modest returns from buying and holding triple-A bonds to maturity were more than enough reward. Markets at : Modern Theory, or MPT as it is most often referred to, has been a crucial element in the unleashing of this recent The Limits of Modern wave of demand for risk. It may not be difficult to understand how MPT, with its Portfolio Theory sophistication, elegance, and complexities, has succeeded in persuading that large can be controlled. Putting the Steve Lydenberg genie of MPT back in the bottle, however, Domini Social will be a more difficult task. Fixing MPT, correcting its flaws, is not sufficient to this task. We will need an entirely new theory to underpin practice if we hope to In the face of one of the greatest tame this powerful force that has been set financial and economic crises of the past 100 free in the financial world. years, legislators and regulators are deciding Even the most casual, unsophisticated what new steps need to be taken to keep the observer can intuitively understand that abuses that have provoked such situations financially risky products are at the heart of from recurring. They are, understandably, today’s financial crisis. It is easy to see that focusing on the supply side: the host of new, it was a $450 billion bet on credit highly risky financial products and practices swaps that brought down AIG, the largest around the world that need to be reined in insurance company in the world; that highly and brought under control. risky subprime mortgages broke the back of Unfortunately, not as much attention Washington Mutual, one of the fast growing is directed at the demand side: the regional banks in the ; that out- Iapparently insatiable demand for risky of-control managers bankrupted Bear products coming from our largest and most Stearns; and that highly leveraged real estate sophisticated institutional investors. Those deals contributed to the downfall of Lehman demanding these risky products have been Brothers. Risk-taking has devastated as responsible for their spread around the financial institutions around the world and world as have those providing the supply. brought whole national economies—Iceland Regulating that demand—tempering it, is the most dramatic example—to the brink restraining it, controlling it—is as likely to of fiscal collapse. prevent the recurrence of future financial These risky products purveyed by reckless crises as is trying to prevent super-smart financial institutions existed in part because money managers from finding fancy ways to there was a willing market—and institutional package risk in today’s marketplace. investors bound by fiduciary principles of Not more than forty or fifty years ago this prudence to their beneficiaries were part demand was easily controlled. Fiduciaries— and parcel of that market. These institutions the largest institutional investors of today: are among the largest investors in the world. pension funds, mutual funds, and trust Pension funds around the world control officers—were by and large limited in their some $25 trillion in assets. (Watson Wyatt abilities to invest in because they were 2008) In the United States, endowments of too risky, not to mention mortgage-backed universities alone exceeded $400 billion in securities, synthetic collateralized debt assets as of 2008. (NACUBO 2009) Some obligations, credit default swaps, double- of the most technically expert investment barrier foreign exchange options and their professionals in the world clearly thought the like. A true fiduciary did not take risks with investments they were making were prudent, other people’s money. The security and and the reason they thought so was MPT.

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 6 | 42 To understand the front-page headlines developing a theoretical rationale for the about today’s financial crises we must step “prudent man” to invest in stocks. MPT behind the scenes to understand some of provided that theoretical framework. those fundamental precepts of MPT that (Bernstein 2005) It demonstrated that the have been so influential. Although a full risks inherent in investing in stocks could be exposition of MPT—its origins, its primary measured and controlled at a portfolio level elements, and the debates about its various during normal market conditions. hypotheses—is not attempted here, the The origins of MPT can be traced to the following highlights a number of its most seminal work of . In a 1952 important contentions and theories and article in the Journal of Finance, Markowitz examines their implications for investment pioneered the concept of controlling risk practices today. at a portfolio level through diversification. Markowitz’s work was revolutionary because Origins of Modern Portfolio it viewed risk as a portfolio problem, not Theory a problem in individual security selection. The progenitors of MPT were academics Investing in countercyclical stocks was who, starting in the 1950s, set out to solve the key to controlling risk. If companies a relatively simple problem: how to justify involved in home repair thrive when those investing in risky stocks. In the late 19th that build new houses struggle, then a and early 20th centuries, stocks were an portfolio of the stocks of both companies unregulated, highly risky, speculative will be less risky than investments in either investment prone to boom and bust—and company alone. Investing in one risky consequently were off limits to prudent might be unwise, but investing in two risky investors. The risks of investing in stocks stocks—each risky in its own way—can be were made painfully clear