Posted on 06/26/2023 11:59:40 AM PDT by nickcarraway
The heart of Markowitz’s research was grounded in the basic relationship between risk and reward
Harry M. Markowitz, an economist who launched a revolution in finance, upending traditional thinking about buying stocks, died Thursday in San Diego. He was 95.
Markowitz won the Nobel Memorial Prize in Economic Sciences in 1990 for his breakthrough research in stock market investments, what became known as ‘modern portfolio theory’, widely referred to as MPT.
The death, at a hospital, was caused by pneumonia and sepsis, Mary McDonald, a longtime assistant to Markowitz, said, the New York Times (NYT) reported.
In 1952, he published his dissertation, “Portfolio Selection,” which overturned the common-sense approach on investments which assumed that the best stock-market strategy was simply to choose the shares of a group of companies that were thought to have the best prospects.
The heart of Markowitz’s research was grounded in the basic relationship between risk and reward.
He showed that the risk in any portfolio is less dependent on the riskiness of its component stocks and other assets than how they relate to one another.
It was the first time that the benefits of diversification had been codified and quantified, using advanced mathematics to calculate correlations and variations from the mean. This breakthrough insight and its corollaries have now permeated all aspects of money management, with few professionals unfamiliar with his work
“Modern portfolio theory has gone from the halls of academia to investment management mainstream, or from gown to town,” Robert Arnott, CEO of Research Associates, a large investment manager in Newport Beach, California, said in a videotaped interview with Markowitz.
In 1999, the financial newspaper Pensions & Investments named him “man of the century.” Related work on investments led Markowitz to be regarded as a pioneer of behavioral finance, the study of how people make choices in practical situations, as in buying insurance or lottery tickets.
Recognising that the pain of loss typically exceeds the joy of comparable gain, he found it crucial to know how a gamble is framed in terms of possible outcomes and the size of the stakes.
Markowitz won 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 supervised the development of Simscript, which is used for programming computer simulations of systems like factories, transportation and communications networks.
Rest in piece, Harry.
A real economist, not like the social warrior fruitcakes taking over all the social sciences nowadays.
“Risk and reward.” Exposure to danger and a fair return.
Q. How much danger will a person accept to get a worthwhile profit?
A. The amount of danger that a person can handle. A lot.
RIP.
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