- Person
- Harry Markowitz
- Lived
- 1927–2023
- Field
- Financial economics
- From
- American
The story
Harry Markowitz was born in Chicago in 1927, the only child of Morris and Mildred Markowitz, who ran a small grocery store. As a teenager he enjoyed popular books on physics and astronomy and began reading philosophy, and he was struck by David Hume's argument that no number of observations can prove what will happen next time. At the University of Chicago he chose economics and was drawn to the economics of uncertainty, studying under Milton Friedman, Jacob Marschak, Leonard Savage and Tjalling Koopmans. He was also invited to become a student member of the Cowles Commission for Research in Economics.
When he had to choose a dissertation topic, a chance conversation suggested applying mathematics to the stock market. Marschak, his adviser, thought it reasonable and told him that Alfred Cowles, the commission's founder, had been interested in such questions.
The key idea came to Markowitz one afternoon in the library while reading John Burr Williams's Theory of Investment Value. Williams proposed valuing a stock by its expected future dividends. If investors cared only about expected returns, Markowitz reasoned, they would put all their money in a single stock. But real investors diversify, because they care about risk as well as return. Markowitz proposed measuring risk by variance, and showed that a portfolio's risk depends not only on the risk of each asset but on how assets move together. Investors, he argued, should choose from the combinations offering the best trade-off between risk and return.
His paper "Portfolio Selection" appeared in the Journal of Finance in March 1952, and he received his doctorate from Chicago in 1954. The Nobel committee later said that people had long known not to put all their eggs in one basket, but that Markowitz developed the first rigorous, operational theory of portfolio selection under uncertainty.
Markowitz became known as the father of modern portfolio theory. UC San Diego noted that his breakthrough has permeated all aspects of money management, replacing the earlier practice of simply picking shares in a handful of companies thought to have the best prospects.
Why it matters
Modern portfolio theory gave savers, pension funds and investment managers a disciplined way to balance risk and return, helping people protect their savings by spreading risk sensibly.
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 wrote the book on efficient diversificationHarry Markowitz’s 1959 book Portfolio Selection: Efficient Diversification of Investments, written at Yale’s Cowles Foundation, set out his theory in full.
Sources
- Harry M. Markowitz: Biographical NobelPrize.org
- The Prize in Economic Sciences 1990: press release NobelPrize.org
- Harry Markowitz Wikipedia
Another act of tikkun olam. This is part of tikkun olam, the Jewish idea of repairing the world, and every one of us can add to it.