Harry Max Markowitz (August 24, 1927 – June 22, 2023) was an American economist who received the 1989
John von Neumann Theory Prize and the 1990
Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (), commonly referred to as the Nobel Prize in Economics(), is an award in the field of economic sciences adminis ...
.
Markowitz was a professor of finance at the
Rady School of Management
The Rady School of Management is the Postgraduate education, graduate business school of the University of California, San Diego, a public university in San Diego, California, United States. The school was established as the University of Califor ...
at the
University of California, San Diego
The University of California, San Diego (UC San Diego in communications material, formerly and colloquially UCSD) is a public university, public Land-grant university, land-grant research university in San Diego, California, United States. Es ...
(UCSD). He is best known for his pioneering work in
modern portfolio theory
Modern portfolio theory (MPT), or mean-variance analysis, is a mathematical framework for assembling a portfolio of assets such that the expected return is maximized for a given level of risk. It is a formalization and extension of Diversificatio ...
, studying the effects of asset
risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...
,
return
Return may refer to:
In business, economics, and finance
* Return on investment (ROI), the financial gain after an expense.
* Rate of return, the financial term for the profit or loss derived from an investment
* Tax return, a blank document or t ...
,
correlation
In statistics, correlation or dependence is any statistical relationship, whether causal or not, between two random variables or bivariate data. Although in the broadest sense, "correlation" may indicate any type of association, in statistics ...
and
diversification on probable investment portfolio returns.
Biography
Harry Markowitz was born to a
Jewish
Jews (, , ), or the Jewish people, are an ethnoreligious group and nation, originating from the Israelites of History of ancient Israel and Judah, ancient Israel and Judah. They also traditionally adhere to Judaism. Jewish ethnicity, rel ...
family, the son of Morris and Mildred Markowitz.
[Harry M. Markowitz �]
Autobiography
The Nobel Prizes 1990, Editor Tore Frängsmyr, obel Foundation Stockholm, 1991 During high school, Markowitz developed an interest in physics and philosophy, in particular the ideas of
David Hume
David Hume (; born David Home; – 25 August 1776) was a Scottish philosopher, historian, economist, and essayist who was best known for his highly influential system of empiricism, philosophical scepticism and metaphysical naturalism. Beg ...
, an interest he continued to follow during his undergraduate years at the
University of Chicago
The University of Chicago (UChicago, Chicago, or UChi) is a Private university, private research university in Chicago, Illinois, United States. Its main campus is in the Hyde Park, Chicago, Hyde Park neighborhood on Chicago's South Side, Chic ...
. After receiving his
Ph.B. in Liberal Arts,
Markowitz decided to continue his studies at the University of Chicago, choosing to specialize in economics. There he had the opportunity to study under important economists, including
Milton Friedman
Milton Friedman (; July 31, 1912 – November 16, 2006) was an American economist and statistician who received the 1976 Nobel Memorial Prize in Economic Sciences for his research on consumption analysis, monetary history and theory and ...
,
Tjalling Koopmans
Tjalling Charles Koopmans (August 28, 1910 – February 26, 1985) was a Dutch-American mathematician and economist. He was the joint winner with Leonid Kantorovich of the 1975 Nobel Memorial Prize in Economic Sciences for his work on the theory ...
,
Jacob Marschak and
Leonard Savage. While still a student, he was invited to become a member of the
Cowles Commission for Research in Economics, which was in Chicago at the time. He completed his A.M. in Economics from the university in 1950.
[
Markowitz chose to apply mathematics to the analysis of the ]stock market
A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks (also called shares), which represent ownership claims on businesses; these may include ''securities'' listed on a public stock exchange a ...
as the topic for his dissertation. Jacob Marschak, who was the thesis advisor, encouraged him to pursue the topic, noting that it had also been a favorite interest of Alfred Cowles, the founder of the Cowles Commission. While researching the then current understanding of stock prices, which at the time consisted in the present value
In economics and finance, present value (PV), also known as present discounted value (PDV), is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money ha ...
model of John Burr Williams, Markowitz realized that the theory lacks an analysis of the impact of risk. This insight led to the development of his seminal theory of portfolio allocation under uncertainty, published in 1952 by ''the Journal of Finance
''The Journal of Finance'' is a peer-reviewed academic journal published by Wiley-Blackwell on behalf of the American Finance Association. It was established in 1946. The editor-in-chief is Antoinette Schoar. According to the ''Journal Citation R ...
''.
In 1952, Harry Markowitz went to work for the RAND Corporation
The RAND Corporation, doing business as RAND, is an American nonprofit global policy think tank, research institute, and public sector consulting firm. RAND engages in research and development (R&D) in several fields and industries. Since the ...
, where he met George Dantzig. With Dantzig's help, Markowitz continued to research optimization
Mathematical optimization (alternatively spelled ''optimisation'') or mathematical programming is the selection of a best element, with regard to some criteria, from some set of available alternatives. It is generally divided into two subfiel ...
techniques, further developing the critical line algorithm for the identification of the optimal mean-variance portfolios, relying on what was later named the Markowitz frontier. It was also in 1952 that Markowitz published ''Portfolio Selection'', his first paper dissecting investment portfolio strategy.
