An Overlooked Step in the History of Portfolio Theory: Dickson Leavens between Cowles and Markowitz

The Nobel Prize-winning work of Harry Markowitz (1952, 1959) at the Cowles Commission and Cowles Foundation established optimal portfolio diversification (minimizing risk for a given expected return) as central to financial theory. Much less attention has been given to the frst Cowles Commission study to show that diversification reduced portfolio risk: Dickson Leaven’s article “Diversification of Investments” (published in Trusts and Estates, 1945). Leavens, a statistician on the Cowles Commission staff and author of a Cowles monograph on silver money, came to this insight as the result of computing returns on twenty randomly-selected portfolios for Alfred Cowles to use in Cowles’s 1944 Econometrica article “Stock Market Forecasting,” which argued that, with one apparent exception, stock market forecasters had failed to out-predict random portfolios. We present Leavens’ little-known contribution and explore his role in the development of financial economics at the Cowles Commission.