Harry Markowitz, Nobel laureate of modern portfolio theory, dies at age 95

Harry M. Markowitz, an economist who revolutionized finance, upended traditional thinking about buying stocks and earned the 1990 Nobel Prize in Economics for his breakthrough, died Thursday in San Diego. He turned 95.

The death, at a hospital, was caused by pneumonia and sepsis, said Mary McDonald, a longtime assistant to Dr. Markowitz.

Until Dr. Markowitz appeared, the investment world assumed that the best stock market strategy was simply to choose the stocks of a group of companies thought to have the best prospects.

But in 1952, he published his dissertation, “Portfolio Selection,” which overturned this common sense approach with what became known as modern portfolio theory, commonly referred to as MPT.

The core of his research was based on the fundamental relationship between risk and reward. He showed that the risk in any portfolio depends less on the degree of risk of the constituent stocks and other assets than on how they relate to each other. It was the first time that the benefits of diversification had been codified and quantified, using advanced math to calculate correlations and variations from the mean.

This groundbreaking insight and its implications have now permeated all aspects of money management, and few professionals are unfamiliar with his work.

“Modern portfolio theory has moved from the corridors of academia to the wealth management mainstream, or dress to city,” said Robert Arnott, CEO of Research Associates, a major investment manager in Newport Beach, California, in a statement. videotaped interview with Dr. Markowitz.

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

“That moment was one of those things where you feel a chill run down your spine,” he said. “I understood what I was getting into.”

In 1999 the financial newspaper Pensions & Investments named him ‘man of the century’.

Related investment work led Dr. Markowitz was considered as a pioneer in behavioral finance, the study of how people make choices in practical situations, such as when buying insurance or lottery tickets.

Realizing that the pain of loss typically outweighs the joy of comparable gains, he felt it was critical to understand how a gamble is framed in terms of possible outcomes and the size of the stake.

Dr. Markowitz achieved fame in two other fields. He developed “sparse matrix” techniques for solving very large mathematical optimization problems—techniques now standard in optimization program production software. And he designed and supervised the development of Simscript, which is used to program computer simulations of systems such as factories, transportation and communication networks.

In 1989 Dr. Markowitz received the John von Neumann Theory Prize from the Operations Research Society of America for his work on portfolio theory, sparse matrix techniques, and Simscript.

His focus has always been on applying mathematics and computers to practical problems, especially involving businesses in uncertain circumstances.

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

The seminal 1952 article, in The Journal of Finance, was expanded in 1959 into his best-known work, “Portfolio Selection: Efficient Diversification of Investments”.

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 Darwin and classical philosophers such as René Descartes and David Hume. In financial terms, Hume’s work was behind the maxim that past performance is no guide to the future.

He continued this direction in a two-year bachelor’s program at the University of Chicago, where, partly inspired by Hume’s focus on the uncertainty of knowledge, he decided to study economics.

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

The basic concepts of portfolio theory came to Dr. Markowitz’s attention one afternoon in the library while reading an investment book by the economist John Burr Williams.

“Williams proposed that the value of a stock should be equal to the present value of its future dividends,” Dr. Enter Markowitz a short autobiography for the Nobel Committee. “Because future dividends are uncertain, I interpreted Williams’ proposal to value a stock based on its expected future dividends.”

But if investors were only interested in the expected value of securities, he thought, that would imply that the best or maximum portfolio would consist of the most attractive stock.

“I knew this was not the way investors acted or should act,” he concluded. “Investors diversify because they consider both risk and return.”

He began measuring the relationships between a diverse range of stocks in order to construct the most efficient portfolio, and to map out what he called a “boundary” where no additional return can be achieved without also increasing risk.

At the RAND Corporation, during periods in the 1950s and 1960s, Dr. Markowitz worked on practical problems in American industry that required the development of simulation methods; he created the Simscript language to reduce their programming time.

He went to work for IBM and General Electric, where he built models of factories. In 1962, he co-founded the California Analysis Center Incorporated, a computer software company that would become CACI International.

The first two marriages of Dr. Markowitz, with Luella Johnson and Gloria Hardt, ended in divorce. In 1970 he married Barbara Gay. She died in 2021.

Mr. Markowitz is survived by two children from his first marriage, Susan Ulvestad and David Markowitz; two of his second, Laurie Raskin and Steven Markowitz; his wife’s son from a previous marriage, James Marks; 13 grandchildren; and more than a dozen great-grandchildren. He lived in San Diego.

In 1968 Dr. Markowitz managed a successful hedge fund, Arbitrage Management Company, based on MPT, which is believed to have been the first to engage in automated arbitrage trading.

Dr. Markowitz was a professor at Baruch College of the City University of New York when he was awarded the Nobel Prize in Economics, which he shared with Merton H. Miller and William F. Sharpe.

He also served on the faculties of Rutgers University, the Wharton School at the University of Pennsylvania, the University of California at Los Angeles, and finally the Rady School of Management at the University of California, San Diego.

After submitting his groundbreaking dissertation, Dr. Markowitz took a job at RAND and was completely convinced that “I know this stuff cold” when he returned to Chicago in 1955 to defend it.

Within a few minutes, however, Professor Friedman told him that while he couldn’t find any faults, the subject was extremely new. “We can’t get you a Ph.D. in economics for a dissertation that is not economics,” he said.

At this point, Dr. Markowitz, “my palms began to sweat” and he was directed to a hallway, where he waited about five minutes.

Finally, a panelist stepped forward and said, “Congratulations, Dr. Markowitz.”

Dr. Markowitz insisted he had not suspected the prank.

Alex Traub reporting contributed.