The Yale Endowment, 1996 Update

The Cowles Commission for Research in Economics, founded in 1932 by Alfred Cowles '13. Consists of a group of economists, mathematicians, and statisticians concerned with applying quantitative techniques to economics and related social sciences. The impetus for founding the Cowles Commission came from an inquiry into the accuracy of professional stock market forecasters by Alfred Cowles, president of Cowles and Company, an investment counseling firm. This study spurred his interest in fundamental economic research, leading him to offer his financial support for the establishment of the Cowles Commission. Among the founding members of the Commission was Irving Fisher of Yale University.

Alfred Cowles Founder James Tobin 1955-61, 1964-65 Tjalling Koopmans 1961-64, 1965-67 Herbert E. Scarf 1967-71, 1981-84 William C. Brainard 1971-73, 1976-81 Martin Shubik 1973-76 Alvin K. Klevorick 1984-96 John Geanakoplos 1996-present

Today, the Cowles Foundation is best known for work in a broad range of disciplines, including theoretical microeconomics, macroeconomics, and econometrics. What may surprise many is that the Foundation has contributed significantly to the advancement and understanding of the investment management industry.

The first publication of the Cowles Commission, written by its founder Alfred Cowles, "Can Stock Market Forecasters Forecast?", is still frequently cited. It attracted widespread attention in part because of the three-word abstract of the paper: "It is doubtful." The study indicated that stock market forecasters were posting results worse than would be expected on the basis of chance alone. Clearly they were not exhibiting skill or insight, which pointed to the strong need for more reliable knowledge on which to base economic forecasts. This was a principal motivation for Mr. Cowles to initiate and subsidize quantitative economic research.

A related project of the Commission under Mr. Cowles' active leadership, was the construction of indexes of U.S. corporate stock prices, earnings, and dividends with proper adjustments for stock splits, rights issues, and recapitalizations. Conceptually, the Cowles Commission indexes, which weighted a company in proportion to its market capitalization, were far superior to the better known Dow Jones Averages. The Dow data were derived, then as now, simply by adding up the prices of the individual stocks, thereby weighting a given stock not by the size of the company or its value, but rather by whether its price is high or low. Moreover, when a stock split, the denominator of the index was adjusted, thereby systematically reducing the influence of successful companies. The methodology of the Cowles Index remains state-of-the-art. Market capitalization weights have become increasingly widely used, underscoring the important role of the Cowles Index as the forerunner of the S&P 500 Index.

Shortly after the Great Crash of 1929, Cowles moved from Chicago to Colorado Springs, hoping to speed his recovery from tuberculosis. Unfortunately, the Commission’s original Colorado Springs location isolated the group from the centers of economic and statistical research. As a result of this, and upon Cowles’ recovery, the Commission moved to the University of Chicago in with Cowles turning active research leadership over to academic scholars, while continuing his interest and support. In the 1950's the Commission decided to seek a new permanent location. Several universities showed an interest in providing a home for the Commission, including the University of California at Los Angeles and Northwestern. Yale, however, did not initiate the negotiations with the Cowles Commission, but rather responded to an interest shown by Cowles and Professor Tjalling Koopmans.

That Alfred Cowles was a Yale graduate and that the family was used to supporting the University’s activities provided logical reasons for the move to New Haven. In addition, James Tobin of the Yale Economics Department was available to serve as director. These considerations led to the move to New Haven in 1955. Yale President Whitney Griswold '29 wanted the organization to have a new name to go with the new location, so the Cowles Commission became the Cowles Foundation for Research in Economics at Yale University.

From Yale’s parochial perspective, Cowles economists have assisted in management of the Endowment, contributing to issues ranging from spending policy to asset allocation. Some of those who have worked with the Investments Office in recent years are William Brainard '50 MA, '63 Ph.D., William Nordhaus '63, Robert Shiller, and James Tobin.

Among the seminal contributions of Cowles economists to finance are Harry Markowitz's work on mean-variance optimization and James Tobin's work on portfolio theory. Recently, the investment community has focused touch attention on the Tobin-Brainard "q," a measure of the relationship between intrinsic and market value.

The impact of the Cowles Foundation has been described as "profound and far reaching" (Gerard Debreu) as well as "striking and permanent" (Kenneth J. Arrow). The weight of these statements is underscored by the fact that eight winners of the Nobel Prize in economic science have conducted research under the auspices of the Cowles Foundation.