In 1954, he received a PhD in economics from the University of Chicago with a thesis on the portfolio theory. The topic was so novel that, while Markowitz was defending his dissertation, Milton Friedman argued his contribution was not economics.[Harry M. Markowitz �]
Nobel Prize Lecture: Foundations of Portfolio Theory
December 7, 1990
PDF format
During 1955–1956 Markowitz spent a year at the Cowles Foundation, which had moved to Yale University
Yale University is a Private university, private Ivy League research university in New Haven, Connecticut, United States. Founded in 1701, Yale is the List of Colonial Colleges, third-oldest institution of higher education in the United Stat ...
, at the invitation of James Tobin
James Tobin (March 5, 1918 – March 11, 2002) was an American economist who served on the Council of Economic Advisers and consulted with the Board of Governors of the Federal Reserve System, and taught at Harvard University, Harvard and Yale Uni ...
. He published the critical line algorithm in a 1956 paper and used this time at the foundation to write a book on portfolio allocation which was published in 1959.[ (reprinted by Yale University Press, 1970, ; 2nd ed. Basil Blackwell, 1991, )]
Markowitz won the Nobel Memorial Prize in Economic Sciences
The Nobel Memorial Prize in Economic Sciences, officially the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (), commonly referred to as the Nobel Prize in Economics(), is an award in the field of economic sciences adminis ...
in 1990 while a professor of finance at Baruch College
Baruch College (officially the Bernard M. Baruch College) is a public college in New York City, United States. It is a constituent college of the City University of New York system. Named for financier and statesman Bernard M. Baruch, the colle ...
of the City University of New York
The City University of New York (CUNY, pronounced , ) is the Public university, public university system of Education in New York City, New York City. It is the largest urban university system in the United States, comprising 25 campuses: eleven ...
. In the preceding year, he received the John von Neumann Theory Prize from the Operations Research Society of America (now Institute for Operations Research and the Management Sciences
The Institute for Operations Research and the Management Sciences (INFORMS) is an international society for practitioners in the fields of operations research
Operations research () (U.S. Air Force Specialty Code: Operations Analysis), often s ...
, INFORMS) for his contributions in the theory of three fields: portfolio theory; sparse matrix methods; and simulation language programming ( SIMSCRIPT). Sparse matrix methods are now widely used to solve very large systems of simultaneous equations whose coefficients are mostly zero. SIMSCRIPT has been widely used to program computer simulations of manufacturing, transportation, and computer systems as well as war games. SIMSCRIPT (I) included the Buddy memory allocation method, which was also developed by Markowitz.
He was elected to the 2002 class of Fellow
A fellow is a title and form of address for distinguished, learned, or skilled individuals in academia, medicine, research, and industry. The exact meaning of the term differs in each field. In learned society, learned or professional society, p ...
s of the Institute for Operations Research and the Management Sciences
The Institute for Operations Research and the Management Sciences (INFORMS) is an international society for practitioners in the fields of operations research
Operations research () (U.S. Air Force Specialty Code: Operations Analysis), often s ...
.
CACI
The company that would become CACI International was founded by Herb Karr and Harry Markowitz on July 17, 1962, as California Analysis Center, Inc. They helped develop SIMSCRIPT, the first simulation programming language, at RAND and after it was released to the public domain, CACI was founded to provide support and training for SIMSCRIPT.
In 1968, Markowitz joined Arbitrage Management company founded by Michael Goodkin. Working with Paul Samuelson
Paul Anthony Samuelson (May 15, 1915 – December 13, 2009) was an American economist who was the first American to win the Nobel Memorial Prize in Economic Sciences. When awarding the prize in 1970, the Swedish Royal Academies stated that he "h ...
and Robert Merton he created a hedge fund that represents one of the first known attempts at computerized arbitrage trading. He took over as chief executive in 1970. After a successful run as a private hedge fund, AMC was sold to Stuart & Co. in 1971. A year later, Markowitz left the company.
Years later, he was involved with CACI's SIMSCRIPT addition of Object-oriented
Object-oriented programming (OOP) is a programming paradigm based on the concept of '' objects''. Objects can contain data (called fields, attributes or properties) and have actions they can perform (called procedures or methods and impleme ...
features.
