Nobel Laureate William Sharpe may be known for his successful career in finance, but like many other famous failure-to-success stories, setbacks helped him to persevere and carve that prosperous path.
For a recent event for Ivey’s Women in Asset Management (WAM) program, Sharpe, who won (along with Harry Markowitz and Merton Miller) the 1990 Nobel Memorial Prize in Economic Sciences, discussed how failure propelled him forward in his groundbreaking work. Sharpe received the Nobel Prize for developing models to assist with investment decision-making, including the famous capital asset pricing model (CAPM) from the 1960s that is the cornerstone of modern finance. CAPM is a financial model used to calculate the expected return on an investment based on its risk level.
Addressing the students virtually from his home in Carmel-by-the-Sea, California during a Q&A-session led by WAM co-directors Steve Foerster, HBA ’81, and Saurin Patel, Sharpe shared how three prominent setbacks influenced his career and life. These included failing a Grade 4 math test, being told his PhD thesis wasn't good enough, and having his most important finance paper rejected by a leading academic journal. It was a fitting topic given the WAM students will soon be embarking on their careers through summer internships after completing one month of in-class training at Ivey.
Sharpe detailed the circumstances around each setback and how they influenced his perspective and actions. The first, failing a fourth-grade multiplication test that resulted in him having to repeat the grade, occurred because he was switching schools through family moves and his old school only taught multiplication up to 10 x 10 while the test was on multiplication up to 12 x 12. While initially disappointed, Sharpe said it was ultimately a good thing because he was already two grades ahead of where he should be and feeling a lot of pressure. He appreciated being able to take a step back, which he said was an important part of the process in his later work.
Early setback fuels Nobel Prize-winning work
The second incident, seemingly a roadblock, actually led Sharpe to his Nobel Prize-winning topic. He told how he was initially interested in the topic of transfer prices while pursuing his PhD and had even written 50 per cent of what he thought was a good dissertation-to-be. But after being encouraged to run it by economist Jack Hirshleifer, whose work it was built upon, Hirshleifer said it wasn’t suitable for a dissertation. Dismayed, he switched course and worked with another economist on a different topic. That economist was Harry Markowitz, who was doing pioneering work around investment portfolio returns and risk. Sharpe extended the work of Markowitz by estimating what each stock’s price or expected return should be within Markowitz’s framework, which was the genesis of his Nobel Prize-winning work. The lesson: be open to new ideas and paths.
The third incident occurred when Sharpe wrote a paper that derived the now famous CAPM that he believed to be his best work, and submitted it to a prestigious finance journal. Sharpe said he was dejected to learn the paper was rejected because a reviewer thought his model assumptions were unrealistic. But he persevered and resubmitted it and the paper was eventually accepted when a new editor joined the journal. That paper now has more than 33,000 citations. It was a classic example of poet William Edward Hickson’s prose on perseverance: “If at first you don't succeed, try, try again.”
Luck may play a role in success, but so does hard work
Noting how these setbacks prompted him to work even harder to make his mark, Sharpe said hard work, deep thinking, and perhaps a stroke of good luck are key to success.
"I got lucky, but I also worked hard," he said. "Work hard, think long and deeply, and don't rush to make decisions."
Keeping in line with the theme of learning from failure, the WAM students gave Sharpe a fitting thank you gift, which was sent to Sharpe's home and arrived just prior to his virtual talk – a framed 1955 stock certificate from Lerner Stores Corporation. The stock certificate is a reminder of a costly lesson Sharpe learned about the importance of diversification. Aiming to make some quick money to buy a car, Sharpe made a significant investment in only one stock – Lerner Stores – and subsequently lost much of his money.
It was another example of how lessons learned shaped Sharpe’s inspiring work and life.