during the crash prudent. (Markowitz 1952, 1959) of 1929 when the lost almost Increasing the opportunities to invest 90% of its value over three years. in risky securities is crucial to investment Initial attempts to legitimize investing managers today because the greater the in the stock market were made during the risks the greater the potential rewards. By depths of the Great Depression. Among the diversifying risk throughout a portfolio, most important were increased transparency managers can achieve greater portfolio and government regulation. The Securities returns without taking greater overall and Exchange Commission was created in portfolio risks. Diversification techniques are 1933 and 1934 and directed to oversee the what Peter Bernstein calls “the closest thing stock markets. Companies were, for the first to a free lunch” that there is in investing. time, required to disclose audited financial (Bernstein 2005) statements. Also in 1934, In the 1960s , Sidney and published their still Alexander, and others developed a second popular classic Securities Analysis: Principles mainstay of MPT: the efficient market and Techniques, which laid out convincingly hypothesis. In its various forms this principles for purchasing stocks at hypothesis asserts that the stock market reasonable prices. (Mitchell forthcoming) essentially reflects all available information This combination of regulatory initiatives at any given time. This implies that stocks and academic advice helped legitimize are appropriately—or “efficiently”—priced. investing in stocks, but essentially wasn’t In addition, this theory implies that a sufficient to justify fiduciaries taking the money manager cannot beat the market—at plunge into the equities markets because it least not all the time—because the market provided no theoretical reason why stocks knows more and is “smarter” than any one should be viewed as safe. individual. (Fama 1970) It wasn’t until the mid-1950s, when the A crucial variation on this theme was stock market once again reached its 1929 necessary as well to account for the fact that highs, that academics tackled the task of markets bounce around irrationally day

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 6 | 43 to day. MPT concedes that stocks can be in temporarily mispriced. These momentary Practice lapses in the otherwise efficient markets give Thus, all the elements of MPT were better-informed investors an opportunity effectively in place by the mid-1970s, but to take advantage of temporary market it took some twenty years for its basic anomalies and, brief as these anomalies precepts to be widely disseminated and might be, to buy or sell stocks before they accepted among institutional investors. The revert to their true mean. conservative of the 1970s and 1980s, Simultaneously, William Sharpe, James who had been told time and time again that Tobin and others were developing the Capital one of the primary duties of a fiduciary was Model, which provides a means to avoid undue risk initially greeted MPT’s of measuring expected returns on any given brilliant academic proponents with doubt investment of a particular level of risk. This and skepticism. (Bernstein 2007) formula—and it is an algebraic formula— The tide turned gradually in the 1980s allows investors to measure the success of and early 1990s, as the proponents of this their investments. That is to say, it allows theory received increasingly widespread them to assess whether they have achieved an recognition—many were eventually awarded appropriate level of return for the level of risk a Nobel Prize in Economics1—and as the they have taken. (Sharpe 1970) technology and practical tools for measuring Crucial to this theory is the definition and controlling risk in investment portfolios of risk as the of a stock’s returns were developed. But it wasn’t until the late relative to the market. A stock is risky if its 1990s that the floodgates truly opened price goes up or down more than the price and fiduciaries in charge of institutional of its peers. This simple, narrow definition investments embraced MPT wholesale. has led to the creation of innumerable Not only did MPT free fiduciaries to benchmarks that define the markets against invest in blue-chip stocks formerly deemed which investment success can be measured. excessively risky, but it has further led to More important, once this definition of the embrace of the even more risky stocks success is accepted, it leads to the logical of small firms and in the stocks on the conclusion that the duty—the fiduciary exchanges of emerging markets around the duty—of an investor is to “beat the market,” world. Other asset classes, whatever their that is, to achieve returns that are better apparent risk, have also become fair game. than a benchmark given comparable levels Private equity, hedge funds, real estate, of risk—or at least, to match the market’s commodities, currencies—virtually any performance while minimizing expenses. investment for which there is a market—are The final piece of the MPT theory was now not only available to fiduciaries, provided by Fischer Black and Myron but frequently promoted as a necessary Scholes when in 1973 they developed the investment if they are to keep up with their formula—the Black-Scholes Model—to price peers and “beat the market.” Previously, the options and other derivatives. This formula thought of investing in these asset classes is crucial because it enabled investors to use was inconceivable—they were seen as derivatives in their portfolios for hedging— reckless and imprudent—now they are a and hedging