptotic

normality, and firmed up the basis for the approach of maximum likeli-
hood. Neither he nor Fisher had completely shored up their theory and
advocacy, but they nonetheless showed that the maximum likelihood tech-
nique produces efficient estimates in many reasonable cases.
These two individuals seemed to spur and motivate each other. This fruitful
Atlantic-spanning relationship, almost none of which is conducted face-to-
face, but rather through elaborate letters, resulted in proofs of the utility of the
maximum likelihood approach under various circumstances, and spawned a
literature, much of which was based in the USA.By then, Hotelling had
firmly established statistics as a stand-alone discipline within mathematics,
had created or inspired numerous departments devoted to statistics, and had
encouraged students and colleagues alike to take up these research questions.
Various scholars took up the challenge, and most notably Abraham Wald, a
colleague and one of the Refugees in Exile that Hotelling had sponsored at
Columbia, and an influential member of the Cowles Commission.
By 1943, Wald had managed to prove the asymptotic sufficiency of maxi-
mum likelihood estimates that had somewhat eluded Fisher as early as 1922.
Meanwhile, on the other side of the Atlantic Ocean, Fisher still suffered for
decades the at times malicious marginalization at the hands of Pearson associ-
ates. Over time, though, and especially in the USA, the discussion turned not
from the general failure of the method of maximum likelihood, but rather
on a better understanding of the conditions that might cause the method
to fail to perform well. Much of this recasting of Fishers theory came from
Hotelling and his colleague, Wald, and dates back to Walds arrival at the
Cowles Foundation in 1938, first in Colorado Springs, then with Hotelling
at Columbia and finally back with Cowles once it moved to Chicago.
Today, the method of maximum likelihood remains one of the most
enduring and valuable paradigms in modern statistics. It is a fascinating
example of the role of personalities in the development of theories, or,
in some cases, in the retarding of innovations. And, it also demonstrates
how collegial relationships can spur innovation. The ability for ideas to
coalesce within an institution is the subject of the next section. By the
late 1920s, the finance, economic and statistical world was ready for a
new approach that would dramatically accelerate statistical t hinking. The
Cowles Commission for Research in Economics provided that institution.
18
The Later Life andLegacy ofHarold
Hotelling
There are a few scholars who are claimed by multiple disciplines. Fisher
and von Neumann were two striking examples. The same rare ability
to span multiple disciplines was demonstrated by Harold Hotelling. He
began as a theoretical mathematician who soon found application in eco-
nomics and in statistics. His location theory and his theory of exhaustible
resources are still taught in economics. And, he represented the establish-
ment of statistics as a discipline that now stands on its own, but spawned
from the unique combination of theoretical mathematics and practical
research methodological studies.
Over his career, Hotelling left an incredible legacy, both in statistics
and in the development of economics and finance. We know him for
his ubiquitous confidence intervals. Within the discipline of econom-
ics, he wrote the incredibly imaginative paper Stability in Competition1
in 1929 that initiated the theory of location analysis. His seminal 1931
work The Economics of Exhaustible Resources2 was the first rigorous work
in both resource economics and, with the work of the Great Mind Frank
Plumpton Ramsey (22 February 190319 January 1930), the introduc-
tion of decision-making over time, that is the defining innovation of

DOI10.1057/978-1-137-34137-2_18
finance. Like Ramsey, he also analyzed taxation in Edgeworths Taxation

Paradox and the Nature of Demand and Supply Functions3 in 1932,
Demand Functions with Limited Budgets4 in 1935 and The General Welfare
in Relation to Problems of Taxation and of Railway and Utility Rates in
1938.
His 1938 paper was presented to the Econometric Society as his address
in his election as its president. A year earlier, he had been elected a fellow
of the American Statistical Association, and rose to its vice presidency by
1941. He also presided over the Institute of Mathematical Statistics, and,
in 1972, was conferred with the North Carolina Award for his contribu-
tions to many aspects of science.
Hotelling was also influential in education. At the Berkeley Symposium
in Mathematical Statistics and Probability in 1946, he presented his lec-
ture The Place of Statistics in the University in which he noted:
The possibilities of teaching quite advanced mathematics to young chil-

dren have scarcely begun to be explored. Children of kindergarten age are
fascinated and thrilled by the wonders of topology, and groups and num-
ber theory can be tremendous sensations in the fifth grade, though all these
subjects are ordinarily reserved for graduate students specialising in math-
ematics. What is lacking is teachers who know mathematics and its appli-
cations and who possess enough freedom to teach what they know instead
of the long, dull, and relatively useless drill on problems of wall-paper-
hanging and the like, problems turning on mere conventions which are
quickly forgotten painful, repetitious work which makes children resolve
to quit mathematics as soon as possible.5
It was in teaching his courses in statistics that Harold Hotelling met

his second wife, Susanna Porter Edmonson (15 August 190914 May
1989), following the untimely death of Floy. They raised three sons and
two daughters together.
While he retired from the University of North Carolina at Chapel Hill
in 1966, Hotelling remained in North Carolina, where he died after years
of poor health, on 26 December 1973.
18 The Later Life andLegacy ofHarold Hotelling 173
Notes
1. Hotelling, Harold, Stability in Competition (PDF), Economic
Journal 39 (153), 1929, pp.4157.
2. Hotelling, Harold, The economics of exhaustible resources. Journal
of Political Economy (The University of Chicago Press via JSTOR) 39
(2), April, 1931, pp.137175.
3. Hotelling, Harold, Edgeworths taxation paradox and the nature of
demand and supply functions. Journal of Political Economy, 40 (5),
October, 1932, pp.577616.
4. Hotelling, Harold, Demand functions with limited budgets.
Econometrica, 3 (1), January 1935, pp.6678.
5. Madow, W.G., Harold Hotelling as a Teacher, The American
Statistician 14 (3), 1960, pp.1517.
Part 4
The Birth of a Commission and
Econometrics
By the 1930s, statistics had been evolving over a little more than a century
and a quarter since Gauss least squares and Laplaces central limit theo-
rem. First as a tool for astronomical observations and global navigation,
it had been adopted by Galton and Pearson as a method by which bio-
logical characteristics could be measured and compared. This innovation
resulted in the creation of the journal Biometrika, with the express goal of
improving the measurement and analysis of scientific data, but especially
in biology. This evolution resulted in a revolution in statistical analysis,
but which was still confined to biological and agricultural questions.
Fischer had determined that modern statistics could not blossom based
merely on the clever characterization and aggregation of measurements
alone. Nor could it be built on the mere strength of personality of one
underfunded and academically marginalized, albeit brilliant, individual.
Perhaps more than any single person, Hotelling helped spark the statistics
movement on a more receptive side of the Atlantic Ocean. But, despite
these contributions in science and statistics, the tools did not treat the
problems most common in finance. It would take an entire team, some
deep pockets, and a few European scholars and war refugees to develop
the special tools needed for the peculiar challenges finance and econom-
ics data present. From these developments emerged the first society to do
for economics and finance what Pearson, Fisher and Biometrika did for
the sciences. It also resulted in a new journal, Econometrica. We next turn
to the story of those who made this possible.
19
The Early Life ofAlfred Cowles III
Some Great Minds make their mark through shear brilliance. Others
make a historically significant contribution not by solving a seemingly
intractable problem, but by recognizing, perhaps from a unique vantage
point, that a problem exists, or by offering, from their access to unique
resources, a pathway to solve the problem. Alfred Cowles III was a great
mind because of his unique ability to motivate others. He also brought to
the problem an infectious entrepreneurial spirit, and access to financial
resources almost never found among modern academics.
His contributions should come as no surprise.
The family name can be traced back to the fifteenth century. Sir John
Cole (14111500) haled from Nythway, Devon, England, where he was
married to Jane Merlot (14151500). They passed their peerage to Sir
William Cole (143989). Sir Williams son, John Cole (14701525),
survived his father and his mother, Elizabeth Weston (145589), and was
survived himself first by Archdeacon Thomas Cole (149410 May 1571),
his wife, Elizabeth Hargraves (14981574), and their son, William Cole
(152416 February 1600). By the birth of William, and his wife, Anne
Colles, the family had moved from Blade, Devon, where they spawned

DOI10.1057/978-1-137-34137-2_19
Pedigree Chart for

Giles Hooker Cowles
John Cole
Samuel Cowles b: 1598 in London, London,
b: 1639 in Hartford,
Captain Isaac Cowles m: 14 Jun 1660 in
b: 28 Mar 1675 in d: 17 Apr 1690 in Hannah Hart
Farmington, Hartford, b: 1613 in Lilborne Parish,
m: 27 Dec 1716 in
Farmington, Hartford,
Abigail Stanley
Ezekiel Cowles Connecticut, United States
d: 07 Feb 1756 in b: 17 Jun 1639 in Hartford,
b: 04 Nov 1721 in Farmington, Hartford, Hartford, Connecticut
Farmington, Hartford, Connecticut, United States d: 20 Oct 1734 in Farmington,
Connecticut, United States Hartford, Connecticut
m: 02 Sep 1752 in
Elizabeth Smith
d: 23 Sep 1806 in b: Feb 1690 in Farmington,
Farmington, Hartford, Hartford, Connecticut, United
Connecticut, United States States
d: 16 Aug 1767 in
Giles Hooker Cowles Connecticut, United States
b: 26 Aug 1766 in
m: 05 Feb 1793 in of Bristol,
Conn. Giles Hooker
d: 05 Jul 1835 in Austinburg, b: 04 Oct 1690 in Farmington,
Ashtabula, Ohio, United Hartford, Connecticut, USA
States m:
d: 19 Feb 1787 in
Martha Hooker Farmington, Hartford,
Connecticut, USA
b: 03 Aug 1734 in
Farmington,Hartford,Connecti
cut,USA
d: 29 Nov 1817 in
Martha Cooke
Connecticut, USA
b: 02 Jun 1693 in Hartford,
Hartford, Connecticut, USA
d: 22 May 1760 in
Connecticut, USA
Fig. 19.1 Distant ancestry of Alfred Cowles III
three generations, to London, England. William and Anne had a son

William (15461610) who, with his wife, Elizabeth Deards (1550),
would be the last to remain in England (Fig. 19.1).
Their son, James Cole, was born in Essex, England, in 1563. James
married Mary Richards (15641601). She died young, but not with-
out two children, Abigail and John Coles (159815 September 1675),
to support. John sough adventure and opportunity, and arrived in the
New World in 1630. There is some evidence that he arrived with his
wife, Hannah Hart. Others claim that he married Hannah Bushoup
(c.161317 March 1683) of Hartford, Connecticut, soon after he
arrived in the colonies.
These Coles were farmers. The family had followed the Reverend
Thomas Hooker (5 July 15867 July 1647), the prominent colonial
Puritan preacher who dissented from religious leaders in Massachusetts

and led a flock to found Connecticut. Known as the Father of Connecticut,
his family had been prominent Hookers in England dating back to the
era of Henry VIII.His descendants include Aaron Burr, the Great Mind
John Burr Williams, J.P.Morgan and Alfred Cowles III.
One of his followers, John Cowles Sr., migrated south to Connecticut
with Reverend Hooker and bought land in Farmington in 1640. Because
there was another John Cole in nearby Hartford at the same time, and
whose daughter was accused of witchcraft, John and his wife Hannah
(161317 May 1683) became known as Cowles, and passed that name
on to their eldest son, Samuel (163917 April 1690), while their young-
est son, John, retained the name Samuel Cowls.
John Cowles represented his region to the Connecticut General
Assembly from 165354, and then became a founding father of the
town of Hadley in Massachusetts, farther west, and then Hatfield, across
the river, in Connecticut. Meanwhile, their eldest son, Samuel, and his
wife Abigail Stanley (17 June 163720 October 1734) remained moved
to nearby Hartford, and raised a family that included Isaac Cowles (28
March 16757 February 1756).
Isaac earned a military title, first as an ensign, then a lieutenant and
a captain with the Second Company of Farmington, the local militia.
He was married three times, including to Elizabeth Smith (February
169016 August 1767), also of Farmington. Together they shared a
number of children, including Ezekiel Cowles (4 November 172123
September 1806), who, with Martha Hooker (3 August 173429
November 1817), the great-great-granddaughter of Reverend Thomas
Hooker, raised Gilles Hooker Cowles (26 August 17668 July 1835)
(Fig. 19.2).
Giles was named for his maternal grandfather, Giles Hooker (4 October
169019 February 1787). He would find his fortunes in the West. In
what will begin a long association between Yale and the Cowles, Giles
graduated from Yale University in 1789 and was granted permission to
preach by the Western Reserve Association of New Haven, Connecticut.
In May of 1791, Gilles Cowles married Sally White (177431 July 1830)
two years later, and was asked by his church to settle and act as a mission-
ary in the Connecticut Reserve lands of Ohio. From there, he assisted in
Pedigree Chart for Giles Hooker Cowles

Edwin Weed Cowles Dr.
Alfred Cowles III b: 03 May 1794 in b: 26 Aug 1766 in
m: 05 Nov 1815 in Norfolk,
d: 06 Jun 1861 in
Alfred COWLES Sally White
b: 13 May 1832 in b: 1774 in Stanford,
Mantua,Portage,Ohio,USA
m: 31 Jan 1860 in
Chicago,Cook,Illinois,USA
Almira Mills Foote Asa Foote
d: 20 Dec 1889 in
Chicago,Cook,Illinois,USA; b: 25 Jun 1788 in Norfolk, b: 1744 in Simsbury,
Age: 57 Litchfield, Connecticut, USA
d: 09 Apr 1846 in
Alfred Cowles II Cleveland,Cuyahoga,Ohio,US Sarah Mills
A; Age: 58 b: 11 Apr 1748 in
b: 05 Jan 1865 in
Chicago,Cook,Illinois,USA
m: 28 Nov 1890 in South
Manchester,,Connecticut,USA Mosely Hutchinson Silas Hutchinson
d: 15 Jan 1939 in b: 07 Nov 1758 in Andover,
Chicago,Cook,Illinois,USA b: 23 Oct 1795 in Ithaca,
Tompkins Co., New York
m: 22 Oct 1822 in Ithaca,
Sarah Frances Hutchinson Tompkins, New York, USA Elizabeth Buell
b: 04 Oct 1837 in d: 17 Jun 1861 in Cayuga b: 05 Jan 1774 in Fort
Cayuga,Cayuga,New County, New York
York,USA
d: 11 Aug 1884 in
Elizabeth Boardman Hall William B Hall
Chicago,,Illinois,USA; Age: 46
b: 15 Apr 1801 in Canoga, b: 10 Nov 1774 in Hartford,
Seneca Co., New York
d: 28 May 1877 in Buried in
Lakeview Cemetery in Village Rebecca Meekins
Alfred Cowles III of Cayuga, NY Boardman
b: 15 Sep 1891 in Chicago, b: 10 Jun 1783 in Arlington,
Cook, Illinois, USA
m: 10 May 1924 in New York
Charles Cheney George Cheney
d: 28 Dec 1984 in Chicago,
Cook, Illinois, USA; Age: 93 b: 26 Dec 1803 in b: 20 Dec 1771 in Oxford
m: 21 Oct 1829 in Volume
d: 20 Jun 1874 in
Knight Dexter CHENEY Electa Woodbridge
b: 09 Oct 1837 in South b: 02 Jan 1781 in East
Manchester, Conn.
m: 04 Jun 1862 in Hartford,
Conn.
Waitstill Dextor Shaw Mason Shaw
d: 1907 in York County,
Maine, USA b: 17 Oct 1809 in Boston, b: 24 May 1773 in
Suffolk, Massachusetts, USA
d: 06 Apr 1841 in Mount
Elizabeth Cheney Pleasant, Hamilton, Ohio, Maria B Howell
USA b: 05 Feb 1779 in Rhode
b: 18 Sep 1865 in Hartford,
Hartford, Connecticut, USA d: 27 Apr 1811 in Maine, USA
d: 07 Apr 1898 in
Chicago,,Illinois,USA Samuel Garfield Smith Samuel Smith
b: 23 Aug 1799 in b: 11 Nov 1765 in

m: 09 Sep 1842 in m:
d: 09 Sep 1842 in New
Edna Dow SMITH Sally Garfield
b: 12 May 1841 in Exeter, b: 21 Oct 1771 in Fitchburg,
N.H.
d: 17 Sep 1915
Elizabeth Dow Jeremiah Dow
b: 18 Sep 1816 in Exeter, b: 09 Apr 1773 in Salem,

