The interview in yesterday's New York Times, by Jeff Sommer with Harry Markowitz, the creator of modern portfolio theory, and the 1990 Nobel Laureate in Economic Sciences, along with William Sharpe and Merton Miller, was not only timely but showed how truly original ideas may, at first, not be accepted.
In the interview, it was noted that when Markowitz defended his doctoral dissertation at the University of Chicago — a treatise on portfolio theory — Milton Friedman (also a Nobel laureate) raised a disturbing objection. Portfolio theory wasn’t economics, Friedman said, and the university couldn’t grant a degree in economics based on it. A few minutes later, Markowitz learned that he would receive his degree after all, but he endured some nervous moments. Years later, Friedman clarified his position somewhat, telling Mr. Markowitz that while he was startled by his student’s novel approach, he was kidding about not granting the doctorate. “Harry, you know we don’t flunk anybody at that late stage,” Mr. Friedman told him.
Now, Mr. Markowitz says: “It’s possible he really didn’t think it was economics. It’s O.K. At the time it was not economics — but now it certainly is.”
I recall meeting Professor Markowitz in the elevator of a hotel at an INFORMS conference and marveled at his stature -- physical, and otherwise, and was awestruck. He became an INFORMS Fellow in 2002, along with the Nobel laureate John Nash and Kenneth Arrow, as well as many luminaries in operations research and management sciences.
As noted in the interview, Markowitz's contributions to portfolio selection are as relevant in the Facebook era as they were over half a century ago, although they are better understood and appreciated today. I also think that it is important to point out all of the algorithmic advances, from quadratic programming to network optimization and even variational inequality algorithms for financial equilibrium models, that have been advanced because of his seminal ideas and work.
His work has inspired so much research and practice and has led to fundamental insights whose richness has survived over half a century. Finance, from a financial networks perspective, has always fascinated me and I am privileged to be in the Department of Finance and Operations Management at the Isenberg School of Management. I was lucky to have had a great doctoral student, Stavros Siokos, whose passion for finance, networks, and engineering, enabled us to co-author the Financial Networks book published back in 1997. Stavros' professional success in the financial industry demonstrates the synergies among finance, economics, and optimization and, of course, operations research and management science.
Three years ago, I taught a short course on Portfolio Optimization at Harvard University and, of course, I recognized the fundamental importance and elegance of Markowitz's work.
I wonder how the financial landscape would have changed if Markowitz's dissertation had not been approved!
For those of you interested and conducting research on financial networks, I am editing a special issue on the topic for the journal Computational Management Science.
The call for papers has been circulating and my colleague, Nikunj Kapadia, who is now on leave at the Office of Financial Research in Washington DC, sent me a message stating:
News of your special issue is going around at the OFR! It is of great interest to us here.