Introduction

On 16 October 1990 the Royal Swedish Academy of Sciences issued a press release to announce that the award of the 1990 Nobel Prize in economics had gone to three pioneers in the field of financial economics. The three laureates were:

• Harry Markowitz for having developed the theory of portfolio choice;

• William Sharpe, for his so-called capital asset pricing model (CAPM); and

• Merton Miller, for his fundamental contributions to the theory of corporate finance.

I remember this well. To me it represented a very important recognition of the theories which underpinned what I like to call the economic value model. The award of the prize served to elevate these particular theories from being ‘just theories’ to being the recognised descriptions of how markets can be explained. They remain simply descriptions of how markets can be explained and not absolute laws but, from 1990 onwards, they took on the status of being acknowledged as the best descriptions that were available. The world of economics had, in effect, said that it would use these descriptions of how markets work as the accepted wisdom. From that point onwards, any competing theories had to take on the burden of proof that they were demonstrably better than what was now accepted.

Now I have always liked the theories and been prepared to accept them. I have, though, always been aware of their shortcomings and I used to have a concern that these might be such as to represent fatal flaws. Perhaps it was only a matter of time before the ‘right’ answer would come along and replace them.