Rockingham, New m:
Hampshire, USA
d: 05 Mar 1879 Ednah Parker
b: 18 Oct 1776 in Bradford,
Fig. 19.2 Immediate ancestry of Alfred Cowles III
the formation of a number of Presbyterian churches in Northeastern Ohio

as an itinerant minister first out of Erie. He was eventually instilled as
minister in Austinburg in 1811.
Shortly after their marriage, but before their western migration, Giles
and Sally had a son, Edwin Weed Cowles (3 May 17948 June 1861), the
first of their five boys and four girls. Born in Bristol, Connecticut, near
Farmington, his ancestors on both sides of the family were all Puritan
settlers, including a maternal ancestor Peregrine White, the first white
child born in on the Mayflower on its way to New England. Educated at
the Farmington Academy, Edwin Weed Cowles followed his family West
and became a prominent physician in Ohio. He and his wife Almira
Mills Foote (28 June 17889 April 1848) remained well established in
Ohio and raised children of great prominence.
Another son, Henry Cowles, followed his father into the ministry and
was one of the first professors at Oberlin College. A daughter, Betsey
Cowles (9 February 181025 July 1876), the eighth of ten children,
became an advocate for education reform and for the advancement of
women and abolition of the slave trade.
Edwin Cowles and Alfred Cowles, two other sons of Giles and
Sally, married two sisters from Cayuga County, New York, Elizabeth
Hutchinson (18271910) and Sarah Hutchinson (183784).
The first son of Edwin and Elizabeth Cowles, Edwin Cowles Jr.
(182590), had, at a young age, became an apprentice printer and co-
formed Smead & Cowles Printers. In 1853, he co-founded the Forest
City Democrat, and later changed its name to the Cleveland Leader news-
paper. He also helped found the Ohio Republican party out of the press-
room at the Leader. When he bought out his partner in the newspaper,
Mr. Medill relocated to Chicago and founded the Chicago Tribune with
Edwins brother Alfred.
Dr. Edwin Weed Cowles and his wife also had another son destined for
prominence. Alfred Hutchinson Cowles had studied geology, physics and
chemistry at the Ohio State University and Cornell University. He was
a student athlete who raced and beat Harvard in the eight-oared crew,
and raced at Henley, England. Upon graduation from his studies in geol-
ogy, he, his father and a brother founded the Pecos Mine in the Cowles
Mining District of New Mexico, which would become one of the richest
zinc, copper, silver and gold mines in the world.
There, Alfred Hutchinson Cowles and his brother Eugene Hutchinson
Cowles (185592) developed many new innovations in mining and
smelting, including novel methods for aluminum extraction from bauxite,

and the construction of the necessary large-scale hydroelectric generation
facilities to power these plants. In the process, they became innovators,
inventors, patent holders and revolutionizers of modern metallurgy. Their
patents were imitated by others, most notably the Aluminum Company
of America (ALCOA), which used its process in plants most notably in
Messena, NewYork.
The new company had been founded by two of Cowles ex-
employees who had witnessed the development of their process at
their Lockport, New York, factory and began to use it to manufac-
ture aluminum in Pittsburgh, Niagara Falls and Massena. The Cowles
brothers sued for the theft of their intellectual property in federal
patent court and won judgments over ALCOA and others worth tens
of millions of todays dollars. Alfred Hutchinson Cowles, the cousin
of Alfred Cowles III, contributed to the establishment of a generation
of wealthy Cowles sons.
The youngest of four boys and a girl of Edwin Weed Cowles and
Almira, Alfred Cowles, was born in Austinburg, Ashtabula County,
Ohio, on 13 May 1832. Following his comfortable and stimulating
upbringing as the son of a highly respected preacher, Alfred started
off first as a bookkeeper, then as treasurer and manager of the Chicago
Tribune newspaper, and became co-owner of the newspaper, along with
John S. Scripps. By then, two sets of Cowles were firmly ensconced
in publishing. He also married Sarah Frances Hutchinson (4 October
183784), and had three boys and a girl.
Their middle son, Alfred Jr. (4 January 186515 January 1939), fol-
lowed in his grandfathers footsteps through his studies at Yale. There,
he was a member of the secretive Skull and Bones student society,
and continued onto Yale Law School from 1887 to 1888 and then
Northwestern University from 1888 to 1889. Upon graduation, he
married Elizabeth Cheney (18 September 18657 April 1898) of
Manchester, Connecticut, on 28 November 1890, with whom he had
four boys, the eldest Alfred Cowles III (18911984).
Alfred Cowles Jr. was admitted to the Illinois Bar in 1889 and spent
much of his career in Chicago practicing law. He took a little more
than two years break from his practice to assist in the management of
the Chicago Tribune newspaper. He also served as a director of boards

for a number of corporations, including the Chicago Tribune and the
American Radiator Company, Continental and Commercial National
Bank, the Electric Smelting and Aluminum Company, his nephews
corporation, and other organizations. He was also civically minded.
In Chicago, he was a member of the Unitarian fellowship and the
University Club. Their family resided on the affluent and exclusive
Lake Shore area, at 1130 Lake Shore Drive, on the shore of Lake
Michigan.
From the 1700s, and certainly by the mid-1880s onward, the Cowles
family had established a tradition of attendance at Yale University. They
were also increasingly indoctrinated into one of Americas most secretive
societies of the elite, the Order of the Skull and Bones. From presidents
such as George Bush to world leaders, this organization contains the elite
of the elite. Alfred Cowles II (class of 1886) and III (class of 1913) were
members, along with their cousins, William Hutchinson Cowles (class of
1887) and William Sheffield Cowles (class of 1921).
The family of Alfred Cowles Jr.s wife, Elizabeth Cheney, was equally
illustrious. They were destined from Cheneys who resided in Hartford
and nearby Manchester, Connecticut, since founding times (Fig. 19.3).
Elizabeth Cheneys grandfather was one of the Cheney Brothers
who founded an industry of silkworm cultivation in Manchester,
Connecticut. They began with the cultivation of mulberry trees, and
expanded into silk spinning in the 1830s and 1840s. A blight affected
their tree operation in 1840, but they persevered the drought and a silk
market crash to invent new processes and lead the world in silk spin-
ning. They translated their entrepreneurship into an internationally
recognized company. They also practiced welfare capitalism in which
they dedicated themselves to provide a living wage and safe working
environment for their workers in the 1860s, just as industrialists in
the Gilded Age were moving in the other direction. The corporate
patriarchs provided heat and water to the nearby town which housed
their workers, built churches and schools and invested in other public
facilities. Synthetic fabrics and the Great Depression caused their com-
pany to shrink dramatically, which must have been troubling for Alfred
Cowles III to observe.
Pedigree Chart for

Elizabeth Cheney
George Cheney
b: 20 Dec 1771 in Oxford Parish,
Manchester, CT, USA
Charles Cheney m: 18 Oct 1798 in East Hartford,
b: 26 Dec 1803 in Connecticut Hartford, Connecticut, United States
m: 21 Oct 1829 in Volume Page d: 19 Jul 1829
Providence City, Providence, Rhode
Island, USA
d: 20 Jun 1874 in Connecticut USA Electa Woodbridge
b: 02 Jan 1781 in East Hartford,
Hartford, Connecticut, United States
d: 12 Oct 1858 in Manchester,
Hartford, Connecticut, United States
Knight Dexter CHENEY
b: 09 Oct 1837 in South
Manchester, Conn.
m: 04 Jun 1862 in Hartford, Conn. Mason Shaw
d: 1907 in York County, Maine, USA b: 24 May 1773 in Raynham, Bristol
County, Massachusetts
Waitstill Dextor Shaw m: 29 Jul 1806 in Providence
b: 17 Oct 1809 in Boston, Suffolk, County, Rhode Island, USA
Massachusetts, USA d: 27 Oct 1860 in Belchertown,
d: 06 Apr 1841 in Mount Pleasant, Hampshire, Massachusetts, USA
Hamilton, Ohio, USA
Maria B Howell
b: 05 Feb 1779 in Rhode Island,
USA
d: 27 Apr 1811 in Maine, USA
Elizabeth Cheney
b: 18 Sep 1865 in Hartford,
Hartford, Connecticut, USA
m: 28 Nov 1890 in South
Manchester,,Connecticut,USA Samuel Smith
d: 07 Apr 1898 in
Chicago,,Illinois,USA b: 11 Nov 1765 in Peterborough,
m:
Samuel Garfield Smith d: 25 Apr 1842 in Peterborough,
b: 23 Aug 1799 in Peterborough,
Hillsborough, New Hampshire,
United States
m: 09 Sep 1842 in Peterborough,
Hillsborough, New Hampshire, Sally Garfield
United States b: 21 Oct 1771 in Fitchburg,
d: 09 Sep 1842 in New Hampshire, Worcester, Massachusetts, United
USA States
d: 01 Sep 1856 in Peterborough,
Edna Dow SMITH Hillsborough, New Hampshire,
b: 12 May 1841 in Exeter, N.H. United States
d: 17 Sep 1915
Jeremiah Dow
b: 09 Apr 1773 in Salem,
m:
Elizabeth Dow d: 13 Oct 1847 in Exeter,
b: 18 Sep 1816 in Exeter,
Rockingham, New Hampshire, USA
d: 05 Mar 1879
Ednah Parker
b: 18 Oct 1776 in Bradford, Essex,
Massachusetts, United States
d: 07 Feb 1846 in Exeter,
Rockingham, New Hampshire,
United States
Fig. 19.3 Ancestry of Elizabeth Cheney

The Arrival ofAlfred Cowles III

Alfred C.Cowles III was born on 15 September 1891 with every advantage
in American life as the peak of the Gilded Age. His father was a successful
lawyer, businessman and part owner of the major newspaper in Americas
second city. He was the eldest of four boys, and his family pedigree was
often taught at Yale University, one of the nations elite schools. In addi-
tion to family newspapers in Cleveland and Chicago, his uncle also oper-
ated a major newspaper in Spokane, Washington.
The family knew young Alfred as Bob. A tall, athletic and handsome
young man, he was educated at the exclusive Taft Preparatory School in
Watertown, Connecticut, about equidistant from his fathers alma mater
of Yale, and his mothers family business in Manchester. The school,
founded by the brother of US President William Howard Taft, still main-
tains today its rich tradition of the education of bright and elite students.
Upon graduation from Taft, Cowles migrated 30 miles southeast to New
Haven, Connecticut, to attend Yale University. Following graduation
from Yale, Alfred had moved to Spokane to learn the newspaper trade
from his uncle, William Hutchinson Cowles (18661920). There, in
1914, he suffered typhoid fever.
Alfred recovered from typhoid. With his fragile health at least partially
repaired, he moved back to Chicago, the center of rail transportation
in the American Midwest, and formed an investment house that pur-
chased and restructured small railroads under the banner Alfred Cowles
Railroad. Meanwhile, his investment and acquisitions firm also published
a regular newsletter on market advice. But, in 191516, his health and
future were once again cast into jeopardy. Just two years into his career,
Cowles became afflicted with tuberculosis. His family commended young
Cowles to convalesce in the cool and dry air of Colorado Springs, where
he increasingly spent his time, often from a sickbed.
The disease, once called consumption, was not an affliction unknown
to the family. Cowles had spent time as a young boy visiting his mother,
Elizabeth Cheney Cowles, in Colorado Springs as she tried to recuper-
ate from the terrible lung disease in the dry and cold air of the Rockies.
She succumbed to that disease in 1898 and left Alfred II to raise their
four young boys: Alfred (Bob) Cowles III, Knight Cheney Cowles (27
December 18921 May 1970), John Cheney Cowles (18941972) and
Thomas Hooker Cowles (6 June 189521 August 1927).
In 1916, just a few years after his graduation, and afflicted with tuber-
culosis, Bob too was attracted to the therapy that had been demonstrating
an improvement in its cure rate since it took the life of his mother. Under
the care of Dr. Gerald Webb, the renowned tuberculosis researcher, of
Colorado Springs, Bob recovered enough over a years stay at a sanitarium
to move in with his aunt Sarah Cowles Stewart and her husband Phillip
Stewart on Colorado Springs Millionaire Row.
20
The Times ofAlfred Cowles III
Cowles remained in Colorado Springs for two decades. He had survived

the stock market turmoil of the late 1920s relatively unscathed financially,
and had simultaneously decided to withdraw from both the financial
markets and urban congestion before the crash of 1929. He was firmly
entrenched in the dry mountain air of Colorado Springs.
Cowles spent time between Colorado Springs and Chicago in the
intervening years, until he met a young woman 11 years his junior.
Cowles had a cousin, Laura Cheney, who was the roommate at Vassar
College with an attractive and athletic woman named Elizabeth (Betsy)
Strong. The Cheney family invited Betsy to take a summer job at their
Manchester silkworm enterprise, where she learned how to drive, and
met her roommates cousin. Albert Cowles III was a self-assured and ath-
letic man with stunning blue eyes and from one of Chicagos million-
aire families. They fell in love, and were married within a year, on 10
May 1924, barely a year after Betsy graduated. Following a honeymoon
in Homestead Hot Springs in Virginia, they moved to their newlywed
home, at 30 Broadmoor Avenue, within a complex of millionaire cottages

DOI10.1057/978-1-137-34137-2_20
and resorts around the private Cheyenne Mountain Country Club and
the exclusive Broadmoor Hotel.
The young couple were fully immersed in the millionaire country club
scene. They partied and entertained, and they made a most handsome
couple. They also looked forward to starting a family together, but dis-
covered they could not have children. Instead, they traveled to Boston
to adopt, first, Richard Livingston, and then, a few years later, Ann. The
larger family also moved to a larger home, at 1506 Culebra, in Colorado
Springs.
At first, Cowles considered himself a journalist in the family tradition,
but he gradually became interested in financial investing, of which his
extended family had much to invest. He was the principal in an invest-
ment company, and from there, began his lifes work. Meanwhile, his
wife became increasingly close to Bobs aunt, and her husband Philip, the
son of a former Vermont governor.
Betsys diversion, first through her uncle by marriage, and then through
her father, became her emotional salvation. She was a young, capable,
well-liked and spontaneous woman, but she found herself married to a
man who was incredibly focused, to the point that he appeared to some
to be aloof and uninterested. Some speculate his focus arose from days
and nights on end in solitude and cold air as he fought for his life against
tuberculosis. His intensity was a great quality for one recovering from
a debilitating disease, for an investor and aspiring economist, and for a
financial theorist. It might not have been the ideal personality for a man
married to a vibrant woman much younger than he was.
Betsys salvation was her fathers newfound fascination with mountain
climbing. He had suffered physical problems later in life that led his doc-
tor to proclaim that he may lose the ability to walk. He took that diagno-
sis as a challenge to climb mountains. He brought his daughter into that
world, at the highest levels around the world. Betsy became a recognized
mountain climber, in Colorado and abroad.
In the 1930s, Betsy fell out of love, and the couple divorced in 193839.
That year, Cowles moved back to Chicago, but continued to support Betsy
for the rest of her life, and continued to manage her fathers investments.
Ten years later, on 24 October 1949, Cowles remarried, to Louise Lamb
Phelps. Betsy later married an air force general, Earle (Pat) Partridge.
20 The Times ofAlfred Cowles III 189
Certainly, Cowles diversions centered around his work. He threw

his intensity into everything he did, whether or not they generated
any income for himself. At the time Cowles was a director of one of
the nations leading tuberculosis research institutes. The Webb-Waring
Institute for Medical Research was founded in 1924, by Dr. Gerald
R.Webb, a leading tuberculosis researcher, and his colleague Dr. James
J.Waring, Chairman of the Department of Medicine of the University of
Colorado School of Medicine. As a director of the Institute, Cowles was
instrumental in creating both financial viability for the organization and
some direction in their medical research that employed statistics.
When he was searching for the best tuberculosis therapy, on behalf of
the tuberculosis foundation in Colorado Spring for which he agreed to
serve, Cowles schooled himself in the emerging statistics of the 1920s.
He successfully constructed an analysis of variance model to predict suc-
cessful courses for the cure of tuberculosis and proved that certain cli-
mates in the USA were more amenable to healing. In fact, Cowles first
publication was in the Journal of the American Statistical Association, in
which he demonstrated that climate was a significant determinant on the
death rate from tuberculosis in the USA.
21
The Great Idea ofAlfred Cowles III
With his interest in statistics stimulated and the time afforded with a life
of semi-retirement, Cowles became interested in applying statistical prin-
ciples to a finance discipline for which he had developed a professional
suspicion that it lacked scientific rigor. He had become growingly suspi-
cious of the spurious advice offered by many financial advisors over the
Roaring Twenties, especially in the wake of the Great Crash of 1929, and
he had schooled himself on the mathematics of least squares and statistics
that could act as the basis for the treatment of finance as a science rather
than an art. His first project in finance was to determine the effective-
ness and correlation of the advice from 24 market newsletters and stock
market performance.
Of course, Cowles could have afforded to commission economists and
statisticians to do his analytic work for him, but he also had the time and
interest to take a hands-on approach. To assist him in the statistical theory,
he came upon an academic, Harold Thayer Davis (5 October 189214
November 1974), who spent summers in the mountain community of
Colorado Springs, Colorado. Davis knew that while the regression calcu-
lations could be performed by a team of clerks, he thought a new device

