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John Forman - The Essentials of Trading author

The following quote from an article on the New York Times web site (Can We Turn Off Our Emotions When Investing?) says exactly what I’ve tried to tell finance professors and teach traders and investor for years. It’s about a comment Harry Markowitz made. Markowitz, if you’re not aware, won a Nobel Prize for his work in developing Modern Portfolio Theory. The idea of MPT is that by combining different securities we can create optimally balanced portfolios that maximize return for a given risk.

The funny thing is that even though Markowitz developed MPT to help in construct his own portfolio, he couldn’t actually implement it himself.

…, he said, “I visualized my grief if the stock market went way up and I wasn’t in it — or if it went way down and I was completely in it. So I split my contributions 50/50 between stocks and bonds.” As Mr. Zweig notes dryly, Mr. Markowitz had proved “incapable of applying” his breakthrough theory to his own money.

This just goes to show how even very bright, normally rational people can get very irrational when it comes to the markets.

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