is the simplest means to control necessary tool for the sophisticated investor. risk. This model made risk control, if not Once investors accept these four principles necessarily child’s play for mere mortals, at of MPT—1) that greater returns come from least child’s play for the highly quantitative securities with greater risks; 2) that the risks mathematicians and scientists hired by Wall of individual securities can be diversified Street to show institutional investors how away at the portfolio level; 3) that returns are risk can be controlled. Derivatives are viewed most meaningfully measured against market as so foolproof a method of controlling risk benchmarks; and 4) that derivatives can be that they are often referred to as “insurance.” meaningfully priced—then fiduciaries are (Black and Scholes 1973) virtually forced to seek out risky products in

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 6 | 44 order to maximize their returns relative to . The more investors control financial risks, their peers. That is why MPT has changed the greater the societal and environmental the face of investment. That is why investing risks. today inevitably and dramatically increases . The more investors hedge their portfolio the demand for risky products in the bets, the more likely markets are to go bust. financial markets. The more convinced investors are that they can control risk, the easier they are to con. Limitations of Modern Portfolio While it may seem intuitively self-evident Theory that the more risky products investors Despite its current wide acceptance in the demand, the more risky financial markets marketplace, MPT has severe limitations will become, MPT’s assertion that risk can that are recognized by many mainstream be controlled cannot be casually dismissed. investors. Here, for example, is what Gao It is not by accident that MPT has become Xiqing, president of the China Investment a fundamental and powerful principle of Corporation, one of the largest sovereign investment today. Its virtues must be fully wealth funds in the world with some $200 appreciated and acknowledged before its billion under management has to say about weaknesses can be accurately analyzed. derivatives—one of the keystones of MPT. MPT needs to be treated with respect When James Fallows, interviewing him for not simply because many of its progenitors The Atlantic, asked what he thought about are Nobel Prize recipients—although that these risky products, he answered:. certainly commands respect— but because “If you look at every one of these it has been so widely embraced by so many [derivative] products, they make sense. But in powerful positions. Its virtues need to in aggregate, they are bullshit. They are crap. be understood not simply because it has They serve to cheat people.” (Fallows 2008) contributed valuable insights to the art of This is a remarkably concise statement investing, but because it has made many of three crucial and somewhat surprising rich. Its weaknesses need to be carefully points. First is the recognition that MPT analyzed not simply because they are when applied “locally”—that is, at the apparently inadequately recognized, but portfolio level (it is, after all, called Modern because it will take an alternative theory Portfolio Theory)—works. The second to replace this theory and reform current assertion, however, is counterintuitive: when financial practices. Understanding where the tools of MPT are widely used—that MPT is strong and where it is weak is the is to say, when these theories are put first step toward building a new theory. systematically into practice—they break Let’s be clear. MPT is an elegant, highly down. Not only do these tools break down, sophisticated set of principles and practices but they can have a destructive impact on that accomplishes exactly what it sets out financial markets as a whole. to do—control risk at a portfolio level. It The third assertion is even more surprising. can identify and measure risk (defined When Xiqing says derivatives “cheat” people, most simply as volatility) within a portfolio. I believe he means that those who sell these It can adjust the level of that risk up or products to institutional investors know full down throughout portfolios through a well that they don’t work if everyone uses variety of sophisticated techniques. It can them. They are not quite Ponzi schemes. They compare risks taken to returns achieved are not outright fraud. They are not illegal. and determine if the returns are appropriate But at crucial times they are ineffective, unre- to that level of risk. It can measure and liable, and ultimately dangerous. compare the capabilities of different . The assertion that the specifics of MPT managers with different investment styles in when applied generally are dangerous can be achieving these risk-adjusted returns. What’s put several different ways. more, it can apply these principles not just . The more investors control portfolio risks, to stocks, but to virtually any asset class for the greater the market risks. which there is a developed market. In its