DOI10.1057/978-1-137-34137-2_21
called a Hollerith Calculator from a new company called International

Business Machines could use punch cards to streamline such calculations.
Davis agreed to help Cowles build an analysis unit at Cowles Colorado
investment office to house the machine and commission the calculations.
Unfortunately, they quickly discovered that the machine was ill-suited
for the linear regression calculations Cowles needed. This reality forced
Cowles to simplify his analysis into a series of simple linear regressions.
Accordingly, he developed a methodology to compare estimates and
forecasts with random guesses. From this necessary deviation from his
research agenda, Cowles quickly developed the hypothesis that neither
market analysts nor the state of the art in existing estimation techniques
could outperform random stabs in the dark.
Cowles fascination with finance theory was piqued. With the encour-
agement of Davis, he came up with the idea to form a commission that
would have as its mission better measurement and estimation in financial
markets. Davis, James Glover, a professor of actuarial mathematics and
computational methods at the University of Michigan, and Thornton
Fry of Bell Telephone Laboratories would provide the methodological
guidance. At the same time, Cowles approached the recently formed
Econometric Society to suggest a mutually beneficial collaboration with its
University of Chicago-based scholars.
At first, the various scholars he tried to engage were skeptical, but
Cowles pledge of significant funding to advance the state of analysis
and expand the use of modern scientific tools in finance and economics
seemed sufficient to secure their support.
Cowles inspiration for the Commission was to raise the level of analy-
sis of the decision-making sciences, especially finance and economics,
to take advantage of the new techniques that were being developed by
Ronald Fisher, Harold Hotelling and others in the emerging science of
statistics. He believed that much of the investment and finance discipline
was little more than glorified guessing, and was confident that the emerg-
ing tools of quantitative analysis would lend themselves well to finance
theory. In turn, problems that arguably brought down the US and other
economies in the developed world from 1929 to 1933 could be remedied
through the application of science. In doing so, he anticipated a shift of
emphasis from the cold world of neo-classical economics that was the
rage at the time to a new world of forecasting and better public policy.
By the early 1930s, Cowles had assembled much of the mathematical,
statistical and computing resources he would need. He then pressed on
his Yale connections to woo the economics discipline. At that time, the
most prominent American economist was the Great Mind Irving Fisher
(27 February 186729 April 1947). A Yale graduate and faculty member,
he had known Cowles father from college days. In fact, both Cowles
father and uncle were Yale graduates, as were others who followed him.
Fisher was highly prominent, if not partially disgraced by his very public
optimism, of the strength of US financial markets even right up to and
immediately following the Great Crash.
Fisher himself had built up a financial fortune from his invention of
data sorting techniques, one of which was an early version of the once
ubiquitous Rolodex. While Fisher irretrievably lost his fortune with the
onset of the Great Depression, he was nonetheless a powerful figure who,
by chance, shared another important characteristic with Cowles. Fisher,
too, had suffered tuberculosis as a young man, and had even spent some
time in Colorado Springs. These connections afforded Cowles a receptive
ear from one of the most well-known and respected economists in the
country who had, for years, been advocating the formation of a society
devoted to scholarly work in econometrics.
Cowles offered the funding if Fisher could assemble the critical
mass of scholars both to create a research commission and to form the
Econometric Society that would rival the statistical societies of England.
Fisher brought the academics, and Cowles built the facility, first in
Colorado Springs.
One motivation of Cowles was his desire to produce a statistical
study of whether stock market forecasters are successful in predicting
the direction of the market. He believed they did not. Cowles devoted
his profound intensity into the analysis of almost five years of data from
7500 investment advisor recommendations from 16 services. From his
mammoth study, he demonstrated that only 6 of 16 services provided
positive returns, with the average investment service actually yielding
financial losses.
His analysis was read at one of the first meetings of his new Econometric
Society, and was published in one of the first editions of the new jour-
nal Econometrica he funded. His Cowles Commission for Research in
Economics, with the motto Science is Measurement, quickly became
the nations most prominent financial and economic research group.
Cowles proved to be one of the Commissions most insightful research-
ers early on. His interest began with his stock market research. Like
Fisher, who had been for decades collecting data on the inflation rate,
bond prices and bond interest rates, with the goal of developing finan-
cial instruments that are immunized from inflation and money supply
manipulation, Cowles realized that data is king. He set about produc-
ing stock price databases that would eventually become the Standard &
Poors 500 index. His indices were much more sophisticated and theo-
retically sound than the simplistic Dow Jones Industrial Index that was
commonly employed at the time.
From his database of stock prices and forecasts, Cowles created a set
of 24 time series of forecasts and demonstrated, within the context of
a multivariate regression, that most of these forecasts were not statisti-
cally correlated to market success. In other words, most forecasts perform
no better than random choices. He stated, The most successful records
are little, if any, better than what might be expected to result from pure
chance.1
In effect, Cowles was developing an early version of the random
walk that was popularized by the Great Mind Paul Samuelson (15 May
191513 December 2009) more than 30 years later, in 1964. It was this
first volley into the premise that forecasters cant beat the market that
produced what now underpins much of financial theory, and was the
subject of an earlier volume in this series on the efficient market hypothesis.
While Cowles emerged as a competent self-taught scholar, his con-
tribution hardly stopped there. Cowles was an academic benefactor and
entrepreneur perhaps without parallel. Never a professor himself, and
having never enjoyed the trappings of the Ivory Tower, Cowles none-
theless successfully assembled one of the greatest groups of scholars in
academic history.
Aside from some early contributors from the mathematical and comput-
ing sciences, Cowles very quickly identified a number of individuals who
he felt could help further the creation of a fledging econometric society.
The notion of a random walk is actually related to an important

econometric issue. Gauss had developed the method to provide a best
fit of an estimated relationship to data that is subject to random error.
If departures from the estimate are random, then the errors of observa-
tions in a time series should not show any dependency with adjoining
observations, and should vary in size according to a random normal dis-
tribution. The importance of ensuring there are no serial correlation in
errors was a leading-edge statistical concern then, as it remains now. If it
can be established, as Cowles and Herbert E.Jones asserted, that there
are no such correlations between errors in observations of stock prices,
then traditional statistical tools can be employed in the analysis of stock
market prices.
Cowles felt that Fisher may share his entrepreneurial ambitions for
finance theory, even if Fisher forever maintained more optimism than
Cowles that stock prices could be predicted. Yet, despite Fishers belief
that the efficient market hypothesis could be repealed, he agreed to
act as an intermediary to use his influence as the president-elect of the
American Statistical Association and the President of the newly founded
Econometric Society, to work with Cowles to fund a commission and a
new journal. Fisher assembled the interested scholars, and Cowles indeed
funded the journal, and acted as its treasurer from 1932 to 1954.
Cowles was instrumental in supporting the new Econometric Society,
but he was not its founder. Shortly after Christmas, on 29 December
1930, just 14 months after the Great Crash, the Econometric Society was
founded. This was almost three years after Fisher, Charles Roos (18 May
19016 June 1958) and the European economist Ragnar Frisch had
assembled to discuss the possibilities at Fishers home in New Haven,
Connecticut. Indeed, Fisher had been trying to create such a society
for a couple of decades by then. But, with the Great Crash, and finally,
with Cowles sponsorship, it appeared the Society, and its journal, would
finally attain the necessary resources to succeed. Indeed, Cowles devotion
to research that can better explain the stock market likely also brought
to the society interest from businesspeople and government officials,
beyond the obvious interest of a few dozen economists.
The timing was perfect. The year 1933 saw breakthroughs in the
legitimization of mathematical statistics in Europe and in the political
climate for better understanding of both finance and public policy in
the USA.Cowles and his Commission found itself on the leading edge
of both and with the resources and stature to attract the worlds leading
scholars.
Another aligning of the stars at the time was the acceleration of
nationalism under Adolf Hitler in Germany, and his warped application
of Galtons eugenics. Some of the brightest applied mathematicians in
Germany, Austria and Eastern Europe at the time were of Jewish descent.
Many were counseled by colleagues to not risk their fate to an increas-
ingly militant German movement, and some others began to feel less
subtle persuasions to leave Europe.
One of the earliest and most formative members of the Cowles
Commission was one such European scholar, Jacob Marschak (23 July
189827 July 1977). He, Ragnar Frisch and Haavelmo, all joined the
Cowles Commission, which, by then, had moved to the University of
Chicago to be better able to tap the resources of one of the countrys best
economics departments, and, by no small coincidence, the family home
of Cowles.
Marschak was a most colorful character. When he joined the Cowles
Commission as its research director in 1943, he joined scholars whose
families had followed a similar migration from regions in and around
the Austro-Hungarian Empire, and found themselves at Cowles, includ-
ing the families of Milton Friedman (31 July 191216 November 2006)
and Franco Modigliani (18 June 191825 September 2003). Marschak
found himself as an immigrant who sought academic refuge at the New
School for Social Research in NewYork City after a four-year stint direct-
ing Oxfords statistics institute in the late 1930s. He had joined the same
University in Exile that Harold Hotelling had supported. Many of these
almost 200 scholars were brought there by the New School co-founder,
Dr. Alvin Johnson (18 December 18747 June 1971), between 1933 and
1945.
First at the New School, and then at Cowles, Marschak found himself
surrounded by the same eclectic and intellectually diverse scholars who
could look at old academic problems in new ways and with new tech-
niques. If they did not have the new techniques yet, they created them.
Marschak and his colleagues at Cowles recognized that the static model
which predated the Great Depression was ill-prepared to treat the rapidly
evolving economies of the 1930s and beyond. The disciplines of eco-

nomics and finance were forced to move beyond the simplistic classical
solutions that proclaimed economic booms and busts could not occur,
to ones that were more dynamic in nature. These models needed to rec-
ognize a richer set of interactions that all come together to determine
market equilibrium. The tools of the trade were no longer artful rhetoric,
but were increasingly founded in mathematics and statistics. The Cowles
Commission was the epicenter for this groundbreaking new approach.
Associated with the Commission were many of the most brilliant
scholars in the nation, indeed the world. Many went on to win Nobel
Memorial Prizes in Economics. Some were also associated with the
University of Chicagos department of economics. This intersection
became problematic, though, as the Commission sometimes eclipsed the
stars of the economics department. As a consequence of this growing ten-
sion, the Cowles Commission moved in 1955 to another Cowles hinter-
land, Yale University. Marschak and many others made the move as well.
The move allowed the Commission to more deftly depart from the
strong neo-classical philosophy of the University of Chicago. It also
allowed the Cowles family to continue simultaneously their generous
support to both the Cowles Foundation, which it was renamed after the
move, and their alma mater of Yale University.
Scholars at the Cowles Commission and the Foundation are now
remembered for their development of a number of methodologies in sta-
tistics and applications to econometrics. These include the techniques of
instrumental variables, indirect least squares and maximum likelihood
estimation. They also developed indirect least squares, instrumental vari-
able methods, full information maximum likelihood method and limited
information maximum likelihood method.
Each of these techniques is now an important element of the finance
toolbox.
The Commission also produced pioneering work by Great Minds that
would go on to secure Nobel Memorial Prizes. The scholars who were
awarded with the ultimate prize for scholarship in economics and finance
include Kenneth Arrow (23 August 1921), Grard Debreu (4 July
192131 December 2004), Tjalling Koopmans (28 August 191026
February 1985), Trygve Haavelmo, Lawrence Klein (14 September
192020 October 2013), Harry Markowitz (24 August 1927), Franco

Modigliani, Herbert Simon (15 June 19169 February 2001) and James
Tobin (5 March 191811 March 2002).
These exceptional individuals who formulated some of the most pro-
found concepts in finance did so not in a vacuum, but within a com-
mission that produced precisely what Cowles was confident it would.
Cowles primed the pump by producing significant work that preceded
later developments in finance such as the random walk and the efficient
market hypothesis. Not only did he encourage and facilitate some of the
very first applications of modern statistical techniques to finance, but
he also then funded the scholars who could take the commission much
farther toward his vision.
Note
1. Cowles, Alfred, III, Can Stock Market Forecasters Forecast?
Econometrica 1(3), July 1933, pp.309324.
22
Legacy andLater Life ofAlfred
Cowles III
While Alfred Cowles III was not college-trained in finance and economics,
he nonetheless attained some of the highest accolades of his field. He was
a Fellow of the American Association for Advancement of Science, and a
Fellow and Treasurer of the Econometric Society. He also was the princi-
pal author of the Cowles Monograph Common Stock Indexes, and contrib-
uted to Econometrica and the Journal of American Statistical Association.
Some of his publications include Can Stock Market Forecasters Forecast?,
a paper read before a joint meeting of the Econometric Society and the
American Statistical Association, Cincinnati, Ohio, 31 December 1932.
This article was subsequently reprinted in Econometrica.1
Cowles also wrote Analysis of 4 Years of Forecasting by 41 Advisory
Services and Publications,2 and wrote, with Herbert E. Jones, Some a
Posteriori Probabilities in Stock Market Actions.3 Other Econometrica papers
included Stock Market Forecasting,4 and A Revision of Previous Conclusions
Regarding Stock Price Behavior.5
His Cowles Commission Monographs included Common-Stock
Indexes, 18711937,6 Common-Stock Index, 2nd edition,7 and Supplement
to Common-Stock Indexes for 1939 and 1940.8

DOI10.1057/978-1-137-34137-2_22
Cowles was also dedicated to other causes. He was a trustee of the

Chicago Historical Society, and director at the Chicago Tribune. His phil-
anthropic work included efforts as a trustee and treasurer for the Illinois
Childrens Home & Aid Society, director of both the Home for Destitute
Crippled Children and the Chicago Maternity Center, and director and
treasurer of the Passavant Memorial Hospital. In Colorado Springs, he
was a trustee at Colorado College and a director at the Institute that
helped save his life.
Notes
1. Cowles, Alfred, III, Can Stock Market Forecasters Forecast?
Econometrica 1(3), July 1933, pp.309324.
2. Cowles, Alfred III, Analysis of 4 Years of Forecasting by 41 Advisory
Services and Publications, Stock Market Technique, ed. by Richard
D.Wychoff, Vol. 2, No. 2, April 1933.
3. Cowles, Alfred III and Herbert Jones, Some a Posteriori Probabilities
in Stock Market Actions, Econometrica, (July 1937), 5(3): 280294.
4. Cowles, Alfred III, Stock Market Forecasting, Econometrica, July
October 1944, pp.206214.
5. Cowles, Alfred III, A Revision of Previous Conclusions Regarding
Stock Price Behavior, Econometrica (October 1960), 28(4):
pp.909915.
6. Cowles, Alfred III, Common-Stock Indexes, 18711937, 1st edition.
Bloomington: Principia Press, Inc. Bloomington, 1938.
7. Cowles, Alfred III, Common-Stock Index, 2nd edition, Principia Press,
Inc., Bloomington, 1939.
8. Cowles, Alfred III, Supplement to Common-Stock Indexes for 1939 and
1940, University of Chicago Press, Chicago, 1940.
23
The Early Life ofRagnar Frisch
While Cowles and his scholarship were distinctly American, two of the
greatest influences on the Cowles Commission were distinctly Norwegian.
This tradition began with Ragnar Frisch.
The family name Frisch is German in origin, but the family has lived
in Norway for almost four centuries.
In the early summer of 1623, two children were herding cattle along a
pathway on Gruvesen hill near present-day Kongsberg, Norway. At that
time, the town, located about 50 miles west and south of Oslo, was part
of the Kingdom of Norway and Denmark, under the monarch Christian
IV.The ox the children were using to help herd their cattle rubbed against
the mountainside and revealed a large shiny stone. The children, Helga
and Jacob, brought the shiny stone to their father, who melted it down
and took it into the nearby town of Skien in Telemark County to sell. He
fetched such a low price for it that the local police became suspicious it
might be stolen. The father was given a choiceto be arrested to tell the
authorities where he found what turned out to be pure silver from what
would become one of the worlds richest mines.

