Through the Looking Glass

After the precepts of Keynesianism, perhaps the most notorious example of specious science in economics is modern portfolio theory, born under highly questionable circumstances in 1952.

Harry Markowitz published his article – ‘Portfolio Selection’, Journal of Finance 7 (1) – in March of that year, an article which would go on to achieve cult status within financial circles.

Markowitz at the time was a young mathematician with no experience of investment. This would not prevent him from advocating the bold investment argument at the heart of his portfolio theory: that a diversified portfolio is always preferable to an undiversified one. This was in turn based on the presumption that ‘variance of return [volatility] is an undesirable thing’ – and a mathematical proof that variance of return may be reduced within a portfolio of stocks and shares by holding a number of different shares.

Through the Looking Glass