Post-CACI
Markowitz divided his time between teaching (he was an adjunct professor at the Rady School of Management at the University of California at San Diego, UCSD); video casting lectures; and consulting (out of his Harry Markowitz Company offices). He served on the advisory board of SkyView Investment Advisors, a traditional and alternative investment advisory firm. Markowitz also served on the Investment Committee of LWI Financial Inc. (" Loring Ward"), a San Jose, California-based investment advisor; on the advisory panel of Robert D. Arnott's Newport Beach, California
Newport Beach is a coastal city of about 85,000 in southern Orange County, California, United States. Located about southeast of downtown Los Angeles, Newport Beach is known for its sandy beaches. The city's harbor once supported maritime indu ...
based investment management firm, Research Affiliates; on the advisory board of Mark T. Hebner's Irvine, California and internet based wealth management and taxes firm, Index Fund Advisors; and as an advisor to the Investment Committee of 1st Global, a Dallas, Texas-based wealth management and investment advisory firm. Markowitz advised and served on the board of ProbabilityManagement.org, a 501(c)(3) non-profit that aims "to reshape the communication and calculation of uncertainty."
Markowitz was co-founder and Chief Architect of GuidedChoice, a 401(k) managed accounts provider and investment advisor. Markowitz's more recent work included designing the backbone software analytics for the GuidedChoice investment solution and heading the GuidedChoice Investment Committee. He was actively involved in designing the next step in the retirement process: assisting retirees with wealth distribution through GuidedSpending.
Markowitz died on June 22, 2023, at the age of 95. He died in a hospital in San Diego, California
San Diego ( , ) is a city on the Pacific coast of Southern California, adjacent to the Mexico–United States border. With a population of over 1.4 million, it is the List of United States cities by population, eighth-most populous city in t ...
due to complications from pneumonia and sepsis.
Research
A ''Markowitz-efficient portfolio'' is one where diversification cannot lower the portfolio's risk
In simple terms, risk is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environ ...
for a given return expectation (alternately, no additional expected return can be gained without increasing the risk of the portfolio). The Markowitz Efficient Frontier
In modern portfolio theory, the efficient frontier (or portfolio frontier) is an investment portfolio which occupies the "efficient" parts of the risk–return spectrum.
Formally, it is the set of portfolios which satisfy the condition that n ...
is the set of all portfolios that will give the highest expected return for each given level of risk. These concepts of efficiency were essential to the development of the capital asset pricing model
In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a Diversification (finance), well-diversified Portfolio (f ...
.
Markowitz also co-edited the textbook ''The Theory and Practice of Investment Management'' with Frank J. Fabozzi of Yale School of Management
The Yale School of Management (also known as Yale SOM) is the graduate school, graduate business school of Yale University, a Private university, private research university in New Haven, Connecticut. The school awards the Master of Business Admi ...
. In the same line, Markowitz was part of the editorial board of AESTIMATIO, the IEB International Journal of Finance.
Selected publications
*
*
*
* (reprinted by Yale University Press, 1970, ; 2nd ed. Basil Blackwell, 1991, )
*
*
*
*
See also
* List of economists
* List of Jewish Nobel laureates
* Risk management tools
References
External links
*
Markowitz: Videos of Interviews by M. Hebner and W. Wellington and Presentations by Markowitz
**
** ttp://nobelprize.org/nobel_prizes/economics/laureates/1990/markowitz-speech.html Banquet Speech December 10, 1990
*
Nobel Prize Lecture: Foundations of Portfolio Theory
December 7, 1990
PDF format
Oral history interview with Markowitz
Charles Babbage Institute
The IT History Society (ITHS) is an organization that supports the history and scholarship of information technology by encouraging, fostering, and facilitating archival and historical research. Formerly known as the Charles Babbage Foundation, ...
, University of Minnesota – Markowitz discusses his development of portfolio theory, sparse matrices
In numerical analysis and scientific computing, a sparse matrix or sparse array is a matrix (mathematics), matrix in which most of the elements are zero. There is no strict definition regarding the proportion of zero-value elements for a matrix ...
, and his work at the RAND Corporation
The RAND Corporation, doing business as RAND, is an American nonprofit global policy think tank, research institute, and public sector consulting firm. RAND engages in research and development (R&D) in several fields and industries. Since the ...
and elsewhere on simulation software development (including computer language SIMSCRIPT), modeling, and operations research.
History of Finance, interviews
The American Finance Association
Guide to the Harry M. Markowitz Papers 1963, 1965, 1967
Adjunct Professor of Finance, bio
Rady School of Management, University of California at San Diego
1st Global Engages Dr. Harry M. Markowitz
1st Global
*
Markowitz’s Mean-Variance Portfolio Selection with Regime Switching: From Discrete-time Models to Their Continuous-time Limits
Problems with the Markowitz mean-variance model
Biography
from the Institute for Operations Research and the Management Sciences
{{DEFAULTSORT:Markowitz, Harry
1927 births
2023 deaths
Nobel laureates in Economics
American Nobel laureates
Economists from California
Baruch College faculty
University of California, San Diego faculty
Jewish American scientists
University of Chicago alumni
Fellows of the Econometric Society
John von Neumann Theory Prize winners
RAND Corporation people
Jewish American economists
American financial economists
Fellows of the American Academy of Arts and Sciences
Fellows of the Institute for Operations Research and the Management Sciences
Presidents of the American Finance Association
Deaths from sepsis in the United States
Deaths from pneumonia in California