DOI10.1057/978-1-137-34137-2_23
Understanding its economic potential, the King came to Telemark

County the next year and declared a new town of Kongsberg. The silver
mines that grew out of the find are located five miles further west of the
town.
The Kings Mine and its adjacent complex of tunnels and caverns
yielded almost three million pounds of silver between 1623 and its clos-
ing in 1957. At its peak, the 80 mines that represented the complex was
the largest employer in Norway and supplied more than 10 % of the
Kingdoms gross domestic product over its lifespan. More than 4000
workers mined the silver in its heyday. The mine also attracted workers
from around Europe who were seeking better jobs. Kongsberg also, quite
naturally, became the location of Norways official mint (Fig. 23.1).
Christopher Frisch was born in 1615 but traveled as a young man
to the Kingdom to work the mines. King Christian IV had asked the
Electoral Prince of Saxony to send a team from the Mining Academy
in Freiberg, Saxony, to assist in the development of the new mines near
Kongsberg. Christopher arrived shortly after that request in 1630.
Pedigree Chart for

Ragnar Frisch
Anthoni Olsen Frisch Ole Povelsen Frisch
Povel Antoniusssen b: 1745
Frisch m: Anna Hansdatter Lia
b: 1790
Antonius Povlsen m: Annichen Willum Bottner
Frisch d: Willumsdatter
Bothner
b: 14 Dec 1826 in
Kongsberg, Buskerud,
Norway Hermand Willumsen Willum Bothner
m: Christine Bothner
d: 1916 Hermasdatter Bottner b:
b:
Anton Frisch d:
b: 1865 in Kristiania,
Norway
m: Othilie
d: 1928 b:
d:
Ragnar Frisch
b: 03 Mar 1895 in Oslo,
Norway
m:
Herr Kittilsen
d: 31 Jan 1973 in Oslo,
Norway b:
m:
d:
Ragna Fredrikke
Kittilsen
b: 1860 in Norway
d: 1936 in Oslo,
Norway
Fig. 23.1 Ancestry of Ragnar Frisch

23 The Early Life ofRagnar Frisch 203
There he started a family, which included a son Petter Christopherson

Frisch (16401703). In turn, Paul Pettersen Frisch (16701730) married
Anne Antonisdatter Nolt, whose father Antonius (164077) had also
migrated from Germany to work the mines. Paul and Anne had a son Ole
Povelsen Frisch (170079), who married Anna Hansdatter Lia (170471)
and had a son together named Anthoni Olsen Frisch (17451801).
Anthoni Olsen Frisch and his wife, Annichen Willumsdatter Bothner,
were the paternal great-grandparents of Ragnar Anton Kittil Frisch. The
son of Anthoni and Annichen produced a son, Povel Antoniussen Frisch
(1790?). He and his wife Christine had a son of their own, Antonius
Povlsen Frisch (18261916), who realized quite quickly that processing
the mineral and making jewelry from gold and abundant silver was a
safer and economically steadier livelihood. In 1856, Antonius, Ragnars
grandfather, established a jewelry workshop in Kristiania, Norway.
In turn, the son of Antonius and his wife Othilie were increas-
ingly enjoying a more comfortable lifestyle for their son, Anton Frisch
(18651928), and his eight siblings. Anton Frisch assumed the family
business. He too had expected his only son to someday do so in turn.
The Arrival ofRagnar Frisch

Young Ragnar Anton Kittil Frisch was born to Anton and his wife, Ragna
Fredrikke Kittilsen (8 July 18581936), on 3 March 1895in Christiana,
Norway, now named Oslo. He drew has family names from both his
fathers and mothers sides. As the son of a skilled craftsman in the heart
of Norway, he was raised and schooled well, but his father had always
hoped hed follow in the family footsteps. When Ragnar was in his late
teens, his father arranged to have him apprentice in the trade with the
David Andersen jewelry workshop.
However, Ragnars mother had an alternative plan. She convinced her
husband to let Ragnar simultaneously study economics at the University
of Oslo as this seemed like the course of study Ragnar could complete
the quickest. By 1919, Ragnar had completed his economics degree, with
distinction, and, by the following year, he also had his jewelers qualifica-
tion in hand. He began to work at his fathers workshop.
By then, though, Ragnar had become fascinated with the interplay

between mathematics and economics. He applied for and was offered
a university fellowship that allowed him to study these two subjects in
England and France. Upon his return in post-Great War Norway in 1923,
he recognized that his fathers business was suffering financially and his
better option for a livelihood may indeed be the decision sciences. He
began studying and publishing in the area of mathematical statistics, and
received his PhD in 1926. Almost immediately, Frisch became a leader
among the burgeoning field of mathematical statistics and econometrics,
despite his relatively young age and his desire to remain in Norway to
build the discipline at home.
24
The Times ofRagnar Frisch
By the time Frisch began to lead the development of the new field of
econometrics, Ronald Fishers Handbook had been well reviewed by Harold
Hotelling, and statistics groups were beginning to sprout across the USA,
especially at the major land-grant universities that contained in their mission
the need to perform research in support of agriculture. With a fresh PhD in
hand by 1926, Frisch was about to join that fray among other founders of
econometrics. In 1927 he was offered a Rockefeller Foundation scholarship
to travel to the USA.One of his first collaborations came when he arrived at
Yale University in New Haven, Connecticut, to work with the great mind
Irving Fisher, just as Cowles was encouraging Fisher to bring to fruition the
vision of an Econometric Society.
This year in the USA proved most influential for both Frisch and sta-
tistics and finance. As discussed earlier, it was his meeting with Fisher that
gave rise to the new Econometric Society that Alfred Cowles III would
later underwrite.
Many of the leading finance, economics and statistical theorists of
the day were trained first as physicists or engineers. This included the
great mind Irving Fisher, and many of his statistics contemporaries,
from Ronald Fisher to Harold Hotelling. Frisch shared that belief the

DOI10.1057/978-1-137-34137-2_24
cornerstone of modern finance and econometrics must be in the hard

sciences rather than political philosophy. His 1926 influential article,
Sur un problme d'conomie pure,1 established econometrics as a tool and
theory at the intersection of mathematics, statistics and economics. He
explained:
Intermediate between mathematics, statistics, and economics, we find a

new discipline which for lack of a better name, may be called econometrics.
Econometrics has as its aim to subject abstract laws of theoretical political
economy or pure economics to experimental and numerical verification,
and thus to turn pure economics, as far as is possible, into a science in the
strict sense of the word.
In the article, Frisch spelled out an axiomatic approach to some of the

pressing analytic issues of the day. He then published a series of articles
on the evolving methodology of econometrics and statistical methods in
time series analyses. Not only did those works firmly establish econom-
ics as a science, and econometrics as an important tool within finance
and economics, but he also formalized the difference between the static
analysis performed on events at a given time and the crucially important
dynamic analysis that is essential for finance theorists to demonstrate
how financial variables evolve over time. He was also the first to demon-
strate the different roles, and label thusly econometrics, microeconomics
and macroeconomics.
Of course, Irving Fisher had made his life interjecting the importance
of the time variable, and the role it plays in interest rates, rates of return
and inflation. Clearly, when the two met in the USA in 1928, they were
already destined to be kindred spirits.
By early 1928, as Frisch had been visiting Princeton University, he
met Charles Frederick Roos of Cornell University, who was also visiting
Princeton as a Fellow of the National Research Council. Roos was also
chairing a section of the American Association with the Advancement of
Science called Section K, which represented economics, sociology and sta-
tistics. Roos was a mathematician who was almost instantly fascinated with
Frischs vision to formalize the mathematical underpinnings of economics
and finance and to develop the new methodology of econometrics.He and
Roos agreed that there was a need to develop an Econometric Society, and
decided to travel to Fishers home in April of 1928 to solicit his help.
Fisher was at first pessimistic about the possibilities as his efforts to do
the same over the past two decades had garnered little momentum. Fisher
asked Frisch and Roos to name a hundred scholars who would be willing
to participate. Perhaps he surmised that Frisch, from Europe, and Roos,
from mathematics, would be hard-pressed to reach such a critical mass
for a new Society.
Frisch and Roos came up with a number of names very quickly, but,
after only a few days, hit upon the wall economists label diminishing
marginal returns. When they came up with only about 70 names, Fisher
quickly added a dozen of his own, and the three men agreed that they had
enough to begin their joint efforts.
In the winter of 1930, the three main associations, the American
Economic Association, Section K of the American Association for the
Advancement of Science and the American Statistical Association all met
in Cleveland. Earlier in 1930, Frisch, Roos and Fisher had sent out invita-
tions to attend a meeting while in Cleveland. Frisch, who had returned to
teach at the University of Oslo following the completion of his Rockefeller
Foundation scholarship, happened to be in the USA as a visiting profes-
sor at Yale, was in attendance in Cleveland, and joined Roos, Fisher and
13 other scholars from the USA and Europe at the Cleveland hotel on 29
December 1930 to inaugurate the new Econometric Society.
Joseph Alois Schumpeter (8 February 18838 January 1950), then of
the University of Bonn, chaired the meeting, and Fisher was elected its
first president. Frisch produced the draft of the Societys constitution,
and a series of meetings, in Lausanne, Switzerland, in September of 1931,
and Washington, DC, in December, were agreed upon. By the end of
that year, 173 members were elected.
Cowles approached the new society on the behest of his Colorado
Springs colleague, Harold T.Davis, the mathematics professor at Indiana
University who spent summers in Colorado. Davis knew of the fledging
society and thought their interests aligned perfectly with Cowles desire
to bring measurement and science to economics and finance. Fisher was
elated to see that Cowles could help resolve the Econometric Societys
lofty goals but meager dues and budget.
Davis arranged a meeting with Cowles and members of the society,

including Harold Hotelling, in NewYork City in late October 1931 just
a few days after Cowles met with Roos and Fisher at Fishers home to
sketch out a plan for the larger group. From this critical mass of almost
a dozen Society members, it was agreed that the president and secre-
tary, Fisher and Roos, would send a proposal out to its members. Most
embraced the concept, but some were wary. It was decided that Frisch
should come to meet in Colorado Springs to meet with Cowles and rep-
resent the European contingent of the Society. Frisch met and stayed
with Cowles for a week, and, as he returned to Norway, met briefly with
Roos and Fisher to affirm his agreement that Cowles and his possible
Commission could add much to the Society.
Just a few months later, by February of 1932, an advisory council for
the Cowles Commission was assembled, and, by the following summer,
its first major research project, the construction of a database of stock
prices, including earnings, dividends, recapitalizations and splits, would
be constructed. The Cowles Commission was chartered in Colorado on
9 September 1932. Its organizational purpose was stated as:
to educate and benefit its members and mankind, and to advance the sci-
entific study and development of economic theory in its relation to
mathematics and statistics.
Cowles was elected a trustee, a laboratory was renovated and the eco-
nomics faculty of Colorado College were enlisted to create the organiza-
tion necessary to pursue its first projects. Cowles provided an annual
budget of $12,000.
The inaugural issue of the journal Econometrics came out in the first
month of 1933, with Frisch framing its editorial. Schumpeter offered the
following introduction to the journal:
The common sense of the program of our Society centers in the question:
Can we not do better than this? Surely it would not be a reasonable policy
to sit down and wait till, in the end, things find their level by themselves,
and meanwhile to allow econometricians of all countries to fight single-
handed their uphill battle. What we want to create is, first, a forum for
econometric endeavor of all kinds wide enough to give ample scope to all
possible views about our problems, yet not wide enough to be hampered by
the weight of an audience which keeps discussion in the ante-rooms of the
real points at issue, and forces every speaker or writer to go every time over
the same preliminaries.
On this forum, which we think of as international, we want secondly to

create a spirit and a habit of cooperation among men of different types of
mind by means of discussions of concrete problems of a quantitative and, as
far as may be, numerical character. The individual problems themselves are,
as it were, to teach us how they want to be handled. We want to learn how
to help each other, and to understand why, and precisely where, we our-
selves, theorists, statisticians, collectors of facts, or our neighbors, do some-
how not quite get to where we want to be. No general discussion on
principles of scientific method can teach us that. We have had enough of it.
We know it leads nowhere, and only leaves the parties to the contest where
they were before, still more exasperated perhaps by those gentle rudenesses
it is customary to administer to each other on such occasions. No general
arguments of this kind ever carry conviction to the man who means real
work. But, confronted with clear-cut questions, most of us will, we hope, be
found to be ready to accept the only competent judgment on, and the only
relevant criterion of, scientific method, that is the judgment or criterion of
the result. There is high remedial virtue in quantitative argument and exact
proof. That part of our differences no matter whether great or small
which is due to mutual misunderstanding, will vanish automatically as soon
as we show each other, in detail and in practice, how our tools work and
where they need to be improved. And metaphysical acerbity and sweeping
verdicts will vanish with it. Theoretic and factual research will of them-
selves find their right proportions, and we may not unreasonably expect to
agree in the end on the right kind of theory and the right kind of fact and
the methods of treating them, not postulating anything about them by pro-
gram, but evolving them, let us hope, by positive achievement.
We should not indulge in high hopes of producing rapidly results of imme-

diate use to economic policy or business practice. Our aims are first and
last scientific. We do not stress the numerical aspect just because we think
that it leads right up to the core of the burning questions of the day, but
rather because we expect, from constant endeavor to cope with the difficul-
ties of numerical work, a wholesome discipline, the suggestion of new
points of view, and helps in building up the economic theory of the future.
But we believe, of course, that indirectly the quantitative approach will be
of great practical consequence. The only way to a position in which our
science might give positive advice on a large scale to politicians and busi-
ness men, leads through quantitative work. For as long as we are unable to
put our arguments into figures, the voice of our science, although occasion-
ally it may help to dispel gross errors, will never be heard by practical men.
They are, by instinct, econometricians all of them, in their distrust of any-
thing not amenable to exact proof.2
With the Cowles Commission, an movement was born and a founda-

tion for the scientific description of finance was established.
Notes
1. Frisch, Ragnar, Sur un problme d'conomie pure (On a problem in pure
economics). Norsk Matematisk Forenings Skrifter, Vol. 1, No. 16, 140, 1926.
2. Schumpeter, Joseph, The Common Sense of Econometrics, Econometrics,
1, 1, 1932, pp.512.
25
Ragnar Frischs Great Idea
The rousing editorial of Joseph Schumpeter was not the only immortal
contribution to the first edition of Econometrica. Also in the volume
was a paper by Ragnar Frisch and his agricultural economist colleague
F.W.Waugh that both postulated and solved a problem that is both some-
what unique and ubiquitous in financial and economic data.
To then, Frisch was well versed in the methods of mathematical sta-
tistics in his day, but also appreciated the challenges of extending these
same tools to financial analyses. Frisch especially tried to understand the
vagaries of the business cycle. It is in this context that he differentiated
between the microeconomics of individual markets, for which much of
the pre-existing economics literature was devoted, to the macroeconom-
ics of the aggregate economy, which often suffers in opaqueness due to
the very aggregation. A few years later, the Great Mind John Maynard
Keynes (5 June 188321 April 1946) offered an alternative model of the
macroeconomy and, for the first time, successfully explained the poten-
tial persistence of economic depressions.
In fact, some of Keynes concepts on the functioning of the macro-
economy seem to follow from Frisch. By 1929, just as global econo-
mies were just showing hints of vulnerability, Frisch was one of the first

