WASHINGTON -- Three American economists, who were among the first to apply modern economic theory to the study of corporations and financial markets, jointly won the Nobel Memorial Prize in Economic Science yesterday.
Professors William Sharpe of Stanford University, Harry F. Markowitz of Baruch College at the City University of New York and Merton Miller of the University of Chicago will share in the $700,000 prize from the Swedish Royal Academy of Sciences.
Mr. Sharpe, 56, and Mr. Markowitz, 63, are widely credited with formulating the basic investment strategies that are now followed by virtually every money manager and large investor in the world. The two economists, who worked together earlier in their careers, developed the economic theory, based in rigorous mathematics, that proved that investors should widely diversify their stock holdings to minimize risks while maintaining high returns.
Mr. Markowitz developed the theories in the 1950s, and Mr. Sharpe refined those ideas in the 1960s in ways that made them practical for use by investors. Mr. Sharpe invented the "beta coefficient," a mathematical index widely used by investment managers to determine how best to diversify their stock holdings.
"Sharpe's work provided a very practical guide to portfolio diversification for the modern investor," said Kenneth Arrow, an economics professor at Stanford and a former Nobel prizewinner.
"Without Markowitz's work, I don't think you would have seen the growth in mutual funds that you see today," said Howard Ross, chairman of the economics and finance department at Baruch College. "The money managers have all followed his principles."
Mr. Markowitz, who is now a visiting professor at the University of Tokyo in Japan, said that he was surprised by the award, adding that he "will be happy when the attention dies down and I can go back to my students and to the blackboard."
Mr. Sharpe, who was attending a conference in Arizona yesterday, deferred to Mr. Markowitz, saying that his work only followed up on that of the older economist. "I owe him a huge debt," Mr. Sharpe said.
Mr. Miller, meanwhile, is widely considered a pioneer in helping to develop the modern field of financial research and is one of the nation's leading experts in the study of stock and commodities markets. Following the stock market crash in October 1987, he issued a controversial study that challenged the Department of the Treasury's contention that the growing power of Chicago's new stock-index futures markets brought on the crash.
"Miller is really a legendary figure," said Murray Weidenbaum, director of the Center for the Study of American Business at Washington University in St. Louis and a chairman of the Council of Economic Advisers under former President Ronald Reagan.
In an interview yesterday, Mr. Miller, 67, said he believes that by jointly awarding all three economists, the prize was a form of recognition for the relatively new field of finance.
Until the 1950s, Mr. Miller said, economists had never attempted to apply hard economic theory to the study of the behavior of corporations and stock markets.
"The fact that they gave it to the three of us shows they were honoring the whole field," said Mr. Miller, who has taught at the University of Chicago since 1961. "We were all pioneers. We helped get the field of finance up and running. The field of finance has come of age, and this was their way of showing that we in finance are now in the mainstream of economics."
George Stigler, Mr. Miller's colleague at Chicago and also a former Nobel winner, said the link between the work of Mr. Miller and the other two economists was that they all pioneered the use of sophisticated analytical methods in their field. "They were all among the first to say, 'Let's use modern economic theory to see how corporations behave and act,' " Mr. Stigler said.
Some economists said they felt that Mr. Miller should have shared in the Nobel prize in 1985, when American economist Franco Modigliani won, primarily for work on which Mr. Miller had collaborated. Indeed, their work was known as the Modigliani-Miller propositions of corporate finance. "It would have been easy for him to have shared it with Modigliani," said Mr. Stigler.
Mr. Miller said that when Mr. Modigliani won and he didn't, "I thought that was it for me."