Massachusetts Institute of Technology finance professor Andrew W. Lo and Mark T. Mueller, a senior lecturer at MIT’s Sloan School of Management, are the first winners of the Harry M. Markowitz Award for their 2010 paper exploring the limitations of quantitative models in predicting market outcomes.
The award, sponsored by The Journal of Investment Management and investment manager New Frontier Advisors, honors the influence of Mr. Markowitz’s work on both theoretical finance and the practice of asset management, according to a news release.
The paper by Messrs. Lo and Mueller, “Warning: Physics Envy May Be Hazardous to Your Wealth,” was selected by a panel of four winners of the Nobel Memorial Prize in economics: Mr. Markowitz, Robert C. Merton, Myron S. Scholes and William F. Sharpe.
According to the news release, Messrs. Lo and Mueller outline the pitfalls that a “false sense of mathematical precision” have caused for investment managers, while outlining “a new taxonomy of uncertainty.”
In a telephone interview, Richard O. Michaud, president and chief investment officer of New Frontier Advisors, said the paper by Messrs. Lo and Mueller was one of several recently which deal with the topic of uncertainty and “the need to be able to construct models which are much more sensitive to the levels of information available in investment management.”
The winning paper points the way to the need for “tools that take into account the imprecision endemic in investment information,” he said.
Mr. Lo, who also is chief investment strategist with money manager AlphaSimplex Group, couldn’t immediately be reached for comment.