The previous Patient Investor article considered the legacy of the late Harry Markowitz, the pioneer of modern portfolio theory, and one of the generation of post-war economists that sought to reconceive their discipline as a science, moving beyond the nebulous tradition of ‘political economy’.
Mathematical analysis based on a concept of the investor as a rational actor pursuing their utility in a seamless market yielded innovations of proven worth, of course, not least the index funds that ensure ordinary investors’ inexpensive access to the market return. But like all models, efficient markets theory posits a stylised version of reality: the market as a system governed by rational behaviour, tending towards equilibrium through the interplay of clear-headed participants. As even occasional investors know, exchanges are volatile, emotional places, buffeted by hope and fear...
Justin Reynolds is a freelance journalist and editor of The Patient Investor blog
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full article, click here.