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 6 | 45 own terms, within the limited boundaries of a security relative to a benchmark index. it sets for itself, MPT is a wonderful and By limiting the definition of risk to price undeniable success.2 volatility, MPT ignores the possibility that Controlling risk at a portfolio level allows investments can either pose social and investors to hold an increased number of environmental risks or, because reward is the risky securities. The importance of this flip side of the risk coin, that investments can concept cannot be overstated. It is the create social and environmental benefits. path that leads to greater portfolio returns Addressing this limitation forces us to without greater portfolio risks. It is a theory recognize that the act of investing—the and a practice that sound too good to be allocation of assets to specific institutions true. And unfortunately, at a market level, for specific purposes—creates products and that is precisely the case. services that impact society. This may sound Within the context of the financial like a self-evident truth, but it is one that markets, two things happen when substantial is ignored by MPT. When investors pour numbers of investors put this theory into money into the fossil fuel industry because practice. The first is that, as the demand a skyrocketing price of oil makes these for risky products increases, the overall companies momentarily profitable, MPT quantity of risky products in the marketplace is of great help in measuring their financial increases. The dangers of this increase returns versus their financial risks, but its are obscured by the fact that the risk of formulas are of no help when it comes to, for each portfolio, when viewed individually, example, the risks of climate change. On the is apparently negligible. (In Gao Xiquin’s flip side—that of measuring rewards—when words, “If you look at every one of these investors allocate dollars to microlending products, they make sense.”) programs that enhance the abilities of large At a portfolio level, risk can be diversified segments of the world’s population who away by purchasing securities or asset classes have not previously had access to financial with countercyclical risks; by securitizing services to take at least tentative steps out and redistributing risky securities to others, of poverty, MPT has no calculus for these as in the case of speculative mortgages or benefits to society. commercial real estate loans; or by hedging In addition, for every investment made against risks through the purchases of there is not only a potential societal risk and derivatives. Hedging in particular is the most reward, but there is an opportunity cost for elegant and most immediately effective way which there is no place in MPT’s equations. to deal with risk. That is why the notional Every dollar invested in oil companies is value of derivatives in the marketplace stood a dollar not invested in alternative energy. at $683 trillion as of June 2008. (Bank for Every decision to invest in the development International Settlements 2008) of high-cost and high- drugs to treat Risky products designed to control the chronic ills of the developed world is a risk—and risky debt (or, as it is often decision not to invest in cures for malaria, referred to in the financial community, sleeping-sickness, tuberculosis, AIDS, and “”) used to multiply the returns from other scourges of the developing world, not these risky products—now dominate the to mention vaccines. investment landscape. When they start to Furthermore, MPT’s ignorance of the fail, they fail spectacularly—as the current societal and environmental implications financial crises that have brought the largest, of investment decisions also -circuits most sophisticated financial institutions in debates about government’s role in the the world to their knees amply demonstrate. creation of public goods. By focusing the (“But in the aggregate, they are bullshit. They concept of investment narrowly on market- are crap.”) based returns, MPT distracts attention A second limitation of MPT is that its from the contribution of investments definition of risk is purely financial—that is provided through the governmental, to say, purely related to the price volatility quasigovernmental, and nonprofit sectors

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 6 | 46 in such areas as infrastructure, education, it would fail in exceptional circumstances. health care, housing, security, and other (Bernstein 2005; Bookstaber 2007) public goods. These goods are provided by The same is true for other derivatives. non-market-based institutions precisely For example, credit default swaps (CDSs) because the profit-motive is too short- are often billed as a form of insurance. This sighted to allocate assets efficiently to these esoteric product, developed within the past endeavors. decade to help lenders control the riskiness of Put most simply—MPT fails to grapple their loans, had become so popular that as of with the complicated task of valuing the 2008 some $65 billion in notional assets were societal and environmental implications so insured. Here’s one example of how a CDS of investments, or even to give them the might work. A bank lending $10 million to a minimal respect of a passing glance. major U.S. corporation can enter into a credit The third weakness of MPT is that it fails default swap with a . The hedge to account for the possibility that markets fund agrees to pay the bank the $10 million if may be in practice more dishonest and the corporation defaults on this loan any time dangerous than they appear in theory. within the next five years. In consideration , in his recent rant for this service, the bank pays an “insurance” against current financial practices, tells a premium to the hedge fund each year, fictional tale about asking a professor what nominal if the chances of the corporation the odds of a coin that has been flipped defaulting are minimal, or greater if the 99 times and comes up heads each time corporation is in financial difficulty. would be of