DOI10.1057/978-1-137-34137-2_25
to understand the limitations of traditional classical economics, and

of much of statistics at the time, and the special needs for our better
understanding of financial trends. Frisch explained that finance and
investment decisions are made over time, but most traditional analysis is
made at a point in time. To describe the significance of this difference, he
used the analogy of an economist who records the price and quantity of
a market in equilibrium over a period in time. On each card, he records
the price quantity pair at each point in time over the period. From this
analogy, Frisch describes the importance of dynamic analysis. He noted:
When (the economist) believes he has obtained sufficiently large material,

he collects the cards. The description of the phenomena is finished and the
analysis begins. If during the analysis he disregards the time sequence of the
cards, if in other words the analysis is of the kind that he might as well
shuffle the cards before beginning the analysis, then the analysis is static.
If, on the other hand, he designs the analysis so as to make the time
sequence of the cards a factor of special importance, the analysis is dynamic.
In the former case, therefore, time is just a kind of auxiliary variable. In the
latter case, the time pattern itself is of central importance.1
Clearly, Frisch had an appreciation of the importance of such dynamic

analysis over time. Indeed, finance by its very nature is dynamic. A few
years later, when the major world economies were in the grips of the
first global depression, Frisch further explained why this dynamic nature
especially important. In 1933, he wrote Propagation Problems and
Impulse Problems in Dynamic Economics,2 in which he constructs the
first extensive macroeconomic model for the economy. He combined
the demand for money necessary to fuel consumption and investment,
consumption as a function of the amount of money available and invest-
ment which in turn leads to the growth of consumption. This interac-
tion between consumption and investment was in line with, but much
more complex than, Irving Fishers groundbreaking analyses of consump-
tion and investment, and predated Keynes subsequent demonstrations
that insufficient consumption and investment can lead to recessions and
depressions. From his analysis, he was able to demonstrate, for the first
time, that random shocks to the economy could produce wave-like busi-
ness cycle fluctuations.
From these experiences, Frisch was one of the first among the Cowles
Commission scholars to recognize that the tools of mathematical sta-
tistics as developed for random observational errors in astronomy and
biology must be adapted for the special challenges of econometrics and
finance. The statistics to then assumed that errors were drawn from an
identical, often normal, distribution, and each was independent of other
measurement errors. In other words, there were no discernable trends in
the errors.
Second, it is assumed that the explanatory variables were orthogonal
to each other. In other words, these variables were uncorrelated with each
other. However, in time series data, it is often the case that the size of
errors grows as time progresses and the size of the explanatory variables
increases, which causes a problem called heteroscedasticity. Also, a time
trend shared by the various explanatory variables may cause them to be
correlated with each other.
In the latter case, it is a challenge to attach this common trend to any
one of the explanatory variables. Frisch asked if this problem would then
distort the coefficients and their reliability associated with the estimations.
In a brilliant paper published with the American agricultural econo-
mist F.V.Waugh (18981974) in the very first edition of Econometrica
in 1933, Frisch resolved this dilemma. He demonstrated that the coef-
ficients of estimation in a linear least squares regression remain the same
if not detrended of time, or if detrended separately. This proof lent confi-
dence to scholars using the primary tool of the day to analyze the prevail-
ing economic and finance problems of the day.
Consider a linear regression model in which a set of dependent obser-
vations Yt over time are postulated to depend on a set of independent
variables Xt over time, where the independent variable vector at each
point in time also includes the constant unity term. Let there also be a
time trend t. Then, the relationship is postulated to be:
Yt = b Xt + a Tt + t
Frisch and Waugh proposed that the time trend be first removed sepa-
rately from both the dependent and the independent variables through a
series of simple linear regressions:
Xit = ci 0 + ci1T + itx

Yt = c0 + c1t + . y
t
Once these subregressions are completed, the residuals ixt and ty ,

calculated by subtracting the estimates from the observations of the inde-
pendent and dependent variables, contain the same information as the
original variables, but with the time trend, or, as M.Lovell pointed out
in 1963, any other seasonal or dummy variable trends, removed.3 We can
then construct two modified variables based on the means of the original
explanatory variables plus the detrended error terms:

Xi*t = X i + e ixt

Yt* = Y i + e ty .
Finally, we can run the detrended regression:
Yt* = b * Xt* + e t* .
Frisch and Waugh showed, and Lovell extended the proof, that the
coefficients and * will be identical in either case. This provided the
justification necessary to apply the various tools of mathematical sta-
tistical regression modeling to the more complicated realm of finance
and econometrics, and allowed a vast expansion of the foundations of
econometrics.
To see how Frisch and Waugh proved this, and how Lovell extended
the method in 1963 to also include the use of dummy variables, lets
consider a simple ordinary least squares regression with only one inde-
pendent variable. Let,
Yt = b X t + a Tt + e t .
We will compare the coefficient from this regression with the corre-
sponding coefficient * from the following regression without the explicit
common trend:
Yt = b * X t + e t* .
Let us first run a regression of the independent variable Y on the sec-

ond set of explanatory variables, which could perhaps be a time trend
that affects both Y and X. We will also suppress the index t, for simplicity.
Then, we can run the following two regressions to remove this common
trend from both the X and Y observations:
Y = aY T + e Y
X = aXT + e X .
These two regressions cleanse the observations of the common trends.

Then, we can construct a second set of cleansed variables X* and Y* from
the means of X and Y and the remaining residuals:

Y* = Y + eY

X* = X + e X .
We now have two expressions for Y and one for X:
Y = b X + aT + e
Y = aY T + e Y
X = aXT + e X .
Equating the two expressions for Y gives:
b X + a T + e = aY T + e Y .
Substituting into the equation above, the expression for X then gives:
b (a X T + e X ) + a T + e = a Y T + e Y .

Collecting terms yields:

e Y = be X + ( ba X + a - aY ) T + e .

Before we conclude the proof, we use a pair of properties from least

squares regressions. They are:
Property 1 Least squares regressions produce residuals that are orthogo-

nal too, or uncorrelated with, the explanatory variables.
Property 2 A regression on a subset of explanatory variables will pro-
duce coefficients that are zero if these explanatory variables are uncorre-
lated with both other explanatory variables and the dependent variable.
This first property implies that both X and Y are uncorrelated with
the trend variable T. Then, the second property implies that all the coef-
ficients in the brackets of the collected terms equal zero, and:
e Y = be X + e .
If we add to each side of the equation the result that:

Y = b X.
we find that:

Y + eY = b X+ e X + e

Y = b X + e.
* *
Recall the alternate regression without detrending stated that

Yt = b * X t + e t* .
Thus, =*, and Frisch and Waugh established that the identical coef-
ficients with the same properties will be obtained whether or not com-
mon trends in the explanatory and independent variables are removed in
advance. This Frisch-Waugh-Lovell theorem greatly expanded the appli-
cability and utility of regression analyses.
With his theorem and an expanded intuition with regard to dynamic
analysis and time series results at hand, Frisch was the first to firmly place
econometrics, finance and time series analysis on their own unique founda-
tion that would prove indispensable for those associated with the Cowles
Commission. He had almost single-handedly created a new intellectual
thrust. It is perhaps no coincidence that his prodigy and Norwegian col-
league would continue on in this work in the USA as Frisch had long since
returned to Norway to build the tradition of sound economic analysis there.
Notes
1. Frisch, Ragnar, Statikk Og Dynamikk I Den konomiske Teori,
Nationalkonomisk Tidsskrift, Bind 3. rkke, 37, 1929, translated as
Statics and dynamics in economic theory, Structural Change and Economic
Dynamics, 3, 1992, pp.391401, at 323.
2. Frisch, Ragnar, Propagation Problems and Impulse Problems in Dynamic
Economics. (1933) In Economic Essays in Honor of Gustav Cassel. Reprinted
in R.A. Gordon and L.R. Klein, eds., Readings in Business Cycles. London:
Allen & Unwin, 1966.
3. Lovell, M., Seasonal Adjustment of Economic Time Series and Multiple
Regression Analysis. Journal of the American Statistical Association 58 (304),
1963, pp.9931010.
26
Legacy andLater Life ofRagnar Frisch
With this lofty beginning, and the combination of Frischs vision and
tenacity and Cowles funding, came to be both a new scholarly society
and perhaps the greatest research commission ever created in the social
sciences.
But, despite the great distance between Colorado Springs and Oslo,
Norway, Frisch nonetheless remained engaged in the journal and influ-
ential in the Commission. His American kindred spirit Roos was the
Commissions first director. Roos moved on in 1937, and was temporarily
replaced by Cowles Colorado Springs colleague Harold Davis. Davis and
Roos each helped direct Cowles and the Commission for the next couple
of years. Then, in 1938, the Commission convened Frisch, Marschak and
the University of Chicago business professor Theodore O.Yntema to try
to entice any of them into directing the Commission. Each felt Colorado
Springs isolation would be academically problematic.
Then, with the death of Cowles father in January of 1939, Alfred
Cowles III was required to relocate back to his familys business base in
Chicago. On 29 September 1939, one month short of the tenth anniver-
sary of the Great Crash that motivated much of the ensuing discussion,

DOI10.1057/978-1-137-34137-2_26
the Cowles Commission was chartered in Chicago. Yntema agreed to

serve as its new director.
With the nation at war in 1941, much of the work of the Commission
was reoriented toward wartime research. Yntema resigned in 1942 to
assist in the war effort in Washington, DC, and in 1943 Jacob Marschak
became its director. Marschak would supervise the most academically rich
period in the existence of the Commission, until the end of his term in
July 1948. Over the period, Marschak put the Commission on a highly
technical track, and succeeded in attracting a multitude of economists
and financial theorists who would go on to win almost a dozen Nobel
Prizes.
While Frisch could not be at the Commission in person, he was none-
theless well represented. Certainly, Marschak shared Frischs rigor and
academic sensibilities. One of the first appointments Marschak made
was to a young student of Frisch from the University of Oslo. Trygve
Haavelmo would go on to advance the econometric tradition, for the
Society and for the discipline.
This tradition pioneered by Frisch was one that evolved in the after-
math of the Great Crash, and the suffering of the Great Depression.
Frisch believed econometrics could be used as a tool to improve markets
and the economy. Indeed, he felt that econometricians had an essential
role in the creation of better markets, government and public policy, not
unlike the charge Schumpeter asserted for the Society. Frisch stated that
the econometrics discipline should engage in describing the economy,
investigating its function in a rational way, predicting its outcome, aid-
ing in better understanding of human decision-making, and engineering
social change to create more resilient and prosperous economies.
Frisch did not confine himself to the establishment of the foundations
of modern economics and finance, though. He was also one of the move-
ments leading econometricians. With his colleague Frederick W.Waugh,
he developed the Frisch-Waugh theorem, which freed econometricians
from some of the concerns that estimators are orthogonal, or mutually
independent. If the estimators are correlated, these estimates may each
have higher estimated variation, but their estimates will nonetheless
remain unbiased.
26 Legacy andLater Life ofRagnar Frisch 221
Frisch suffered first the vagaries of the Great Depression, and then
World War II in ways few can imagine. Indeed, he was fortunate to sim-
ply survive the war, though. In October of 1943, the Nazis, who had
occupied Norway, interred Frisch to a concentration camp, where he
would spend a year. He shared this insult with a number of other profes-
sors and associates of his Institute.
Upon his release from the Nazi prison in the autumn of 1944, he was
still unable to communicate with the USA through regular channels for
another year. One of the first correspondences Frisch received was in July
of 1945. A letter from his prodigal student, Trygve Haavelmo, described
success Haavelmo was having in his residency in the USA during the
war years. Haavelmo had just published a major work on the probability
approach to econometrics, and noted:
I must have been quite likely with (the article) as the Cowles Commission
with Marschak in charge, took up the methods suggested in the article and
now has a special group working on further corroboration I attended a
conference about this work in Chicago this winter. Hotelling and others of
the big boys were also invited, and it was thus quite fun.
Frisch was a devoted and generous mentor, and was pleased to see
his young prodigy escape the fate of imprisonment, and, at the same
time, help redefine modern econometrics. He recognized that neither
economics nor politics can solve social problems in isolation. Instead, the
political bodies must work with the learned societies to solve problems.
This was consistent with his Scandinavian colleague Knut Wicksell (20
December 18513 May 1926), who established the Stockholm School
in this mold. Frisch devoted much of his life after the war to assist the
Norwegian government in these lofty technocratic goals.
His devotion to a mix of practical and theoretical problems earned Frisch
a number of recognitions. He received the Accademia Nazionale dei Lincei
award in 1961, and the first Nobel Memorial Prize ever awarded, in 1969,
which he shared with Jan Tinbergen (21 April 19039 June 1994). He also
left perhaps more unfinished manuscripts than ones he published. He was a
notorious perfectionist, which meant he often failed to polish and publish
work that lesser scholars would have nonetheless submitted.
Frisch edited the journal Econometrica for 21 years. The annual Frisch
Award is offered every two years in his honor for the best paper in
Econometrica. There is also a Frisch Medal, and a Frisch Center named in
his honor at the University of Oslo.
He enjoyed a fulfilling personal life as well. In 1920, he had married
Marie Smedal, and they shared a child, Ragna. His wife died in 1952,
and he subsequently married an old college friend, Astrid Johannessen.
She had graduated from the University of Oslo his same year. The daugh-
ter of I.M.Johannessen, a shipping magnate from masted ship days, and
his wife Julie Caspersen, Astrid grew up in relative comfort. These friends
of Ragnars parents had produced a daughter for whom Ragnar was lov-
ingly devoted.
Together, Ragnar and Astrid enjoyed Ragnars granddaughter, his
interests in mountain climbing and beekeeping, and his amateur stud-
ies of the eugenics of bees. He admitted his interest in genetics, and its
related statistics may have been more of an obsession than an avocation.
27
The Early Years ofTrygve Haavelmo
In the 1800s, aside from a few centers of government and company

towns, much of Norway remained rural. One such community, Gol, in
the county of Buskerud, is a farming and forestry community about an
hours drive northwest of Oslo. There, a family named Olsen was headed
by Halvor (1853?) and his wife Ingeborg (1857), formerly Eikro.
The couple had four children: Ole Halvorson (18791958), son of
Halvor, Barbro (18841953) and Birgit (190085) Halvorsdatter; and
Halvor Haavelmo (18861967). The surnames of these children either
reflected that they were the son of their father or the daughter of their
mother, or, for the second son, a conjunction of the family name and the
name of their farm. Hence, their final son, HalvorHaavelmo did not reflect
the family name, but rather the name of their home and farm.
By the time Halvor Haavelmo and his wife Jenny Gunderson married
in 1910, the government had encouraged rural families to depart from
past traditions and instead adopt a single paternal surname for all their
children. In 1923, Norways government legislated this paternal surname
custom. Hence, both of the two boys born to Halvor and Jenny, Sverre

DOI10.1057/978-1-137-34137-2_27
Pedigree Chart for

Trygve Haavelmo
Halvor Olsen
b: 1853 in <Gol, Buskrud, Norway>
Halvor Haavelmo
m: 1879
b: 1886 in d: ; Y
Hvelmoen,Gol,Hallingdal,Norway
m: 1910
Ingeborg Eikro
d: 1967 in
Skedsmo,Akershus,Norway; Y b: 25 Feb 1857
d: ; Y
Trygve Haavelmo
b: 13 Dec 1911 in Skedsmo,
Norway
m:
d: 26 Jul 1999 in Oslo; Y Gunderson
b:
Jenny Gunderson
m:
b: 1890 in d: ; Y
Skjetten,Skedsmo,Akershus,Norwa
y
d: 1923 in
Skedsmo,Akershus,Norway; Y
Fig. 27.1 Ancestry of the Haavelmo family
(191384) and Trygve (13 December 191128 July 1999) retained the
same Haavelmo family name (Fig. 27.1).
Their father, Halvor, grew up on a farm named Hvlmoen in Gol,
but had the opportunity to complete school and attend the Elverum
Teacher Training College. He passed the teaching exams in 1907 and
took a teaching job in his village of Gol. A year later, he took a job in
Skedsmo, about ten miles northeast of Oslo, where he spent the rest
of his career.
Halvor was a successful and well-regarded teacher and principal in
Skedsmo. He also was appointed mayor of Skedsmo for two terms,
and sat for many years on its school board. He maintained an interest
in athletics and encouraged sports for his sons as well. The younger
son, Sverre, was a champion ski jumper at a ski hill Halvor helped
establish.
Halvor became the town historian and published a number of volumes
on local history. His children were provided every opportunity for a good
education.
27 The Early Years ofTrygve Haavelmo 225
The Arrival ofTrygve Haavelmo

