Nobel pioneer of portfolio theory dies at 95 – 06/26/2023 – Market

Harry M. Markowitz, an economist who launched a financial revolution by overturning traditional thinking about stock ownership and who won the 1990 Nobel Prize in Economic Sciences for his innovation, died Thursday in San Diego, Calif. . He was 95 years old.

Death, in a hospital, was caused by pneumonia and sepsis, according to Mary McDonald, Markowitz’s former assistant.

Until its inception, the investment world assumed that the best stock market strategy was simply to pick stocks from a group of companies considered to have the best prospects.

In 1952, he published his dissertation, “Portfolio Selection”, which overturned this commonsense approach with what became known as modern portfolio theory, widely known by its acronym, MPT.

The core of his research was founded on the basic relationship between risk and reward. He showed that the risk in any portfolio depends less on the risk of its component stocks and other assets than on how they are related to each other. It was the first time that the benefits of diversification were codified and quantified, using advanced mathematics to calculate correlations and mean variances.

This groundbreaking insight and its corollaries now permeate all aspects of money management, with few practitioners unfamiliar with Markowitz’s work.

“Modern portfolio theory has moved out of the halls of academia into the mainstream of investment management,” Robert Arnott, CEO of Research Associates, a large investment manager in Newport Beach, Calif., said in a videotaped interview with Markowitz.

When the economist heard one of his colleagues describe how his work had brought “a process” to what had been, until the 1950s, the “random” creation of institutional portfolios, he knew he deserved his reputation as the father of theory. modern portfolio portfolio, he said.

“That moment was one of those things where you get a shiver down your spine,” he said. “I understood what I had started.”

In 1999, the financial journal Pensions & Investments named him “the man of the century”.

Investment-related work has led Markowitz to be considered a pioneer of behavioral finance, the study of how people make choices in practical situations, such as purchasing insurance or lottery tickets.

Recognizing that the pain of loss often outweighs the joy of a comparable gain, he found it crucial to know how an investment is structured in terms of possible outcomes and the size of the bets.

Markowitz gained renown in two other fields. He developed “sparse matrix” techniques for solving very large mathematical optimization problems—techniques that are now standard in production software for optimization programs. He also designed and oversaw the development of Simscript, which is used to program simulations of systems such as factories, transportation, and communication networks.

In 1989, Markowitz received the John von Neumann Theory Award from the American Society for Operations Research for his work in portfolio theory, sparse matrix techniques, and Simscript.

His focus has always been on applying mathematics and computers to practical problems, mainly involving business under uncertain conditions.

“I’m not a Nobel laureate just for doing one thing,” Markowitz said in an interview for this obituary in 2014. Though he was 87 at the time, he embarked on a monumental analysis of risk and return in securities.

The seminal 1952 article in The Journal of Finance was expanded into his best-known work, “Portfolio Selection: Efficient Diversification of Investments” [Seleção de portfólio: diversificação eficiente de investimentos]in 1959.

Harry Max Markowitz was born on August 24, 1927 in Chicago, the only child of Morris and Mildred Markowitz, who owned a small grocery store.

In high school, he began reading the original works of Charles Darwin and classical philosophers such as René Descartes and David Hume. In financial terms, Hume’s work underpins the maxim that past performance is no guide to the future.

He continued on that path into a two-year bachelor’s program at the University of Chicago, where, inspired in part by Hume’s focus on the uncertainty of knowledge, he decided to pursue economics.

It was in graduate school, where he studied with Milton Friedman and other eminent economists, that a casual conversation about possible dissertation topics led to his work applying mathematical methods to the stock market.

Markowitz’s first two marriages, to Luella Johnson and Gloria Hardt, ended in divorce. In 1970 he married Barbara Gay, who died in 2021.

Markowitz is survived by two children from his first marriage, Susan Ulvestad and David Markowitz; two from the second, Laurie Raskin and Steven Markowitz; a stepson, James Marks; 13 grandchildren; More than a dozen great-grandchildren. He lived in San Diego.

In 1968, Markowitz began managing a successful hedge fund, Arbitrage Management Co., based on MPT, which is believed to have been the first to practice computerized arbitrage trading.

Markowitz was a professor at Baruch College at the City University of New York when he received the Nobel Prize in economic science, sharing it with Merton H. Miller and William F. Sharpe.

Translated by Luiz Roberto Gonçalves