coming up heads again on the If I’m a speculative and profit-minded hundredth flip. The professor’s answer is banker, however, I might decide to enter 50-50, because odds do not change simply into two or three CDSs for this loan, instead because of chance variations. When he asks of just the one. After all, if the corporation the same question to his street-wise friend defaults I am now not only protected against Fat Tony, however, he gets a very different a loss, but stand to make a tidy profit. In answer. Fat Tony would give you only a one- fact, the next time that corporation comes in-a-hundred odds of heads coming up the to me for a loan, I might be willing to make next time. Why? Because “The coin is clearly one that is more risky at a higher interest rigged. It can’t be a fair game.” (Taleb 2007) rate because, using CDSs, I can make more The point of this story is that, while many money whether the loan is paid off or not. of the risk-control techniques that have The problem with this scenario—which one been sold to the financial community as might view as a win/win for both the corpo- insurance are theoretically sound, they rate community and the bank (corporations don’t work when widely used. What’s worse, have access to risky loans, the banks are pro- they can actually increase the chances of tected against default)—is that as more and systemic collapse. For example, a set of more investors take out CDSs on risky loans hedging techniques were developed by two the less likely the hedge funds or other third academics from the University of California, parties are to be able to pay if these corpora- and widely marketed to the financial tions actually default. (Sarra 2008) community in the early 1980s as “portfolio Michael Lewis has said of the credit insurance.” By early 1987, some $70 billion default swap, “Call it insurance if you like, in assets were theoretically insured against but it’s not insurance most people know. market declines of theoretically predictable It’s more like buying fire insurance on your magnitude. However, during the precipitous neighbor’s house, possibly for many times of October of that year, the value of that house—from a company these insurance policies not only failed to that probably doesn’t have any real ability protect investors against large losses, but to pay you if someone sets fire to the whole even contributed to the size and speed of neighborhood.” (Lewis and Einhorn 2009) the crash. The more investors used this This is true of many hedging techniques insurance technique, the greater the chance in the financial world. They are sold as

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 6 | 47 insurance, but they are no such thing. They isn’t that these investors need a better system work only if limited numbers of investors use or even a better casino. What they need them. As more investors pile onto the risk is a better theory of what to do with their control techniques that have been developed investment funds to begin with. to implement MPT, the more likely they are In order to develop a theory that will not to work. This is why Gao Xiquin says compete successfully with the allures of they “cheat people.” MPT, the definition of the goal of investing must be changed. As as success in It Takes an Alternative Theory investing is defined as controlling risk and MPT’s assertions about risk control are in beating price-based benchmarks, risk-taking many senses too good to be true. It is this and will become irresistible to attractiveness—the promise of a free lunch— investors at some point and the markets will that has made them so popular within the again find a way to fill that demand. institutional investment community. A theory of investment that can stand Investors always have a difficult time up to MPT will, I believe, relate success in saying no to a good deal. Those that invested investing to the social and environmental in an outright fraud, such as the Ponzi purposes for which particular investment scheme run by Bernard Madoff, should asset classes were created. have known better, should have done their After all, banks were not created so that due diligence more thoroughly, and should depositors could earn interest. They were have seen that the promise of an unbroken created to help support family-owned series of positive returns could not be businesses and local economies. The purpose kept. The remedy for this kind of abuse is of issuing bonds is not to help citizens straightforward —as a fiduciary, do your job, make money, but to fund the creation of don’t be seduced by fraud. public goods by governments acting in the The problem posed by a world of public interest. Stock markets didn’t come institutional investors exercising their into being so that investors could beat fiduciary duties under the precepts of MPT benchmarks, but to fund large-scale business is more complicated. MPT is progress in enterprises providing useful products and the sense that it works for some investors all profits for a community of stakeholders. A the time, and all investors some of the time, conception of success in investing solely but it doesn’t work for all investors all the as achieving better returns than those of time—and it cannot. It cannot because it is your neighbor, no matter what the asset the right answer to the wrong problem. class in which you are investing, is limited, The question responsible investors should impoverished, and anemic. be asking themselves is not “How can risk An alternative to MPT and current be controlled at the portfolio level?” A better financial practices needs to be