A Chicago childhood
Harry Max Markowitz was born in Chicago on August 24, 1927, into a Jewish family, the only child of Morris and Mildred Markowitz, who owned a small grocery store. In his Nobel autobiography he remembered a comfortable childhood: a nice apartment, always enough to eat, a room of his own. He was never aware, he wrote, of the Great Depression raging around him.
He played baseball and touch football in an empty lot and the violin in his high-school orchestra, and he read voraciously, first comic books and pulp adventure magazines such as The Shadow, then popular accounts of physics and astronomy, and finally the philosophers themselves. He was especially struck by David Hume’s argument that however many times a ball falls when released, we have no logical proof that it will fall the next time, and by the way Charles Darwin marshalled evidence and answered objections in The Origin of Species. Uncertainty, and how to reason about it, would become his life’s subject.
Chicago and the Cowles Commission
Markowitz entered the University of Chicago straight from high school and took its two-year bachelor’s programme, built around reading original texts. When he had to choose a specialisation he picked economics, almost casually. What gripped him was the economics of uncertainty, the theories of expected utility developed by John von Neumann and Oskar Morgenstern and by Jacob Marschak, and Leonard Savage’s ideas about personal probability. Among his teachers were Milton Friedman, Marschak, Savage and Tjalling Koopmans, whose course on efficient sets of activities proved crucial.
As a student he was invited to join the Cowles Commission for Research in Economics, then based in Chicago, a small, intensely creative group that would produce a remarkable number of Nobel laureates. He received his master’s degree in 1950.
An afternoon in the library
Looking for a dissertation topic, Markowitz had a chance conversation that suggested applying mathematics to the stock market. Marschak approved, noting that Alfred Cowles, the commission’s founder, had been interested in exactly that. One afternoon in the library, Markowitz was reading John Burr Williams’ Theory of Investment Value, which held that a share is worth the present value of its future dividends. Since those dividends are uncertain, he reasoned, Williams’ approach implied valuing shares by their expected dividends. But an investor who cared only about expected returns would put everything into the single security with the highest expected return. That is not what sensible investors do. They diversify, because they care about risk as well as return.
Markowitz’s insight was to treat risk mathematically. He measured it by variance, the spread of possible outcomes, and saw that the risk of a whole portfolio depends not just on the riskiness of each holding but on how the holdings move in relation to one another, their covariances. Two risky assets that tend to rise and fall at different times can together be less risky than either alone. An investor should therefore choose among portfolios that offer the highest expected return for each level of risk: the set that became known as the efficient frontier.
“Portfolio Selection”
He published these ideas in a fifteen-page article, ‘Portfolio Selection’, in the Journal of Finance in March 1952. The same year he left Chicago for the RAND Corporation in Santa Monica, where he met George Dantzig, the inventor of linear programming. The optimisation techniques he learned there shaped his ‘critical line algorithm’ for actually computing efficient portfolios, published in 1956. At the invitation of James Tobin, he spent 1955–56 at the Cowles Foundation, by then at Yale, writing the book Portfolio Selection: Efficient Diversification of Investments (1959). He later said it was not clear the book would ever have been written without Tobin’s invitation.
He received his Ph.D. from Chicago in 1954. The subject was so new that at his defence Milton Friedman objected that, whatever its merits, it was not economics. The Nobel committee would eventually disagree.
How it changed investing
The old proverb said not to put all your eggs in one basket. Markowitz turned that folk wisdom into a rigorous, usable theory, and in doing so, as the Royal Swedish Academy of Sciences put it, established financial analysis as a respectable field of economic research. In the 1960s William Sharpe and others built on his model to create the Capital Asset Pricing Model, which introduced the now-ubiquitous ‘beta’ measure of an investment’s risk relative to the market.
Today the vocabulary of risk, return, correlation and diversification that Markowitz formalised underlies how pension funds, endowments, insurers and ordinary savers decide how to spread their money across shares, bonds and other assets. Asset-allocation models, many retirement-plan default strategies and much automated investment advice descend from mean-variance analysis. Few academic ideas have shaped so directly where so much of the world’s money goes.
