Harry Markowitz, economist, 1927-2023

{"text":[[{"start":null,"text":"

"}],[{"start":14.28,"text":"The study of finance can easily be split into two eras: before and after Harry Markowitz. "}],[{"start":19.79,"text":"The economist, who died on June 22, was one of the first academics to introduce abstract mathematical concepts — and rigour — to investment decision-making. "},{"start":29.006999999999998,"text":"In doing so, he sparked a revolution in the way financial markets are understood. "}],[{"start":34.46,"text":"“Everyone knew about diversification — not putting all your eggs in one basket,” said Andrew Lo, professor at the Massachusetts Institute of Technology and co-author of In Pursuit of the Perfect Portfolio. "},{"start":45.439,"text":"“But Markowitz told us more than that. "},{"start":47.632000000000005,"text":"He told us how many eggs we should put in the different baskets, and how to diversify in a systematic way. ”"}],[{"start":53.980000000000004,"text":"Markowitz had a key insight as he read that stock prices are the present value of future dividends. "},{"start":59.397000000000006,"text":"That definition failed to account for uncertainty, he realised; in reality, stocks could only be valued by their expected dividends. "},{"start":67.089,"text":"That thought grew into his PhD thesis, where he modelled the optimisation of investments across an entire portfolio. "}],[{"start":74.36,"text":"This development caught on widely. "},{"start":76.614,"text":"Almost all modern professional investing is built on this type of quantitative analysis, with a focus on optimisation and concepts of risk management that may not exist in their current forms without Markowitz. "}],[{"start":87.38,"text":"His innovation also helped create the trillion-dollar passive-investing behemoths such as Vanguard, and in the process displaced a cadre of fund managers and stockpickers who relied primarily on corporate fundamentals and received wisdom to manage money. "}],[{"start":100.99,"text":"Markowitz’s work was built upon by William Sharpe, who invented the standard for modelling and measuring risk-adjusted returns. "},{"start":107.857,"text":"Sharpe, Markowitz and Merton Miller won the Nobel Prize for Economics in 1990. "},{"start":113.012,"text":"“Without Harry’s work, there was no way I would have gone down that path,” Sharpe said. "}],[{"start":117.99,"text":"Markowitz, born in 1927 in Chicago, was the only child of Morris and Mildred, who owned a grocery shop. "},{"start":125.06899999999999,"text":"He said they always had enough to eat, despite the Depression. "},{"start":128.474,"text":"He first studied liberal arts at the University of Chicago and then turned to economics for his MA and PhD. "},{"start":134.329,"text":"He learnt from Milton Friedman, Leonard Savage and Tjalling Koopmans. "},{"start":138.434,"text":"He said Koopmans’ course on activity analysis was “a crucial part” of his education, as it defined efficiency and provided a framework to analyse efficient sets. "}],[{"start":147.60999999999999,"text":"After Chicago he mixed academic and corporate work. "},{"start":150.927,"text":"Sharpe and Markowitz first met at the RAND Corporation in the late 1950s, where Sharpe worked while completing his PhD. "},{"start":157.61899999999997,"text":"“I was very much formed by the RAND Corporation,” said Sharpe. "},{"start":161.31199999999998,"text":"Markowitz also studied operations at RAND, another realm that has benefited from the real-world application of mathematical theories. "}],[{"start":168.6,"text":"Rob Arnott, founder of Research Affiliates, felt Markowitz’s influence from the start of his career. "},{"start":174.47899999999998,"text":"In his first job at The Boston Company in 1977 he used the economist’s algorithm in a quadratic programming optimiser, he said. "},{"start":182.072,"text":"He has since built a systematic investing empire, managing about $130bn worldwide. "}],[{"start":188.41,"text":"“He knew that he changed the finance world beyond recognition,” Arnott said. "},{"start":192.927,"text":"“Before Harry, investing was a bunch of rules of thumb . . . When somebody of his phenomenal stature dies, it’s easy to portray him as an intellectual giant because he was. "},{"start":201.40699999999998,"text":"But he was also a kind, gentle and fun-loving person. ”"}],[{"start":205.67,"text":"Many friends and colleagues spoke of Markowitz’s irreverent humour and open-mindedness. "},{"start":210.53699999999998,"text":"His distaste for received wisdom and intellectual rigour may have helped him radically alter the status quo in financial markets, they say. "},{"start":217.45399999999998,"text":"It’s rare for a mathematician to see their work have such a widespread impact within their lifetime. "},{"start":222.559,"text":"But the transition to systematic and passive investing didn’t go unchallenged. "}],[{"start":227.14,"text":"“The industry was slower to embrace these ideas . . . [Markowitz and Sharpe] were certainly iconoclastic, but more importantly they threatened the livelihoods of the stockbrokers and the gunslingers who were charging fairly high fees, in some cases upwards of 5 to 10 per cent for their services,” said Lo. "}],[{"start":242.67999999999998,"text":"But Markowitz was not an evangelist for passive management or systematic investing, however. "},{"start":248.10899999999998,"text":"He felt that quantitative strategies were only as good as the thinkers that built them, said Arnott. "}],[{"start":254.07999999999998,"text":"“He was a patient, gentle man, but he wasn’t patient with wilful stupidity,” Arnott said. "},{"start":259.597,"text":"“If your inputs are carelessly crafted, optimisation becomes garbage-in, garbage-out. "},{"start":264.602,"text":"He was always fascinated when people just threw numbers into a formula without carefully thinking through. ”"}],[{"start":269.62,"text":""}]],"url":"https://creatives.ftacademy.cn/album/114195-1688364764.mp3"}