Harry Markowitz, Father of Modern Portfolio Theory, Dies at 95
Harry Markowitz, a Nobel Prize-winning economist who redefined money management by showing that diversification could reduce investment risk while maximizing returns, has died. He was 95.
Markowitz was best known as the father of modern portfolio theory, which he introduced in 1952 in an article published by the Journal of Finance. He broke with traditional investment analysis by focusing on combinations of assets, rather than individual securities.
The theory “dramatically changed the way nearly all wealth is managed,” Michael Litt, a former managing director at Morgan Stanley, wrote in a 2006 paper published by the Washington-based American Enterprise Institute.
Markowitz also did groundbreaking work in mathematical programming and computer simulations. He developed Simscript, a language used to write simulation software, and co-founded CACI International Inc. of Arlington, Virginia, in 1962 to provide services and training related to Simscript.
The Operations Research Society of America honored his contributions in these areas, as well as portfolio theory, by presenting him with the 1989 John von Neumann Theory Prize. He shared the Nobel Prize in economics with Merton H. Miller and William F. Sharpe the following year for his ideas on finance.
“A good portfolio is more than a list of good stocks and bonds,” he wrote in “Portfolio Selection,” a 1959 book that expanded on his theory. “It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.”
In 2009, Markowitz said the previous year’s equity-market plunge that accompanied a worldwide financial crisis only reinforced his belief that stocks moved unpredictably, like a “thundering herd.”
His solution — the diversified portfolio — didn’t please everybody.
Nassim Nicholas Taleb, author of The Black Swan, said investors who lost money in the financial crisis should blame the Nobel committee for honoring Markowitz and other economists who devised equations that made equities seem less risky than they really are.
For his part, Markowitz said in a 2008 paper that the real problem was that “the layers of financially engineered products of recent years, combined with high levels of leverage, have proved to be too much of a good thing.”
Harry Max Markowitz was born on Aug. 24, 1927, in Chicago. He was the only child of Morris and Mildred Gruber Markowitz, who owned a grocery store.
As a high school student, he read the works of David Hume, the 18th-century Scottish philosopher, historian and economist, who was known for his skepticism. Markowitz also enjoyed learning about physics and astronomy and played violin in the school orchestra.
Markowitz entered a two-year undergraduate program at the University of Chicago after high school. He earned a bachelor’s degree in 1947 and stayed to pursue a master’s degree, which he received three years later.
While studying at the university, Markowitz married. With his wife, the former Barbara Gay, he had four children and two stepchildren, the San Diego Union-Tribune reported in 1999.
The idea of doing a doctoral dissertation about the stock market came from a conversation with a broker outside the office of his academic adviser, Professor Jacob Marschak, he recounted in a 2004 interview with the American Finance Association.
Markowitz found a topic while reading The Theory of Investment Value, a book by economist John Burr Williams that argued that stock prices ought to be based on the projected value of future dividend payments.
Investors who followed this approach would put all their money into whichever stock had the highest expected value, Markowitz said in the interview — “and that’s not right.”
Instead, he saw the best choice as a so-called efficient portfolio, striking a balance between returns and risk. He drew from statistics to develop his theory.
Markowitz received his doctorate in economics in 1954 after defending his dissertation before a panel that included Milton Friedman, another future Nobel winner.
“At one point he says, ‘You have a problem,’” Markowitz recalled during the 2004 interview. Friedman, he said, contended that portfolio theory is “‘not economics, it’s not mathematics, it’s not business administration’ — and Professor Marschak said, ‘It’s not literature.’”
That didn’t stop his approach from gaining converts, especially after the dissertation was published in 1955 and Portfolio Selection came out four years later.
Markowitz joined the research staff of Rand Corp., a think tank based in Santa Monica, California, in 1952 and worked there off and on until 1963.
Near the end of his time with Rand, he started CACI with Herbert Karr, who had collaborated with him on Simscript. They founded the company, originally California Analysis Center Inc., in 1962 to provide training and support after the simulation language was released into the public domain.
Markowitz stayed with CACI until 1968, when he joined the University of California at Los Angeles as a professor. He left UCLA the next year to become president of Arbitrage Management Co., a convertible-bond arbitrage firm based in New York.
In 1972, he left the firm to teach at the University of Pennsylvania’s Wharton School and take on consulting work. Two years later, he joined International Business Machines Corp.’s Thomas J. Watson Research Center, where he developed a programming language called EAS-E. He stayed at IBM until 1983.
Rutgers University employed Markowitz as a professor from 1980 to 1982, when he moved to the City University of New York’s Baruch College. In 1984, he set up a namesake consulting firm.
Markowitz left Baruch in 1993 to teach at the University of California at San Diego’s Rady School of Management. He also served on the advisory boards of Robert Arnott’s Research Affiliates Inc. and Index Fund Advisors Inc., a money-management firm. He co-founded GuidedChoice, an independent investment adviser to retirees.