The firstborn child of Halvor and his wife, Jenny, was born on 13
December 1911 in Skedsmo. While his younger brother had a strong
interest in athletics, Trygve was more reserved and studious. His strong
academic strengths allowed him to attend Oslo Cathedral School, one of
the most elite schools in Norway, with a tradition dating back to its found-
ing in 1153. It was the school of kings (Harald V), the famous painter
of The Scream, Edvard Munch (18631944), the exceptional mathemati-
cians, Caspar Wessel (17451818) and Niels Henrik Abel (180229),
and the Nobel Prize winner Trygve Haavelmo. One of the oldest schools
in the world, it retains a strong dedication to the liberal arts.
Trygve went on to study at the University of Oslo in 1930, not long
after Ragnar Frisch had received his PhD at Oslo and had returned from
his Rockefeller Scholarship in the USA.Like Frisch, when it came time
to attend college, the elder son of Halvor Haavelmo was determined to
find a course of study at the University of Oslo that would allow him to
graduate quickly. And, like Frisch a handful of years earlier, he settled
on economics.
At Oslo in the early 1930s, Haavelmo gravitated immediately toward
the Frisch, who was 15 years his senior, but only a decade more advanced
in his studies because of Frischs familys initial indecision whether Frisch
should pursue his studies over the family jewelry business. Frisch and
Haavelmo also shared a loyalty to Norway, gentle personalities, a strong
quantitative orientation, but also with a firm theoretical foundation, and
a determination to build their department for economic analysis at the
University of Oslo. Perhaps Frisch was more evangelic in his agenda to
extend better public policy analysis to a wider audience, while Haavelmo
was more circumspect and studious. But, both seemed remarkably simi-
lar in their deep understanding of the unique problems in econometric
and financial quantitative analysis.
Upon his graduation in 1933, Haavelmos mentor Frisch nominated
him to join the Institute of Economics, which Frisch ran. There he was
assigned as Frischs assistant.
In these years at Oslo, Frisch traveled and visited the USA extensively.
By 1936, Haavelmo was ready to pursue advanced study in statistics,
and attended University College London, where he studied and worked
directly with Egon Pearson, the son of Karl Pearson. During his stay at
the University College London, he was undoubtedly drawn somewhat
into the battle of the titans, Egon Pearson and Ronald Fisher. While
Haavelmo remained loyal to his mentor Pearson, and Pearsons brilliant
colleague, Pearsons co-developer of the likelihood ratio test, Haavelmo
maintained a strong geometric intuition about statistics, which was much
more closely aligned with Fisher.
Haavelmo also studied in Oxford, Berlin and Geneva, Switzerland,
before he took on his first academic position at the University of
Aarhus in Denmark. He remained there for a year before he was
afforded the opportunity to visit and network in the USA in 1939 on
a Rockefeller Foundation scholarship. Following completion of his
Rockefeller Foundation scholarship, he became associated with the
Cowles Commission, and remained in the USA to work on behalf of
the Norwegian governments Nortraship (Norwegian Shipping and Trade
Mission) in NewYork City for the remainder of the war.
28
The Times ofTrygve Haavelmo
In 1947, Haavelmo returned to Norway to take up a position alongside

Frisch at the University of Oslo. He spent the balance of his career teach-
ing at Oslo, with Frisch as his colleague.
It was his years in the USA before his return, though, that established
Haavelmo as one of the fathers of modern econometrics, along with
his mentor Frisch. There he published results from his thesis in a 1943
Econometrica article entitled The Probability Approach in Econometrics.
By the war years, econometrics, especially as it was developed at Cowles,
was immersed in the estimation of economic models and hypothesis test-
ing of the significance of these estimates. Haavelmos thesis demonstrated
that the state of analysis in econometrics at the time was misleading. To
reduce complex interactions of various markets into one reduced-form
equation was problematic.
Instead, Haavelmo developed a new paradigm to such econometric
analyses in his years in the USA.He did so by applying more advanced
tools from mathematical statistics he had gleaned both in his interac-
tions with Jerzy Neyman and Egon Pearson, and in his discussions while
at the Cowles Commission. His new theory of economic systems and

DOI10.1057/978-1-137-34137-2_28
their estimation was perhaps the single most insightful contribution to

modern econometric theory and practice.
Indeed, once various members of the Cowles Commission obtained
a copy of Haavelmos PhD dissertation, they invited him to join the
Commission and set up a special working group to understand and fur-
ther his most important contribution.
Much of the interest the Cowles Commission expressed in Haavelmos
research can be attributed to the influence of Jacob Marschak. Marschak
was universally renowned for his ability to spot and mentor young academic
talent, and to recognize brilliant concepts. Many of these concepts he devel-
oped in his own mind and freely gave them to others to more fully explore,
such as the application of the first and second moment mean and variance
measure of risk, which eventually formed the basis of the Great Minds Harry
Markowitzs (24 August 1927) modern portfolio theory, James Tobins (5
March 191811 March 2002) portfolio separation theorem and William
F.Sharpes (16 June 1934) CAPM. Each of these groundbreaking theories
in finance were developed in or flowed out of the work of individuals associ-
ated with the Commission under Marschaks tutelage.
Marschak had come to know Haavelmo from Haavelmos NewYork City
days in World War II immediately after he completed his PhD in 1941. While
working on behalf of the Norwegian government in support of the war effort,
Haavelmo attended a weekend econometrics seminar sponsored by Marschak
and others. Immensely impressed with Haavelmos insights and intellect,
Marschak asked Haavelmo to join the Cowles Commission, even if Haavelmo
would be unable to physically reside at the Commission in Chicago. In fact,
despite his immense influence on the Cowles Commission research agenda,
Haavelmo was only in residence at Cowles in Chicago for about a year imme-
diately following the end of World War II and his obligation on behalf of
the Norwegian government. By March 1947, Haavelmo had returned to his
home country to take up a teaching position at his alma mater.
Haavelmos influence can be seen in a passage in the annual report for
the Cowles Commission written by Marschak in 1943. There he stated:
28 The Times ofTrygve Haavelmo 229
The method of the studies is conditioned by the following characteristics

of economic data and economic theory: (a) the theory is a system of simulta-
neous equations, not a single equation; (b) some or all of these equations
include random terms, reflecting the influence of numerous erratic causes in
addition to the few systematic ones; (c) many data are given in the form of
time series, subsequent events being dependent on preceding ones; (d) many
published data refer to aggregates rather than to single individuals. The statis-
tical tools developed for application in the older empirical sciences are not
always adequate to meet all these conditions, and much new mathematical
work is needed. To develop and improve suitable methods seems, at the pres-
ent state of our knowledge, at least as important as the publication of studies
on the general theory of economic measurements It is planned to continue
these methodological studies systematically. The available results of mathe-
matical analysis are currently applied and tried out in econometric investiga-
tions; conversely, new situations arising in the course of practical work present
new problems to the mathematician. It is intended to make this hand-in-hand
work the basis of the Commissions activities.1
Marschak was essentially reading from the Haavelmo script. In doing

so, the Cowles Commission was diverging from the original and more
simplistic methodology of Alfred Cowles III himself, and into break-
ing ground and establishing the foundation for all of econometrics
ever since. This was a period in which econometrics also diverged from
its roots in biological statistics. In the latter class of problems, cross-
sectional data did not present the same sort of problems that financial
and market data present. Such data was at a particular point of time,
and was typically not aggregated. When financial variables evolve over
time, and when economic data is aggregated, two types of problems
emerge, as described by both Frisch and Haavelmo. Multicollinearity
exists when one factor can influence multiple variables at once. In such a
case, these multiple variables share similar trends, which makes difficult
the researchers ability to pin the underlying trend down to one particu-
lar variable. The Frisch-Waugh theorem helped resolve this challenge.
Trygve Haavelmo helped resolve the otherthe problem of simultane-
ity and the identification problem.
Note
1. Christ, Carl F. (1994). The Cowles Commission Contributions to
Econometrics at Chicago: 19391955. Journal of Economic Literature 32
(1), 1994, pp.3059, at p.40.
29
Haavelmos Great Idea
Frisch had described implications of the statistical problems unique to

econometrics and finance in his paper published in the Nordic Statistical
Journal in his 1929 Correlation and Scatter in Statistical Variables and
also in his 1934 book Statistical Confluence Analysis by Means of Complete
Regression Systems.1 This work was influential on Haavelmo, who followed
up Frisch work with his Econometrica paper The Statistical Implications
of a System of Simultaneous Equations.2 The Haavelmo paper, at only
a dozen pages long, set the agenda for the Cowles Commission over the
next decade and econometrics ever since.
In that paper, Haavelmo described a three-equation representation
of the determination of national income, and the challenges in the
use of the traditional least squares regression model for its estimation.
In a consumption-led economy, the consumption equation, as postu-
lated first by Frisch and then more formally by the Great Mind John
Maynard Keynes, is the product itself of other underlying equations. It
was well known in the discipline that, were the consumption equation
not the product of other interactions, both the traditional least squares
and its maximum likelihood estimate would be the same, under mild

DOI10.1057/978-1-137-34137-2_29
assumptions. Indeed, recall that Gauss had derived the least squares
technique from a maximum likelihood perspective.
However, if one postulates that consumption is a linear function of
an intercept, likened to Keynes autonomous consumption term, and
an induced term that rises proportionally with income, and if, in turn,
income depends on the level of consumption spending, the simple linear
least squares model is violated because random errors arise both in the
simple equation and in the determination of income. Ronald Fisher had
treated such a generalization in his maximum likelihood statistics at the
beginning of the twentieth century. Haavelmo expanded this methodol-
ogy of maximum likelihood estimation to both highlight when the least
squares model creates biased estimations, and how the method of maxi-
mum likelihood can instead be employed.
As a brief example of Haavelmos insights, consider the interaction
between the aggregate supply of goods and services in an economy and
its aggregate demand. The supply comes from the aggregated decisions
of millions of market participants who formulate their decisions based in
part on the income they would earn from their sales, and the factor pay-
ments they must pay to the resources they would employ.
Another equation might describe how the recipients of these factor
payments use their income to purchase these same goods and services.
In equilibrium, these two equations of aggregate demand and aggregate
supply would intersect at an aggregate price and income.
The estimation of this system would provide perhaps a corresponding
income at the intersection of these two equations. But, one discerned
intersection point could actually be the product of many aggregate
demand and supply curves. The mere identification of the equilibrium
intersection point, which is subject to some random error, sheds little
light on the precise nature of the two underlying curves. Hence, a wide
variety of parameters for candidates for the underlying curves could be
consistent with the observed market variables.
This observation led to a new line of research that would become the
basis for a most fruitful period of research by Cowles Commission fel-
lows, and would lead these fellows to numerous Nobel Prizes. Among
them are Nobel Laureates that include Tjalling Koopmans, Kenneth
Arrow, Grard Debreu, James Tobin (5 March 191811 March 2002),
Franco Modigliani (19 June 191825 September 2003), Herbert

A.Simon (15 June 19169 February 2001), Joseph E.Stiglitz (9 February
1943), Lawrence Klein (14 September 192020 October 2013), Trygve
Haavelmo, Leonid Hurwicz (21 August 191724 June 2008) and Harry
Markowitz (24 August 1927).
Haavelmos colleague at Cowles, Tjalling Charles Koopmans (28 August
191026 February 1985), one year Haavelmos senior, and a graduate
of mathematics and economics at Netherlands Utrecht University and
Leiden University, took up Haavelmos challenge. Koopmans had com-
pleted a PhD thesis Linear Regression Analysis of Economic Time Series
in 1936 and had arrived in the USA just before Haavelmo. Koopmans
took up Haavelmos challenge and, in 1949, published Identification
Problems in Economic Model Construction in Econometrica.3
Koopmans, who had by 1949 taken over the helm of the Cowles
Commission from Jacob Marschak, wrote:
Where statistical data are used as one of the foundation stones on which
the equation system is erected, the modern methods of statistical inference
are an indispensable instrument. However, without economic theory as
another foundation stone, it is impossible to make such statistical inference
apply directly to the equations of economic behavior which are most rele-
vant to analysis and to policy discussion. Statistical inference unsupported
by economic theory applies to whatever statistical regularities and stable
relationships can be discerned in the data. Such purely empirical relation-
ships when discernible are likely to be due to the presence and persistence
of the underlying structural relationships, and (if so) could be deduced
from a knowledge of the latter. However, the direction of this deduction
cannot be reversed from the empirical to the structural relationships
except possibly with the help of a theory which specifies the form of the
structural relationships, the variables which enter into each, and any fur-
ther details supported by prior observation or deduction therefrom. The
more detailed these specifications are made in the model, the greater scope
is thereby given to statistical inference from the data to the structural equa-
tions. We propose to study the limits to which statistical inference, from
the data to the structural equations (other than definitions), is subject, and
the manner in which these limits depend on the support received from
economic theory.4
The vision of Frisch and Haavelmo had by 1949 been fully

incorporated into the conventional thinking of econometricians and
financial theorists. Haavelmo went further, though. He also articu-
lated an important role for our models to inform public policy. His
1943 paper was not only one of immense statistical significance, but,
in a strong Cowles tradition, provided a mathematical laboratory by
which policy makers can experiment within the economy without
holding economic players hostage as laboratory animals. This is the
avenue of causal inference.
This expansion of the role of decision-making theory remains contro-
versial. Often theorists limit their roles to the description of the world
around us, not necessarily its activist evolution. Perhaps economists are
more susceptible to this doctrinaire trap than financial theorists. After all,
financial theory is rarely limited to simple understanding. Some scholars
may harbor the profit motive, as are all financial practitioners. Others
develop their theories to correct market imperfections and improve upon
their efficiency.
Often, the Nobel Memorial Prize Committee tries to set an activist
scholarly tone, in the interest of Alfred Nobel, who devoted his fortune
to not only the description of the world, but also its improvement. The
Nobel Memorial Prize committee was making a statement in awarding
Haavelmo noted:
During the 1930s, noteworthy attempts were made to test economic theo-
ries empirically. The results of these attempts called attention to two funda-
mental problems associated with the possibility of testing economic
theories. First, economic relations often refer to large aggregates of indi-
viduals or firms. Theories regarding such relations can never be expected to
conform fully with available data, even in the absence of measurement
errors. The difficult question then is to determine what should be consid-
ered sufficiently good, or better conformity. Second, economists can sel-
dom or never carry out controlled experiments in the same way as natural
scientists. Available observations of market outcomes, etc., are results of a
multitude of different behavior and relations which have mutually interact-
ing effects. This gives rise to interdependence problems, i.e., difficulties in
using observed data to identify, estimate, and test the underlying relations
in an unambiguous way.
In his dissertation from 1941 and a number of subsequent studies, Trygve

Haavelmo was able to show convincingly that both fundamental problems
could be solved if economic theories were formulated in probabilistic
terms. Methods used in mathematical statistics could then be applied to
draw stringent conclusions about underlying relations from the random
sample of empirical observations. Haavelrno demonstrated how these
methods can be utilized to estimate and test economic theories and use
them in forecasting. He also showed that misleading interpretations of
individual relations due to interdependence cannot be avoided unless all
relations in a theoretical model are estimated simultaneously.
Haavelmo was also recognized for his identification of the interdepen-

dence problem. The committee noted:
In economic life, every individual decision may be regarded as affecting all

other decisions through a chain of market relations. This economic inter-
dependence creates problems in empirical research because an observed
market outcome is the result of a large number of simultaneous or previous
decisions and behavioral relations. Thus, an underlying relation can never
be observed, as it were, in isolation, but only as conditioned by a number
of other simultaneous relations and circumstances in the economy. As
Haavelmo showed, interdependence gives rise to difficulties in specifying,
identifying and estimating economic relations.
The committee also recognized his marriage of econometrics with

thoughtful economic theory when it added:
Once the foundation of probabilistic econometrics had been established,

