ABSTRACT

Modern Portfolio Theory (MPT) and the market-dominant theories that grew up with it are both brilliant and deeply flawed. They are flawed by omissions, flawed by commissions, and flawed by self-imposed constraints. They contain a number of unreal and/or mistaken assumptions. MPT is a creature of its historical moment. That moment has long passed. While there was in the 1950s into the 1980s a plausible argument that these flaws, although problematic, allowed MPT to usher in a conceptual and practical revolution. MPT’s massive successes, clearly based on Markowitz’s complex math and others subsequently developing a variety of complementary techniques and strategies, have blinded most MPT practitioners to the limitations of the MPT tradition. Extended risk and extended intermediation need to be factored into day-to-day investment and trading decisions, as well as into stage three governance activities. This is what “investing that matters” means.