Harry Markowitz wrote the book on efficient diversification

Person

Harry Markowitz

Lived

1927–2023

Field

Financial economics

From

American

The story

Harry Markowitz published his paper "Portfolio Selection" in 1952, the same year he left the University of Chicago to join the RAND Corporation. The ideas were so new that when he defended his doctoral dissertation on them in 1954, Milton Friedman argued that the work was not economics at all. At RAND Markowitz did not work on portfolio theory, but he learned optimisation techniques from George Dantzig, the inventor of the simplex method, that would shape his later work.

The economist James Tobin brought him back to the subject. Tobin invited him to spend the 1955–56 academic year at the Cowles Foundation, the research group that had moved from Chicago to Yale University, and Markowitz took leave from RAND to accept. He used the year to write a full book on portfolio allocation. Looking back in 1990, he wrote that it was not clear the book would ever have been written without Tobin's invitation.

Portfolio Selection: Efficient Diversification of Investments was published by John Wiley & Sons in 1959. It set out the theory in far more detail than the 1952 paper, and an appendix presented his methods for the fast computation of efficient portfolios, building on the algorithm he had published in 1956. Yale University Press reprinted the book in 1970, and a second edition followed from Basil Blackwell in 1991.

When the Royal Swedish Academy of Sciences awarded Markowitz a share of the 1990 Nobel Memorial Prize in Economic Sciences, it named the 1952 essay and the 1959 book as the work being honoured, describing the book as the more extensive presentation. The Academy explained that his theory reduced the complicated problem of choosing among many assets to a simple two-dimensional one, balancing expected return against risk, and that the model had won wide acclaim for its algebraic simplicity and its suitability for practical use. It credited his portfolio work with establishing financial analysis as a respectable field of economic research.

The book remains a classic. More than seventy years after Markowitz first set out his ideas, the theory it describes is still taught as modern portfolio theory.

Why it matters

The book made portfolio theory accessible to a wide audience of investors and scholars, spreading the practice of disciplined diversification.

About Harry Markowitz

Chicago grocer’s son whose 1952 paper ‘Portfolio Selection’ founded modern portfolio theory, the mathematics of diversification behind how the world invests. Nobel 1990.

More about Harry Markowitz

• Harry Markowitz developed buddy memory allocationHarry Markowitz developed the buddy memory allocation method, included in the first version of his SIMSCRIPT language, a technique for managing computer memory.
• Harry Markowitz showed how to compute efficient portfoliosHarry Markowitz developed the critical line algorithm, published in 1956, to compute the efficient frontier, the set of portfolios giving the best return for each level of risk.
• Harry Markowitz created the SIMSCRIPT simulation languageIn the early 1960s Harry Markowitz returned to RAND to develop SIMSCRIPT, a programming language that made computer simulations much faster to build.
• Harry Markowitz pioneered sparse matrix computingAt RAND in the 1950s Harry Markowitz saw that big economic models were mostly zeros, and devised sparse matrix techniques now standard for solving huge systems of equations.
• Harry Markowitz turned diversification into a scienceIn his 1952 paper “Portfolio Selection”, Harry Markowitz showed mathematically how investors can reduce risk through diversification, founding modern portfolio theory.

Sources

• Harry M. Markowitz: Biographical NobelPrize.org
• The Prize in Economic Sciences 1990: press release NobelPrize.org
• Harry Markowitz Wikipedia

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