Sharpe Rethinks CAPM
11 October 2006 at 9:20 pm Peter G. Klein 1 comment
| Peter Klein |
A core Kuhnian principle is that scholars never change their minds. This is especially when their original views lead to Nobel Prizes. So what a surprise to learn that Nobel Laureate William Sharpe, co-creator (with Harry Markowitz) of the Capital Asset Pricing Model (CAPM), is rethinking his views on asset pricing.
[Sharpe’s] latest book, “Investors and Markets: Portfolio Choices, Asset Prices and Investment Advice,” may send investors and academics scurrying. Published this month by Princeton University Press, the book eschews mean-variance analysis — the mathematically complex formula that relates rewards to risks of securities or portfolios — in favor of a “state preference” approach that relies on an easy-to-understand simulation. That approach is based on a model closer to that used in financial engineering than in the ivory tower.
Markowitz, apparently, is not convinced, and will debate Sharpe at an upcoming conference. (Via Mark Thoma)
Entry filed under: - Klein -, Methods/Methodology/Theory of Science.
Organizations and Markets 
1.
Tom Schenk Jr. | 12 October 2006 at 1:33 am
Don’t forget about Fama’s reversal on CAPM as well (http://ideas.repec.org/a/bla/jfinan/v47y1992i2p427-65.html). Recent empirical data has shown what were valid observations during the formation of CAPM can no longer be validated. Not only do these reversals butt against Kuhn’s analysis, but supports Popper’s argument that testing/falsification of theories drives scientific progression–even if it’s reversed by the original theoretician.
I think this is interesting though, one would think as asset price and risk models become established in the industry that data would converge further toward CAPM/mean-variance theory.