built on a question for MPT to have addressed might foundation of investments that maximize have been “How can risk be controlled at the societal goods they are best at creating. the market level?” But even that question This necessitates understanding the risks isn’t the right one—because risk cannot be involved—risks certainly cannot be ignored. controlled. Risk and speculation are part More importantly, however, it involves of the investment process and they can no understanding the specific needs that more be eliminated from it than death can investments fill, the specific goods they create, be eliminated from life. and the specific rewards they bring to the It is as if fiduciaries were persuaded to society and environment in which we live. enter a casino by some smart people with Successful, effective investment is as promises of a system to beat the house. Their much about particular rewards as it is initial allocation of assets to slot machines about generalized returns. Understanding and the roulette wheel paid off handsomely, how investments relate to the asset classes but now everyone seems to be using the through which they are made will promote system and it is breaking down. The problem a world of lesser risks—financial, societal,

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 6 | 48 and environmental—and greater long-term Lewis, Michael and Einhorn, D. 2009. “The rewards. Defining the purpose of investment End of the Financial World As We Know It,” as achieving these ends is a short, quick New York Times January 4:WK9. road to creating the demand that will help Markowitz, Harry M. 1952. “Portfolio stabilize financial markets and sustain long- Selection,” Journal of Finance Vol. 7, No. term societal wealth. 1:77-91. The current economic crisis is a rare moment of opportunity to rethink the Markowitz, Harry M. 1959. Portfolio fundamental purpose of investing and to Selection: Efficient Diversification of invent the tools that serve this purpose. Investment. New Haven, Connecticut: Yale The key to such rethinking is to define University Press. investment as a means to socially purposeful outcomes rather than a numbers game built Mitchell, Lawrence. Forthcoming. “The on a societally inadequate theory. n Morals of the Marketplace: A Cautionary Tale of Our Time.” Forthcoming in Stanford References Law & Policy Review. Bank for International Settlements. June 2008. “Amounts Outstanding for Over-the- NACUBO. 2009. “2008 NACUBO Counter Derivatives.” Available at http:// Endowment Study.” Available at http:// www.bis.org/statistics/otcder/dt1920a.pdf. www.nacubo.org/Research/NACUBO_ Last visited May 10, 2009. Endowment_Study.html. Last visited May 10, 2009. Bernstein, Peter L. 2005. Capital Ideas: The Improbable Origins of Modern Wall Street. Sarra, Janis. 2008. “Credit Derivatives, Hoboken, New Jersey: John Wiley & Sons, Inc. Market Design Creating Fairness and Sustainability.” Available on the Social Bernstein, Peter L. 2007. Capital Ideas Sciences Research Network at http:// Evolving Hoboken, New Jersey: John Wiley papers.ssrn.com/sol3/papers.cfm?abstract_ & Sons, Inc. id=1399630. Last visited May 10, 2009.

Black, Fishcer and Myron Scholes. 1972. Sharpe, William F. 1970. Portfolio Theory and “The Valuation of Contracts and Capital Markets. New York: McGraw-Hill. Corporate Liabilities,” Journal of Political Economy Vol. 81: 637-654/. Taleb, Nassim Nicholas. 2007. The Black Swan: The Impact of the Highly Improbable. Bookstaber, Richard. 2007. A Demon of Our New York: Random House. Own Devising: Markets, Hedge Funds, and the Perils of Modern Financial Innovation. Watson Wyatt. 2008. “Global Hoboken, New Jersey: John Wiley & Sons, Inc. Assets Rise and Fall.” Press Release, January 31. Available at http://www.watsonwyatt. Fallows, James. 2008. “Be Nice to the com/news/press.asp?ID=18579. Last visited Countries that Lend You Money,” The May 10, 2009. Atlantic, December: 62-65. ENDNOTES Fama, Eugene F. 1970. “Efficient Capital 1 What is frequently referred to as the Nobel Prize in Markets: A Review of Theory and Empirical is technically the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, which Work,” Journal of Finance: Vol. 25, No. 2: has been awarded annually since 1968 by the Swedish 383-417. national bank. The Nobel Prizes for achievements in physics, chemistry, medicine, literature and for peace Graham, Benjamin and Dodd, D.L. 1934. have been awarded by the Nobel Foundation since 1901. : Principles and Techniques. 2 MPT has also succeeded in converting investing New York: McGraw Hill. from an art into a science, in the sense that investing

2009 SUMMIT ON THE FUTURE OF THE CORPORATION | PAPER NO. 6 | 49 according to MPT has become a highly complicated, rigorously quantitative exercise for which physicists and mathematicians at the highest levels (the proverbial rocket scientists) are necessary. In making this conversion, MPT has achieved an underlying goal of taking personal preference and politics out of the investment process. The assertion that the personal and political should have no role in investment is not simply a practical consequence of MPT’s rules, it is a dogmatic belief fundamental to its religion. This making over of investment into an impersonal science has the virtue of restraining conflicts of interest and opening up the investment world to merit and skills that are independent of class and entrenched power. Discussing the strengths and weaknesses of this other aspect of MPT, unrelated to its attitudes toward risk, is a separate topic not dealt with here.

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