"When Theory Collided With Financial Markets: The Saga of Paul Samuelson and Commodities Corporation "

Paul Samuelson is widely regarded as (per his leading biographer) “the founder of modern economics,” and for decades his college textbook dominated Western higher education economics pedagogy. But off the public stage, Samuelson the investor/consultant suffered a remarkable setback in the 1970s. Based on deep research into a variety of hitherto unmined archival sources, this paper documents the saga of the great economist and one of the first quantitatively driven trading organizations he co-founded: Commodities Corporation (CC; 1970-1997). Act 1: In 1970, a group of PhD economists from MIT and other top universities left academia to launch CC, a talent incubator where many future hedge fund stars first shone. One of the original CC backers, Samuelson had been co-creator of the efficient market hypothesis (EMH) – that superior fundamental analysis may lead to superior returns in efficient markets, whereas technical analysis may not. Act II: Guided by EMH, CC engaged in a series of trades in 1971 so disastrous they nearly bankrupted the company. Act III: CC promptly pivoted to trend following, a disarmingly simple technique that signals traders when to buy or short an asset based solely on its price trend. Ironically – according to EMH architects Samuelson, Eugene Fama, and others – price trends do not exist.
Along with Samuelson revisionism, this case study holds broader implications about the place of efficient market-oriented theory, especially EMH, in the behavior of financial markets. The research draws on several Commodities Corporation (CC) sources including the Paul Samuelson archival collection at the David M. Rubenstein Rare Book & Manuscript Library at Duke University, which includes a collection of Samuelson’s personal letters on CC as well as unpublished interviews and lectures.