John V. Lintner                                       To exit, click Go Back

John Lintner grew up in Kansas (his middle name was Virgil, and he didn't use it). Lintner was an unselfish man and one of the most intelligent people on the planet. He taught at Harvard from 1946 until his death in 1983.

Unfortunately, one must be alive to receive a Nobel Prize. In 1990, the Nobel Prize in Economics was awarded to the major surviving developers of Modern Portfolio Theory (MPT) -- William Sharpe retired from Stanford and a founder of, James Tobin of Yale, and Harry Markowitz.

The next section is from the Boston Globe, October 17, 1990, note the last paragraph:

Three American founders of modern corporate finance won the Nobel Prize for economics yesterday for a series of contributions in the 1950s and 1960s in which they created the intellectual framework with which money managers evaluate the risks and rewards of their investments.

Everyone from newly minted MBAs and lofty pension managers to Eastern European entrepreneurs uses their tools to calculate the cost of capital and the rate of return on various investments, mainly stocks and bonds.

Harry Markowitz, 63, of the City University of New York, was cited by the Swedish Academy of Sciences for developing the theory of portfolio choice.

Merton Miller, 67, was honored for work on the effect of firms' capital structure and dividend policy on their market price.

William Sharpe, 56, was hailed as the author of the capital asset pricing model, the device that gave Wall Street the concept of the "beta" -- a coefficient designed to measure its riskiness and volatility relative of a particular stock relative to the performance of the stock market as a whole.

It was the first time that the Swedish Nobel committee cited three economists, though dual awards have been common enough in the 22 years since the prize was first awarded in 1969.

Several finance specialists said the late John V. Lintner Jr. of the Harvard Business School would have shared the prize had he lived, for having devised a capital asset pricing model in parallel with Sharpe. Lintner died in 1983.

History of MPT: In 1952 and 1959, Markowitz published a paper and book suggesting that a variance-covariance matrix of security returns combined with security expected returns and investor risk tolerance could give solutions finding optimal portfolios. At the time, computers could not handle this large of a problem. Now it can even be done quickly on a PC. In 1963 and 1964, Sharpe published seminal papers leading to a diagonal model that eliminated the then intractable covariance matrix. Sharpe showed that a simple diagonal portfolio model could be used for portfolio management if the correlation between various stocks all came through a common "market" security.

In 1958, Tobin published a paper that introduced the Separation Theorem. If there was an optimal portfolio of risky assets (highest return given a risk level), everyone would invest some portion of their assets in that portfolio. How much was invested depends upon their risk tolerance. The remainder would be put into a riskless asset such as Treasury bills.

In 1965, Lintner published two papers that are the basis of MPT -- alpha, beta and separation as we know it. In a September 1964 paper, Sharpe had an equation in a footnote that could have been solved to give the basic MPT formula. In a reply to Lintner's paper (Journal of Finance, December 1966), Sharpe courteously acknowledged missing the solution and attributed Lintner as the founder of MPT.

What's the point? Academic finance has gotten so complex since the 1970's that it is virtually inapplicable. The basic principles of MPT and the Black-Scholes option pricing model (1972) are still the basis for trillions of dollars invested every day by bankers and hedge funds. Scholes and Merton shared the 1997 Economics Nobel for the option pricing theory  (Black died in 1995). The prize winners in Economics that focused on investments (Markovitz, Tobin, Sharpe, Scholes and Merton) are great men, but we should not forget Lintner and Black who died before their time.

Wagner was John Lintner's friend, Retirement Assistant and Teaching Fellow and misses him. He was a very smart guy. Had he not died before his time, I could have boasted that my thesis supervisor and mentor was a Noble Laureate. John Lintner was a great guy.

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