Tuesday, February 22, 2011
Pages 73-75
Economists were slow to pick up on the CAPM model that Treynor had developed. The first two economists to publish their CAPM ideas were William Sharpe and John Lintner in 1964 and 1965, respectively. All of the CAPM approaches being developed at this time were looking at the problem from different perspectives. During a three year span, Fischer learned economics mainly through relaying messages from Lintner to Treynor about how the economic CAPM model worked.
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A for Jack.
ReplyDeleteIt isn't clear at this juncture of the book, but there is Finance 1.0 and Finance 2.0. Finance 1.0 is killed by economists.
Up until Markowitz, Modigliani-Miller, Treynor/Sharpe/Lintner and Black-Scholes, finance was a pure business profession. You trained on the job, and there wasn't much theorizing - everything was hunches and searches for patterns. State of the art investing was to become an expert at a small handful of companies, and to try and pick one to put all your money into. This is Finance 1.0.
Not all those guys were economists. But, what they were doing was applying economic theory and modeling to firm up finance. What emerged was Finance 2.0: a field that was technical, based on diversification, and closest to macroeconomics.
Treynor was the only guy that came out of Finance 1.0 in that group. But, he was already an outside in Finance 1.0 because he kept telling professionals that there was more to what they were doing than meets the eye, and they weren't even looking for it.