Haavelmo's next important research effort involved attempts to trans-
form various components of economic theory so that the new economet-
ric methods would be applicable. According to Haavelmo, the
prerequisites for achieving this purpose were not only additional assump-
tions about probability distributions, but also in many instances a more
dynamic theoretical formulation. There are two areas in particular
investment theory and economic development theory where
Haavelmo's approach has resulted in influential and far-reaching contri-
butions. In addition to these main lines of research, Haavelmos achieve-
ments include valuable contributions in numerous areas from analysis
of macroeconomic fluctuations and fiscal policy to price theory and the

history of economic thought.5
Haavelmo also made another memorable contribution. In 1944, he wrote

a major monograph, The Probability Approach in Econometrics.6 In this
groundbreaking statement on experimental design, Haavelmo observed:
The aim of econometrics, as you may read it on the cover of every issue of
Econometrica, is The Advancement of economic theory in its relation to
Statistics and Mathematics. That is, econometrics should be an attempt,
not only towards more precision in the formulation of economic theories,
but perhaps still more an attempt to reach such formulations that the theo-
ries lend themselves to testing against actual observations.
So far, however, it seems that most of the energy has been spent on con-
structing rational models, involving exact relationships that are much too
rigid if we would try to identify the theoretical variables involved with
some actually observable economic quantities.
The relation between such exact economic models and economic reality is,
of course, in point of principle similar to the relation between rational
mechanics and the bodies and motions observed in the real physical world.
But the difference in the degree of precision is and is probably always going
to be tremendous. In economics it is therefore not sufficient first to set up
a system of exact relationships and then allow for certain small deviations
in the applications of facts. We shall have to start out with a probabilistic
formulation of our models, from the beginning, otherwise we shall either
have to call all our theories wrong or we may call almost any theory right
by allowing for sufficiently large discrepancies (in a subjective manner).7
Haavelmo elaborated:
What makes a piece of mathematical economics not only mathematics but

also economics is, I believe, this: When we set up a system of theoretical
relationships and use economic names for the otherwise purely theoretical
variables involved, we have in mind some actual experiment, or some
design of an experiment, which we could at least imagine arranging, in
order to measure those quantities in real economic life that we think might
obey the laws imposed on their theoretical namesakes.8
This observation required scholars to fully understand the nature of

the variables included in an analysis. Inherent is the notion of autonomy,
which he coined to indicate those variables that are not affected by others
in the analysis, but will in themselves affect the analysis. He was also beg-
ging the question of causality. Just as Frisch painstakingly described the
causality of money supply on consumption and investment through one
pathway, and the causality of consumption and investment on output and
money demand through another, the econometrician must be most mind-
ful of the way models are constructed, the carefully considered reasons
why some variables are considered independent, and others dependent,
and how multiple equations in this model are combined and interact.
He introduced the important intuition of simultaneity in the equations
that govern a model, and warned about the imprudent or careless use of
reduced-form equations to summarize other more complex interactions.
Haavelmo went on. He reminded econometricians that whatever be
the explanations (of economic relationships) we prefer, it is not to be
forgotten that they are all our own artificial inventions in a search for an
understanding of real life; they are not hidden truths to be discovered.9
Haavelmo also argued, convincingly, if disturbingly, that we implicitly
assume the dependent variables we model are a function of a number
of independent variables, each which may be prone to its own measure-
ment error, but each which also may be probabilistic in itselfthat is,
drawn from a range of possible values according to some sort of prob-
ability distribution function. Indeed, these independent variables may
be, and often are, interrelated, so that joint probability distributions
may govern these observations. To merely characterize the relationship
between the dependent and the independent variables as accurate, but for
a random and identically and independently distributed measurement
error, is thus simplistic. The resulting statistics and confidence become
misleading.
Econometricians were at first taken aback by Haavelmos challenge.
Gradually, though, there was growing acceptance about the limitations
of such modeling.
Haavelmo was influential, if not thoroughly so. Before his monograph,
econometricians worried more about their confidence in the estimation
of coefficients in a given regression analysis, and less in the significance of
the overall model. Following Haavelmos line in the sand, individual coef-
ficient estimates drawn from probabilistic draws of the corresponding

independent variable were deemphasized in favor of the consideration of
the overall model, just as Fisher had asserted two decades earlier.
Another implication of his philosophical stance on econometric model
building came from the ensuing Monte Carlo technique. In this simula-
tion technique, random draws of independent variables from some pre-
determined probability distribution function are allowed to determine
values of corresponding dependent variables. By repeating such draws and
predictions, the econometrician can better explore the effect of random-
ness in the draws of independent variables on model outcomes. Without
an acknowledgment of the probabilistic nature of economic variables,
there would have been little utility in the determination of model robust-
ness through Monte Carlo simulations.
This approach was a rich one for the Cowles Commission. With
the challenges of Frisch and Haavelmo at hand, many members of the
Cowles Commission made significant theoretical and applied economet-
rics contributions using the Monte Carlo simulation method to test the
robustness of econometric modeling results.
These researches in turn resulted in much better understanding of mac-
roeconomic and financial modeling. Indeed, the adopted tool of Monte
Carlo simulations, with its explicit acknowledgment of the probabilistic
nature of observations on the right-hand side of our financial models, is
now a standard methodology in the financial theorists toolbox.
Notes
1. Frisch, Ragnar, Statistical confluence analysis by means of complete regression
systems, Universitetets , konomiske institutt, 1934.
2. Haavelmo, Trygve, The Statistical Implications of a System of Simultaneous
Equations, Econometrica, Vol. 11, Issue 1, 1943, pp.112. Bjerkholt, Olav,
Tracing Haavelmos steps from Confluence Analysis to the Probability
Approach, Memorandum 25/2001, University of Oslo Department of
Economics and the Frisch Center for Economic Research, May 2001, at p.29.
3. Koopmans, Tjalling C, Identification problems in economic model con-
struction. Econometrica 17 (2), 1949, pp.125144.
4. Ibid. at 126.
5. The Prize in Economics 1989 Press Release. Nobelprize.org. Nobel Media
AB 2014. Web. 16 March 2016. <http://www.nobelprize.org/nobel_prizes/
economic-sciences/laureates/1989/press.html>
6. Haavelmo, Trygve, The Probability Approach in Econometrics. Supplement
to Econometrica, Vol. 12, July, 1944, pp. S1S115.
7. Bjerkholt, Olav, Tracing Haavelmos Steps from Confluence Analysis to the
Probability Approach, Memorandum 25/2001, University of Oslo
Department of Economics and the Frisch Center for Economic Research,
May 2001, at pp.2728.
8. Ibid, at p.5.
9. Ibid. at p.3.
30
Legacy andLater Life ofTrygve
Haavelmo
Haavelmo explained the reason why our world of financial econometrics

may be more complicated than some would like to believe. While he
offered clarity in the reasons why simultaneity of equations and the
probabilistic nature of observations must be further considered, mem-
bers of the Cowles Commission were only partially successful in their
completion of Haavelmos agenda. It would take decades to fully digest
Haavelmos observation, and to develop methods such as Monte Carlo
simulations, non-parametric testing tools and tests of causality. However,
eventually, the discipline made headway.
It should then come as no surprise that the discipline took so long to
award Haavelmo with its most important prize, the Sveriges Riksbank
Prize in Economics Sciences in Memory of Alfred Nobel in 1989.
Indeed, while Haavelmo committed to a lifetime of scholarly work, and
had made contributions in his later career to economics and public policy
before his retirement in 1979, the Committee noted Haavelmos work in
probability and in simultaneity:

DOI10.1057/978-1-137-34137-2_30
The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred

Nobel 1989 was awarded to Trygve Haavelmo for his clarification of the
probability theory foundations of econometrics and his analyses of
simultaneous economic structures.1
Haavelmo accepted the award with characteristic modesty. He noted,

I am honored. Anyone would be. But I had nothing to do with mak-
ing this award. I really have nothing to say, Haavelmo commented. He
further added that the prize is quite irrelevant to the real issues. Im
exhausted and I have nothing more to say.2
Despite his modesty and some of the regrets he shared with Frisch,
Haavelmo was recognized well in his life. Over his lifetime, Haavelmo
was named a Fellow of the Econometric Society, and the Institute of
Mathematical Statistics. He was also a member of the Norwegian
Academy of Sciences, the Council of the Econometric Society and the
Danish Academy of Sciences. He presided over the Econometric Society
in 1957, was named an Honorary Member of the American Economic
Association in 1975 and won the Fridtjof Nansen Award for Outstanding
Research in 1979. He was a member of the American Academy of Arts
and Sciences. He lived out his career at the University of Oslo and retired
a Professor Emeritus. He remained unmarried throughout his life.
Increasingly, his research turned to broader economic issues. In 1954, he
published a book entitled A Study in the Theory of Economic Evolution, which
performed groundbreaking work on the path by which nations develop eco-
nomically. This book is a cornerstone of economic development theory and
was one of the earliest pieces of formal scholarship in this area.
Haavelmo also made a direct contribution to finance, with impli-
cations on fundamentals analysis. His 1960 A Study in the Theory of
Investment modeled the demand for capital and the sluggishness in its
supply. His work has been the basis of much follow-up scholarship that
models investment behavior. Haavelmo has also treated environmental
economics issues, again well before it became a sub-discipline of its own.
It is often difficult for ones peers who view their colleagues in a more
intimate light to gauge the profound, and sometimes forgotten, contri-
butions of someone with whom they may share a department or a nation.
Within Norway, Haavelmo is often spoken of much like Frischas a
30 Legacy andLater Life ofTrygve Haavelmo 243
teacher and a public servant. While at the Institute of Economics at the

University of Oslo, where he began and he subsequently ended his career,
he was often the first contact with many students on a variety of their
economic interests, just as Frisch was for him. He left a multitude of
research students who benefited from his academic generosity in the years
19481979.
Ten years after he retired from his position of Professor of Economics
and Statistics, his contribution was cemented with the awarding of the
1989 Nobel Memorial Prize. By then, though, and up to his death in the
Oslo neighborhood of sters, Norway, on 28 July 1999, he was remem-
bered as an economic legend by some and as a mentor by many others.
When one asked him once why he returned home to Norway after
such a productive decade in the USA in the late 1930s and part of the
1940s, he replied he missed trout fishing. When his friend pointed out
that there is excellent trout fishing in the USA, Haavelmo noted that they
werent Norwegian trout.3
Notes
1. The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred
Nobel 1989, Nobelprize.org. Nobel Media AB 2014. Web. 25 March 2016.
< http://www.nobelprize.org/nobel_prizes/economic- sciences/
laureates/1989/>
2. http://articles.latimes.com/1989-10-12/news/mn-294_1_economics-nobel-
prize, accessed 16 March 2016.
3. Bjerkholt, Olav, Tracing Haavelmos steps from Confluence Analysis to the
Probability Approach, Memorandum 25/2001, University of Oslo
Department of Economics and the Frisch Center for Economic Research,
May 2001, at p.30.
Part 5
What We Have Learned
This book is the seventh in a series of discussions about the great minds in
the history and theory of finance. It is somewhat unique in this series in
that the other treatments demonstrated a relatively straight line of inno-
vation, with each contribution by a great mind shoring up and expanding
the contributions of those who came before.
The Great Minds that gave rise to econometrics, though, are much
more varied. They included one of humankinds greatest mathematicians,
a charismatic explorer, an early biometrician and an agricultural statisti-
cian. From their work in an evolving statistics, an applied mathematician
in the USA, a financial entrepreneur and a pair of scholars from Norway
turn statistics into the econometric tools now used by financial theorists.
We conclude with a brief summary of their collective contributions.
31
Conclusions
Quantitative methods underpin modern financial analysis. These methods

combine mathematical techniques developed by Great Minds documented
in the series volume Rise of the Quants and the statistical techniques devel-
oped by the Great Minds described here.
These econometricians and statisticians first identified problems dis-
tinct from those that challenge financial theory. A wave of innovation
began with a very practical problemto predict the movement of plan-
ets and other orbiting bodies. The fascination with these astronomical
movements predated modern computing and simulation methods, so
these first analyses had to be performable merely with pen and paper.
With necessity as the mother of invention, scholars beginning with Carl
Friedrich Gauss and ending with Trygve Haavelmo all derived profound
intuitions for how we can organize data generated from the world around
us just before the invention of the computer. Then, with the aid of com-
puterization and numerical methods, the quants took things from there.
Gauss was the first of this handful of scholars to create a compact
order from a complex universe. In doing so, he gave us three fundamental
tools of modern finance: the normal distribution, maximum likelihood
estimation and the method of least squares. He even introduced us to

DOI10.1057/978-1-137-34137-2_31
the intuition of the central limit theorem, a result that his colleague and
friend Pierre-Simon, the Marquis de Laplace generalized in a way that
have provided us much intuition ever since. One cannot compete a foun-
dational tract in statistics within our university finance curricula without
an indoctrination of Gauss contributions.
Across the English Channel in the mid-nineteenth century, as Gauss
was reaching the eve of his life, an explorer and man of leisure with a
remarkable ability to sense the pulse of populism, Sir Francis Galton,
was creating in his own mind a theory of eugenics just as his famous
cousin Charles Darwin was revolutionizing the theory of evolution.
Galton needed some rudimentary statistical techniques to support his
hypotheses, and applied some of the insight of Gauss and his method
of least squares to demonstrate such tendencies that the height of sub-
sequent generations tends to regress toward the mean of their parents
heights. Galton was no mathematician, though, so it is entirely possible
that the statistical movement he fueled with his intuition was not initially
informed by Gauss brilliance that came before him.
It took Galtons successors, first Karl Pearson, and then Ronald Fisher,
to create first the measures of basic statistics, some of which Gauss had
developed a century later, and then the geometric interpretation for mod-
ern hypothesis testing, again by applying the techniques so masterfully
developed by Gauss.
The story told described a clash of personalities that created a toxic
statistical environment on one side of the Atlantic to the point that the
statistics discipline could not progress efficiently until it was effectively
transplanted to the other side of the Atlantic Ocean. In the USA in the
1920s and 1930s, Harold Hotelling advocated for the statistics and
the department that would develop them, and began to use the tool to
answer questions of economic and finance significance. But, Hotelling
had an active mind that drew him in many directions.
It would take a financial entrepreneur and practitioner willing to
devote a portion of his familys fortune to further develop and popularize
techniques that could be applied to modern finance. Alfred Cowles III,
called Bob by his family and friends, created a Cowles Commission for
which almost every leading econometrician from Ragnar Frisch to Harry
Markowitz and beyond was associated.
31 Conclusions 249
Cowles vision for his commission gave rise to the Econometric Society
and the journal Econometrics that would do for financial statistics what
Biometrika did for biological statistics. He also originated important con-
cepts himself, such as the notion of the random walk and the efficient
market hypothesis.
Our story ends with two individuals. One helped form the Econometric
Society and edited its journal for 21 years, and defined the problems that
make economics and especially finance distinct from the statistics of biol-
ogy. Ragnar Frisch is still considered a father of modern econometrics.
It was his Norwegian colleague and prodigy, Trygve Haavelmo, though,
who almost single-handedly inspired the agenda which the Cowles
Commission would adopt to establish a discipline distinct from math-
ematical statistics.
Trygve Haavelmo and Ragnar Frisch each won Nobel Memorial
Prizes for their contributions. The committee recognized these individ-
uals, first in 1969, in the first year of the award, and then two decades
later, in 1989, for contributions that may have been difficult to under-
stand and absorb at the time, but which were eventually fully incor-
porated into our toolbox of methods to properly employ data in our
financial models.
The story does not end with the Cowles Commission of the 1940s,
though. From there, Cowles members such as the Great Minds Jacob
Marschak, Harry Markowitz and Kenneth Arrow took the results of
the Cowles Commission of the 1940s and created the plethora of
tools now employed in quantitative finance. These subsequent inno-
vations were documented in the book in this series entitled The Rise
of the Quants. We now rely on the mean and variance approach that
arose first from the explorations of Carl Friedrich Gauss, a remarkable
Great Mind who also spurred the creation of modern statistics and
regression modeling.
The works of these individuals have defined finance theory ever since.
Their contributions allow us to summarize data, construct and then test
financial models, and have allowed both practitioners and policy makers
to digest huge amounts of data to enhance the efficiency of our modern
markets and economies. The modern-day products of their contributions
are the test of the genius of the Great Minds described here.
Glossary
Arithmetic Mean A central tendency of a series of numbers based on their sum.

Asymptotic The value a variable converges on in the limit as time goes to infinite.
Binomial Model An options pricing methodology that breaks the dynamic path
of the derivatives into a series of steps at various points in time between the
valuation date and the expiration date.
Capital Asset Pricing Model A model that relates risk and expected returns based
on a mean and variance approach.
Center of Mass A concept in physics in which the sum of the relative positions
of mass, weighted by their respective masses, sums to zero.
Classical Model A cohesive set of microeconomic theories about the way markets
attain equilibrium.
Collinearity Also called multicollinearity, occurs when two or more independent
variables in a multiple regression model are correlated with each other, and
thus, one of the variables can be predicted by the other.
Complex Analysis A theory of functions involving complex numbers.
Complex Number A number that can be represented as the sum of a real and an
imaginary component.
Constructable Polygon A regular polygon that can be constructed solely through
the use of an unmarked compass and straightedge.

