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E. L. SMITH’S ENDURING CONTRIBUTIONS TO FINANCIAL ECONOMICS

Published online by Cambridge University Press:  04 February 2020

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Abstract

In 1924, Edgar Lawrence Smith published a monograph presenting evidence aimed at overturning the conventional view that equities were speculative and bonds were the only long-term investments. This was immediately so successful that such eminent commentators as Irving Fisher and Benjamin Graham agreed that the monograph had had a material impact on market psychology, playing an instrumental role in the Great Crash. In this article, we examine Smith’s approach in detail, arguing that he made significant, enduring contributions to finance theory, empirical finance, and portfolio management practice. He was influential in creating the “cult of the equity,” laid the foundations for the equity risk premium, and introduced a probability-based risk metric and equally weighted portfolios. His influence is felt nowadays not only in the methodology employed in empirical work but also in major aspects of the conventional approach to portfolio management.

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Articles
Information
Journal of the History of Economic Thought , Volume 42 , Issue 1 , March 2020 , pp. 79 - 104
Copyright
© The History of Economics Society 2020

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Footnotes

J. E. Woods, john.woods@cantab.net; Surrey, UK. I am very grateful to the referees for their comments on previous versions of this article and especially the co-editor, Professor Pedro Duarte, for his constructive criticism and advice. I am responsible for all remaining errors.

References

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