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The Theory and Practice
of Rational Investing
Volume Ill
HARRY M. MARKOWITZ
ISBN: 978-0-07-181833-9
MIIlD: 0-07-181833-2
The material in this eBook also appears in the print version of this title: ISBN: 978-0-07-181831-5,
MIIlD: 0-07-181831-6.
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[T]he race is not to the swift. nor the battle to the strong,
neither yet bread to the wise, nor yet riches to men of
understanding, nor yet favour to men ofskill; but time
and chance happeneth to them all.
-Ecclesiastes 9: 11
-Benjamin Franklin
Preface xiii
The Rational Decision Maker xiv
Words of Wisdom xv
John von Neumann xix
Aclmowledgments xxiii
13. Predecessors I
Introduction 1
Rene Descartes 4
There Is No "Is," Only "Was" and "Will Be" 8
Working Hypotheses 11
RDM Reasoning 19
David Hume 19
Eudaimonia 27
Financial Economic Discoveries 29
Economic Analyses That Have Stood
the Test of Time 33
Constructive Skepticism 39
Isaac Newton, Philosopher 42
Fields Other Than Physics 45
vii
viii • Contents
Karl Popper 50
Mysticism 52
Caveats 57
Charles Peirce 58
Immanuel Kant 67
What an RDM Can Know A Priori 70
Lemma 109
Lemma 116
Proof 116
The Paradoxes (a.k.a. Antimonies) 116
Three Directions 118
Notes 279
References 287
Index 297
PREFACE
xiii
xiv • Preface
WORDS OF WISDOM
So soon old,
So late smart.
asked, "Wise old rabbi, why is it that when you ask a Jew a
question, he answers with another question?" The wise old
rabbi transfixed the professor with a pointing finger and an
intense gaze, and said, "Why not?"
The use by Jews of questions for purposes other than
interrogation can have serious objectives. The quote form
Hillel asked "when" and "who." The answer is not always "me,"
"right now." For example, the first Monday of December, my
colleagues (Mary "Midge" McDonald and Lilli Alexander) and
I meet to discuss which tasks must be done before December
15 (when Christmas cards should be in the mail), which
before December 25, which before December 31, and which
may be done the following year. We also make sure that every-
one knows who will do what. In addition to "who" and "when"
other important questions include "what," "how," and "why."
The use by Jews of questions for noninterrogatory purposes
is ancient. In particular, Hillel, the Elder, died in 10 A.D., and
is said to have lived 120 years, just like Moses. Conceivably,
the noninterrogatory use of questions had been passed down
from biblical times.
Benjamin Franklin did not offer wisdom in the form of
questions, but he knew the value of questions of various sorts.
He had a saying, which I will amplify a bit, to the effect that
xxiii
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13
PREDECESSORS
INTRODUCTION
1
2 • Risk-Return Analysis
investment, and still do. But the greatest influences in the for-
mation of my views of these matters came later, in the works
of J. von Neumann and 0. Morgenstern (1944) and Leonard
J. Savage (1954). The former was cited extensively in Volume
II; the latter, as well as the former, are central to the present
volume.
The present chapter reviews the positions of Descartes,
Hume, Kant and others, and my current views vis-a-vis them.
It is not intended to be a balanced account of the history of
philosophy, but primarily an informal account of my own fun-
damental views on the preceding three numbered questions.
For example, I do not explain Plato's views and then proceed to
explain why; instead, I am a disciple of Aristotle, as amended by
Hume, Galileo, Newton, Darwin, Hilbert, etc. Such a discussion
would not advance the objectives I have for this chapter.
Newton famously said that "I saw so far because I stood
on the shoulders of giants." I would add that those who do not
study their relevant predecessors stand on the ground. Those
who learn from their predecessors stand on the shoulders of
giants, who stood on the shoulders of a succession of giants
stretching back-literally-thousands of years. I have learned
much from the giants reviewed in this chapter, albeit a small
fraction of what they have to teach.
RENE DESCARTES
Is Descartes Practical?
H: We met at nine
M: We met at eight
H: I was on time
M: No, you were late
H: Ah, yes, I remember it well
We dined with friends
M: We dined alone
H: A tenor sang
M: A baritone
H: Ah, yes, I remember it well
That dazzling April moon!
M: There was none that night
And the month was June
Predecessors • 9
WORKING HYPOTHESES
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