Computers, simulation and business
Markowitz’s interests ranged well beyond portfolios. At RAND in the 1950s he worked on huge models of industrial capacity and noticed that most numbers in their matrices were zeros; by choosing calculation steps carefully, these ‘sparse’ matrices could be kept sparse and solved far faster. Sparse-matrix methods became standard in large-scale optimisation software. Convinced that many practical problems could only be tackled by simulation, he returned to RAND in the early 1960s to develop SIMSCRIPT, a programming language that let users describe the system they wanted to simulate rather than spell out every step for the computer. It was widely used to model factories, transport and computer systems, as well as for war games.
In July 1962 he and Herb Karr, who wrote SIMSCRIPT’s manual, founded California Analysis Center, Inc., today the large defence and information-technology contractor CACI International. In 1968 he joined Arbitrage Management Company, where, working with the economists Paul Samuelson and Robert Merton, he helped run one of the earliest attempts at computerised arbitrage trading; he became its chief executive in 1970 and left after it was sold. Later he co-founded GuidedChoice, a firm providing managed accounts for 401(k) retirement savers, and advised several investment firms.
A restless, practical mind
Portfolio theory was not Markowitz’s only early contribution to economics. In April 1952, a month after ‘Portfolio Selection’, he published ‘The Utility of Wealth’ in the Journal of Political Economy, examining why the same people buy both insurance and lottery tickets. He suggested that people judge gains and losses relative to their current wealth rather than in absolute terms, an idea that anticipated later work in behavioural economics on how people actually make risky choices.
Throughout his career he described his focus as the application of mathematical or computer techniques to practical problems, especially business decisions under uncertainty. Sometimes that meant using existing tools, sometimes inventing new ones; he measured success, he wrote, by whether the ideas were accepted in practice. At General Electric he helped build simulation models of manufacturing plants. SIMSCRIPT incorporated a method of managing computer memory, the ‘buddy’ allocation system, that he also developed. Late in life he returned again and again to the foundations of his own theory, defending mean-variance analysis against critics and writing on the question of how efficient markets really are. In 2002 he was elected a Fellow of the Institute for Operations Research and the Management Sciences.
Nobel laureate
In 1989 the operations research profession gave Markowitz its John von Neumann Theory Prize for three distinct achievements: portfolio theory, sparse-matrix methods and SIMSCRIPT. The next year, while he was a professor of finance at Baruch College of the City University of New York, he shared the Nobel Memorial Prize in Economic Sciences with Merton Miller and William Sharpe for pioneering work in the theory of financial economics. The citation credited him with developing the theory of portfolio choice, how wealth can be optimally invested in assets that differ in expected return and risk. The prize was divided in three equal parts: Sharpe was honoured for the Capital Asset Pricing Model, built on Markowitz’s portfolio model, and Miller for his theory of corporate finance, three pioneering contributions to financial economics, in the academy’s account.
In his Nobel autobiography he looked back on nearly four decades of collaboration with characteristic modesty, saying he had often considered work to be play.
Later years and legacy
Markowitz kept working into his nineties as an adjunct professor at the Rady School of Management at the University of California, San Diego, and through his own consulting company. In 2018 he donated his Nobel medal and diploma to UC San Diego’s Geisel Library, citing his love for the campus and the joy he found in teaching there. He died in a San Diego hospital on June 22, 2023, aged ninety-five, of complications from pneumonia and sepsis.
Markowitz is part of a remarkable cohort of Jewish American economists of the twentieth century, among them his own teacher Milton Friedman, who reshaped how economics understands markets. His family background was Jewish, though his autobiographical writings focus on ideas rather than religion. His legacy is everywhere money is invested with an eye to risk: whenever a saver is told to diversify, or a fund manager weighs how assets move together, they are using the framework that came to a young graduate student one afternoon in a Chicago library.
Sources & further reading
Harry M. Markowitz, Biographical, NobelPrize.org · Press release: The 1990 Prize in Economic Sciences, NobelPrize.org · Harry Markowitz, Wikipedia · Harry Markowitz, Jewish Virtual Library · Researched from the sources above and checked against them. Spotted an error? Tell us.
A life 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.