The lightbulb moment (2023)

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Nobel Prize 1990 | How important is risk diversification?

Nobel Prize Fellowpaulo samuelsonhe allegedly pronounced, "Wall Street is on the shoulders of Harry Markowitz." Whether he actually said it is up for debate, but the sentiment is true. Markowitz didn't create Wall Street, but he is almost solely responsible for the Wall Street we know today.

Harry M. Markowitz

SverigesRiksbank Prize in Economic Sciences in Memory of Alfred Nobel, 1990 (shared)

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To be born:1927, Chicago, Illinois, USA. UU.

Campo:financial savings

Award-winning work:Pioneering work in portfolio management theory for individual wealth holders

Your three heroes:John von Neumann, Leonard J. Savage and George Danzig

A little advice:Diversify and start young

(Video) Introducing "The Lightbulb Moment"

On connections with art:"Shakespeare is to literature what Bach is to music"

life creed:"You can judge a man by his friends"

About teaching a class:Never tell a joke at the beginning of a class, it always fails.

Revolutionizing financial investing

As a 24-year-old graduate student at the University of Chicago, Markowitz wrote a paper on portfolio selection that, in 1990, won him the Nobel Prize. In the nearly four decades it took him to receive the award, he established portfolio theory, influenced the way academic research addressed portfolio diversification, revolutionized the risk assessment of financial investments, managed a business, consulted with others, and developed the SIMSCRIPT computer programming language, all while receiving numerous other awards and recognitions.

“I received an award for portfolio theory, which in a nutshell says, 'Don't put all your eggs in one basket.' But there is a trade-off between long-term average return and return variability,” he says. "So I worked on the math of the risk-return ratio."

Diversify as much as you like, but beware of the risks

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Don't put your eggs in one basket

Getting to this point deserves a story. In the early 1950s, young Markowitz knew that, according to John Burr Williams in his Theory of Investment Value, the expected value of a stock should be the present value of its future dividend. "So, I'm thinking, dividends are uncertain, they must mean an expected value or an average," says Markowitz. “Then he even said that if you diversify enough, you'll make the risk disappear and you'll get the median. Well, the notion that if you diversify enough, risk disappears, that's true for uncorrelated risks."

(Video) How The Barcode Made Our Modern Economy - The Lightbulb Moment

Markowitz was two years old at the start of the Great Depression and lived to an age where he also saw the aftermath of the 2008 crash. “Any fool, especially one who lived through the depression or the stock market crash, can probably see that we have correlated risks. and then things don't go to zero”, he says. "But the theory was not consistent with the practice."

"Wall Street is on the shoulders of Harry Markowitz"

the moment aha

Discovering the disconnect between theory and practice set Markowitz on the path to remedying it. Bringing theory into line with practice meant finding a way to mathematically express the change in expected dividend values ​​and account for the correlated risks. This led him to look up the variances and standard deviations of weighted sums in J. V. Uspensky's Introduction to Mathematical Probability in the library. “And that was the a-ha moment,” he says. “Portfolio volatility depends not only on the volatility of the components, but also on the extent to which they rise and fall together.”

However, the implications of this lightbulb moment go far beyond the realm ofInvestment Management. As his longtime friend Martin Gruber describes it, Markowitz's work “had a big impact on economics because we started to see that you can't look at items in isolation, you have to look at the relationships between them. Whether we are talking about the relationship between the GDP of different countries or two stock exchanges within the same country. They tend to move together, the extent to which they move determines the extent to which you can reduce risk. And until Harry's work, no one had looked at it."

What's in a free lunch and how can you minimize risk with an efficient frontier?

Life Goal: Have fun

Needless to say, Uspensky's book found its way onto a special shelf in Markowitz's office, where he also keeps the leather-bound copy of his own 1959 book, among others that somehow became important in his life. “Owning a small business was never my goal,” he says. “Having fun, having interesting problems, having to fight: that's bread and butter, meat and potatoes. And then the 'a-ha' moments, those are dessert. But they are random. They happen suddenly."

celebrating 25heanniversary of your nobel prize

Across town, on the campus of the University of California, San Diego (UCSD), guests gather to celebrate the results of a private a-ha moment on the 25th.anniversary of Markowitz receiving his Nobel Prize.

Scholars, financial industry colleagues, friends and family came from around the world to honor Markowitz's life and accomplishments. Gracefully enjoying all the attention, she doesn't forget to mention that she thinks you can tell a man by his friends, and she was lucky. Having friends and loved ones around her is reward enough. The laureate initiates conversations with guests on topics far removed from portfolio selections, engaging them with his broad intellect, knowledge and curiosity. And all this at almost 90 years old!

Harry Markowitz's greatest hits So what?

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"He's as brilliant at 88 as he was at 62," says John Guerard, a guest and former colleague.

“I was a smart kid,” Markowitz replies. “Now I'm a smart old man. And the only difference between now and then is that I've had many, many years to be a smart kid, a smart middle-aged kid, and a smart old man."


creating a profession

As we say goodbye we hear one last time "Well let me tell you a story" he says. “When people get excited about my Nobel Prize, I like to tell them that my Nobel Prize was not my greatest honor. My highest honor was bestowed upon me in the men's room of a large Washington DC hotel, after dinner, sometime between Christmas and New Year's 1990." He had been invited by the American Financial Association and, after an evening in that Markowitz, along with his co-laureatesGuillermo SharpeymillerAfter saying a few words, Markowitz went into the men's room. It was here that someone in the next stall said to him:

"Thank you, Dr. Markowitz, for creating the profession we all earn our living from." And that's better than a Nobel Prize.

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What does Markowitz's work mean to us?

"If there's anything to be learned from working in financial markets, it's that risk or uncertainty is a fundamental part of our lives."

Paul Donovan
Global Chief Economist UBS Wealth Management

More stories from Nobel Prize winners

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Edmundo S. Phelps

Nobel Prize, 2006

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What is the lightbulb moment? ›

Meaning of light-bulb moment in English

a moment when you suddenly realize something or have a good idea: It was a light-bulb moment for me when I realized I could no longer go on without help.

What is the origin of the phrase lightbulb moment? ›

Lightbulb moment appeared first as a visual gag in cartoons. Internet lore attributes it to Felix the Cat, a cheeky feline star of the silent-film era, whose thoughts were often represented as pictograms above his head.

What is an example of gender lightbulb moment? ›

A “gender lightbulb moment” is a time you became aware of being treated differently because of your gender. For example, a girl not being allowed to play football, or a boy being told he shouldn't play with dolls.

What is the idiom with light bulb? ›

a light bulb goes off/on (in someone's head)

What is another term for light bulb moment? ›

light-bulb moment (plural light-bulb moments) (informal) A moment of enlightenment, inspiration or sudden realization. synonym ▲ Synonym: eureka moment.

What is the meaning of Eureka moment? ›

: a moment of sudden, triumphant discovery, inspiration, or insight.


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