DOI10.1057/978-1-137-34137-2
252Glossary
CorrelationThe statistical relationship between two variables. It is typically

easured by demonstrating that the movement of one variable is associated
m
with the movement of other.
Correlation CoefficientMost commonly, the Pearson correlation coefficient
measures the degree of linear association between two variables.
Covariance A measure of the degree to which returns on two risky assets are
correlated in their movement.
Cowles Commission A research institute founded by Alfred Cowles to provide
for the theory and decision science that can help explain financial markets.
Derivative In mathematics, the instantaneous rate of change of one variable as
a function of the change of another. In finance, a financial instrument that
derives its value from another underlying asset or instrument.
Dynamic The analysis of a process as it changes over time.
Econometrics The set of tools used to demonstrate predictable statistical correla-
tions between financial and economic variables.
Efficient Market Hypothesis A theory based on the premise that one cannot sys-
tematically beat the market because market prices already properly incorpo-
rate all available information.
Equilibrium A state in which all relative forces of influence are in balance and the
system remains steady.
Eugenics The science of improvement in humankind through controlled breed-
ing for desirable human characteristics.
2n
Fermat Number A number that can be expressed as 2 + 1 , where n is a positive
integer.
Fermat Prime A prime number, defined as one that can only be divided without
a remainder by itself and one, that is also a Fermat number.
First Moment The mean of a variable that can be described by a known prob-
ability distribution function.
Frisch-Waugh Theorem A theorem that shows the regression coefficients generated
from two variables with a common trend in a least squares regression are iden-
tical to the coefficients obtained if the common trend is first removed from
the variables.
Gauss-Markov Theorem States that the coefficients generated in an ordinary least
squares regression model in which errors have expected values of zero, are
uncorrelated, and have equal variances are linear unbiased estimates.
General Theory of Relativity An extension of the Special Theory of Relativity to
include bodies that are accelerating.
Geometric Mean A measure of central tendency of a set of numbers based on
their product rather than their sum.
Glossary 253
Goodness of FitA model or measure that describes how well a postulated

istribution describes a set of observations. The measure is usually a summary
d
statistic that describes the difference between observed and predicted values.
HeteroscedasticityA concept which describes an explanatory variable which
exhibits variability that is not constant over the range of the dependent vari-
able that it predicts.
Identification Problem A failure to be able to determine a consistent and an
accurate estimate of as statistical relationship because the equation is actually
representative of a complex set of other relationships.
Imaginary Number A multiple of the square root of 1.
Independent and Identically Distributed An assumption that each random vari-
able shares the probability distribution as other random variables in the rela-
tionship, but each variable is mutually independent.
IntertemporalModels and relationships that include variables which change
over time.
Least Squares A method to solve for the relationship between a dependent vari-
able as a weighted sum of independent variables. This technique minimizes
the squared difference between the dependent variable and the predicted
amount from an estimate of a weighted combination of the independent vari-
ables. Before the recent advent of significant computing power, this readily
calculable technique was used to estimate relationships between dependent
and independent variables.
Keynesian Model A model developed by John Maynard Keynes that demon-
strates savings may not necessarily be balanced with new investment and
the gross domestic product may differ from that which would result in full
employment.
Mean A mathematical technique that can be calculated based on a number of
alternative weightings to produce an average for a set of numbers.
Modern Portfolio Theory The set of techniques developed in the 1950s by Harry
Markowitz to design optimal portfolios and the most efficient risk-reward
tradeoff.
Moment Generating Function A characterization of a random variable X which
equals the expected value of the random variable.
Monte Carlo Simulations An algorithm that repeats simulations of a postulated
financial relationship with random elements. The Monte Carlo simulation
often reveals patterns that cannot be gleaned by analytic methods.
Normal Distribution of Returns A distribution that follows a prescribed and a
symmetric pattern that occurs frequently in natural processes.
Number Theory A branch of algebra that considers properties of numbers.
254Glossary
Ordinary Least Squares A methodology that fits a straight line through a number
of points to minimize the sum of the squares of the distances from the best
fit lines to the points.
P-value Also called the calculated probability, is the probability of finding the
observed results when the null hypothesis H0 is true.
Polar Coordinates The description of points on a Cartesian or Complex plane
based on their distance and orientation from the origin.
Polygon A multisided geometric shape with at least three sides and angles.
Probability Density Function A function of a continuous random variable that can
be integrated over an arbitrary interval to determine the probability that the
value of the variable falls within the interval.
Random Walk The expectation that a security return at time t is equal to its last
period value plus a stochastic (random) component that is an independent
and identically distributed with zero mean and variance 2.
Real Number A number that can represent the distance along the number line.
Rectangular Coordinates The description of points on a Cartesian plane based
on the distance from the origin in the direction of each of the dimensions.
Regression A technique used to fit a dependent variable as a weighted sum of
independent variables.
Regular Polygon A polygon for which each apex is equiangular and each side is
of the same length.
Second Moment A weighted measure of the deviation of a random variable from
its mean or first moment.
Simultaneity A condition that occurs when an independent variable and the
postulated dependent variable influence each other.
Special Theory of RelativityEinsteins theory that specified the relationship
between space and time. It is based on the concepts that physical laws are
identical for all non-accelerating frames of reference, and that the speed of
light in a vacuum is a constant for all observers, regardless of their motion
relative to the light source.
Standard Deviation A measure of the spread of numbers, as calculated by the
square root of their variance.
Static The consideration of mathematical, physical, or economic relationships
that do not change over time.
Students t Describes properties of the mean of small samples from a normal
distribution when the population standard deviation is unknown.
Taylors Series The expression of the range of a function arising from deviations
of its domain as represented by an infinite series of the functions derivatives
and the deviations of its domain.
Glossary 255
Type-I Error The incorrect rejection of a correct null hypothesis. This rejection is
often called a false positive.
Type-II Error The failure to reject a false null hypothesis. This acceptance is often
called a false negative.
Unit Circle A circle centered at the origin of orthogonal axes and with a radius
of unit length.
Variance A specific measure of the sum of distances of a set of data points around
their mean value. These distances can be calculated by summing the square of
the coordinates for each point.
Volatility A measure of the degree of uncertainty and unexplained movements
of a variable over time.
Index1
A C
Adrian, Robert, 46 capital asset pricing model
Aitken, Alexander Craig, 134, (CAPM), 79
137n2 Cardano, Girolamo, 20, 21
Al-Khwarizmi, 19 Cayley, Arthur, 134, 137n1
asympotic, 1679 center of mass, 40, 49, 54, 149
Chebyshev, Pafnuty, 56
Classical Model, 251
B Clifford, William, 89, 90
Bell, Eric, 157, 158 collinearity, 229
Bernoulli, Jacob, 47, 49, 50, 56, 65, Columbus, Christopher, 38
91 complex analysis, 30, 64
Born, Max, 12 complex number(s), 1731, 41
Boscovich, Roger, 37 Comte, Isadore, 76
Brahe, Tycho, 48 constructable polygon, 16, 29
1
Note: Page number followed by n denote footnotes

DOI10.1057/978-1-137-34137-2
258 Index
correlation coefficient, 79, 95, 96, Ferro, Sciopione del, 19, 20

104, 120, 124, 125, 132, Feynmann, Richard, 24
133 Fiore, Antonio Maria, 19, 20
Cotes, Roger, 25, 26, 37, 39, 40, 49 Fisher, Irving, 193, 205, 206, 212
Cowles, Alfred III, vii, 17789, Fisher, Ronald, vi, 105, 109,
191200, 200n18, 248 11127, 12937, 13958,
Cremona, Gerald of, 19 192, 205, 226, 232, 248
Friedman, Milton, 1vii, 96
Frisch, Ragnar, vii, 7, 97, 195, 196,
D 20110, 210n1, 21117,
Darwin, Charles, 70, 72, 73, 78, 83, 217n1, 217n2, 21922,
99, 116, 117, 120, 121, 248 2257, 229, 231, 234, 237,
Darwin, Horace, 117 238, 238n1, 238n2, 239n7,
Darwin, Leonard, 117, 120 242, 243, 243n3, 248, 249
Davis, Harold Thayer, 191, 192, Frisch-Waugh theorem, 220, 229
207, 208, 219 Fry, Thornton, 192
derivative, 50, 54, 79, 166 F-statistic, 165
Descartes, Rene, 21, 22
Dirichlet, Peter, 12
dynamic, xi, 197, 206, 212, 217, G
217n12, 235 Galton, Francis, vi, 6773, 7584,
86, 905, 99101, 104,
105, 109, 112, 11518,
E 1213, 132, 140, 143, 149,
Eddington, Arthur, 34 175, 196, 248
Edgeworth, Francis, 94, 172 Gauss, Carl Friedrich,, vi, 331,
Einstein, Albert, 16, 30, 33, 34, 61, 3367, 75, 76, 7880, 83,
64, 902, 1057 90, 91, 94, 99, 100, 104,
equilibrium, 145, 197, 212, 232 118, 124, 127, 129, 130,
eugenics, vi, 65, 66, 70, 78, 81, 82, 1335, 147, 149, 1657,
90, 100, 101, 104, 175, 195, 232, 2479
11620122, 141, 143, Gauss-Markov Theorem, 46
144, 161, 196, 222, 248 general theory of relativity, 33, 34,
90, 92, 107
geometric mean(s), 11, 1416, 23, 30
F Glover, James, 192
Fermat, Pierre de, 30, 46, 48 goodness of fit, 78, 90, 94, 95, 97
Fermat prime, 29 Gosset, W.S., 1235, 160, 161
Fermi, Enrico, 12 Gresham, Thomas, 93
Index 259
H L
Haavelmo, Trygve, vii, 196, 197, Lagrange, Joseph-Louis, 9, 30, 31
220, 221, 22339, 2413, Lambert, Johann, 42
247, 249 least squares, vi, 9, 11, 23, 26, 34,
Heisenberg, Werner, 12, 92 37, 406, 50, 53, 57, 59,
heteroscedasticity, 213 61, 646, 76, 79, 95, 97,
Hilbert, David, 12, 139 104, 1337, 147, 165, 175,
Hitler, Adolf, 12, 117, 144, 161, 191, 197, 213, 214, 216,
162, 196 231, 232, 237, 248
Hotelling, Harold, vi, vii, 97, 109, Legendre, Adrien-Marie, 30, 435,
137, 14863, 1659, 53, 56n3, 57, 59, 64
1713, 175, 192, 196, 205, Leibniz, Gottfried, 44
208, 221, 248 Lexis, Wilhelm, 94
Hudson, Henry, 154 Lorenz, Ludvig, 17
Humboldt, Friedrich, 61, 62 Lyapunov, Aleksandr, 56
I M
identification problem, 229, 233, Malthus, Thomas, 77
238n3 Markov, Andrey, 56
imaginary number, 13, 18, 20, 224, Marschak, Jacob, vii, 196, 197,
27, 30 21921, 228, 229, 233, 249
independent and identically Maxwell, James, 61, 86, 87
distributed, 46, 54, 237 mean(s), vi, ix, 4, 8, 11, 12, 1416,
intertemporal, xii 19, 21, 23, 30, 36, 37,
3941, 45, 46, 48, 504,
56, 57, 72, 75, 79, 91, 94,
J 95, 97, 100, 123, 127, 129,
Johnson, Alvin, 196 131, 132, 1357, 142, 146,
147, 161, 166, 209, 214,
215, 221, 228, 231, 238n1,
K 248, 249
Kepler, Johannes, 38 Mendel, Gregor, 116
Keynes, John Maynard, 117, 211, Michelson, Albert, 17
212, 231, 232 Mill, John Stuart, 100, 107
Kohlrausch, Rudolf, 61 Modigliani, Franco, 196, 198, 233
Koopmans, Tjalling, 197, 232, 233, Moivre, Abraham de, 22, 24, 28, 46,
238n3 48, 50, 56, 91
260 Index
moment- generating function, 54, 56 Q

Morgan, J.P., 12, 179 Quetelet, Lambert Adolphe, 758,
Morley, Edward, 17 91, 94, 109, 123
N R
Newton, Isaac, 4, 9, 22, 25, 39, 44 Ramsey, Frank, 171, 172
normal distribution, vi, 45, 4656, real number, 17, 22, 24, 50
76, 90, 91, 936, 123, 125, Rectangular coordinates, 254
129, 166, 195, 213, 247 regression(s), xi, 46, 76, 79, 80,
number theory, 13, 30, 41, 157, 172 957, 104, 125, 1315,
137, 191, 192, 194,
21317, 217n3, 231, 233,
O 237, 238n1, 249
Occam's Razor, 39 regular polygon(s), 10, 13, 15, 16,
Ockham, William of, 39 27, 28, 33
Olbers, Heinrich, 34, 42 Ricardo, David, 70, 71
Oppenheimer, Robert, 12 Riemann, Bernhard, 12
ordinary least squares, 79, 214 Roos, Charles, 195, 2068, 219
P S
Pascal, Blaise, 468 Samuelson, Paul, 194
Pauli, Wolfgang, 12 Savage, Jimmie, 146
Pearson, Egon, 103, 104, 126, 127, Schumpeter, Joseph, 207, 208,
140, 141, 143, 226, 227 211, 220
Pearson, Karl, vi, 80, 827, 8997, Sharpe, William, 228
99107, 116, 118, 1202, Simon, Herbert, 73, 77, 198, 233
125, 140, 141, 160, 226, simultaneity, 229, 237, 241
248 Snedecor, George Waddel, 142
Piazza, Guiseppe, 33, 34 Special Theory of Relativity, 107
Pisa, Leonardo da, 19 standard deviation, 50, 80, 93, 94,
Planck, Max, 12 104, 121, 124, 166
polar coordinates, 26 static(s), 92, 196, 206, 212,
polygon(s), 10, 1316, 279, 33, 59 217n1
probability density function, 40, Stratton, J.M., 118, 121, 123, 130,
45, 53 160
P-value(s), 104 Student's t, 132, 142, 160
Index 261
T W
Tartaglia, Niccolo, 19, 20 Wald, Abraham, 161, 169
Turnbull, Herbert Westren, 134, 137n2 Wallis, John, 21, 22
type-I error, 104 Waugh, Frederick, 211, 213, 214,
type-II error, 104 217, 220
Weber, Wilhelm, 602
Weldon, Walter, 92, 93
U Wessel, Caspar, 22, 23, 26, 225
unit circle, 13, 15, 268 Williams, John Burr, 165, 179
V Y
variance(s), vi, 46, 525, 91, 93, 94, Yntema, Theodore, 219, 220
96, 97, 1214, 127, 12931, Yule, G.Udny, 126
135, 136, 140, 142, 147,
166, 167, 189, 228, 249
Veblen, Oswald, 158, 167 Z
Veblen, Thorstein, 158 Zach, Franz von, 34
Verrezzano, Giovanni, 38 Zimmerman, Duke Carl Wilhelm,
von Neumann, John, 12, 139, 171 8, 9

(Great Minds in Finance) Colin Read (Auth.) - The Econometricians - Gauss, Galton, Pearson, Fisher, Hotelling, Cowles, Frisch and Haavelmo - Palgrave Macmillan UK (2016) PDF

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Colin read

More information about this series at

Great Minds in Finance

Library of Congress Control Number: 2016948000

The Editor(s) (if applicable) and The Author(s) 2016

Printed on acid-free paper

This Palgrave Macmillan imprint is published by Springer Nature

The conceptual framework began with the work of Carl Friedrich

interpretation of the statistics Pearson proposed and produced an axi-

Through their contributions, our theories of finance could be compared

When one mentions the word finance to an interested and engaged

These economic decisions are primarily thought of as financial

Many were surprised by the Global Financial Meltdown that soon

Part I Mathematicians and Astronomers 1

1 The Early Life ofCarl Friedrich Gauss 3

2 The Times ofCarl Friedrich Gauss 11

3 Carl Gauss Great Idea 33

4 The Later Years andLegacy ofCarl Friedrich Gauss 57

Part II From Least Squares to Eugenics 65

5 The Early Life ofFrancis Galton 67

6 The Times ofFrancis Galton 75

7 The Later Life andLegacy ofSir Francis Galton 81

8 The Early Life ofKarl Pearson 83

9 Karl Pearsons Great Idea 89

10 The Later Life andLegacy ofKarl Pearson 99

Part III The Formation of Modern Statistics 109

11 The Early Life ofRonald Aylmer Fisher 111

12 The Times ofRonald Aylmer Fisher 121

13 Ronald Fishers Great Idea 129

14 Later Life andLegacy ofRonald Fisher 139

15 The Early Life ofHarold Hotelling 149

16 The Times ofHarold Hotelling 159

17 Harold Hotellings Great Idea 165

18 The Later Life andLegacy ofHarold Hotelling 171

Part IV The Birth of a Commission and Econometrics 175

19 The Early Life ofAlfred Cowles III 177

20 The Times ofAlfred Cowles III 187

21 The Great Idea ofAlfred Cowles III 191

22 Legacy andLater Life ofAlfred Cowles III 199

23 The Early Life ofRagnar Frisch 201

24 The Times ofRagnar Frisch 205

25 Ragnar Frischs Great Idea 211

26 Legacy andLater Life ofRagnar Frisch 219

27 The Early Years ofTrygve Haavelmo 223

28 The Times ofTrygve Haavelmo 227

29 Haavelmos Great Idea 231

30 Legacy andLater Life ofTrygve Haavelmo 241

Part V What We Have Learned 245

Colin Read is Professor of Economics and Finance, former dean of the

Fig. 1.1 The ancestry of Carl Friedrich Gauss 5

We begin with the struggle of some great mathematicians who wrestled

There is perhaps no discipline that is so intrinsically tied to data than the

The Author(s) 2016 3

These prodigies were viewed more as intellectual athletes and mystics.

Pedigree Chart for

Jurgen Gauss Henrich Gauss Hans Gauss

Fig. 1.1 The ancestry of Carl Friedrich Gauss

The Arrival ofCarl Gauss

university because of its extensive mathematics library. He chose well and

Gauss loved numbers. When he imagined geometric concepts and from

The Author(s) 2016 11

This value of x, now more commonly expressed as the square root of

Fig. 2.1 The calculation of geometric means

The Creation ofComplex Numbers

The Normal Distribution