Tracy Needham

Modern Finance Founder Merton Miller Dies

When asked for a simple explanation of his theorum, Miller responded, "If you take money out of your left pocket and put it in your right pocket, you're no richer." When reporters were surprised that he received the Nobel for something so obvious, he quipped, "Yes, but remember, we proved it rigorously."

Economist Merton Miller, one of the founders of modern corporate finance and a Nobel Prize recipient, passed away on June 3 in Chicago. He was 77 years old.

Miller was a strong proponent of passive investing, believing that the market efficiently reflects all relevant information about a stock. Miller felt that since pertinent information is strewn all over the world, one person can only know a small fraction of it. He held that only the market can aggregate, evaluate and incorporate that information into securities prices.

Miller acknowledged that a small group of traders think they can beat the market using careful research to find significant non-public information. However, he also felt that the money they make as a group, on average, just covers the cost of their extensive research.

When someone questioned him about the long-term record of active investment managers such as Peter Lynch and Warren Buffet, Miller pointed out that it only takes "one big score" to become a hero, that this jackpot run will keep the manager's average high for a number of years. He said the only way to prove that someone has devised a foolproof method for picking stocks is for that person to teach it to others, and see if their pupils can make the same gains. If the students do not reproduce the returns, then the manager's success can't be ascribed to anything more than sheer luck.

Miller received the Nobel Memorial Prize in Economic Sciences in 1990 for his part of the "M&M theorem." Miller and Franco Modigliani, who received the Nobel in 1985, had worked together to establish a method to consistently value a firm. In the end, they found that the market value of a firm is independent of its capital structure - therefore, the proportion of equity and debt that the firm uses to finance its operations does not affect the value of the corporation. This was later modified to account for some of the market's imperfections.

The media often asked him to explain the theorem in simple terms, and he sometimes responded, "If you take money out of your left pocket and put it in your right pocket, you're no richer." When reporters were surprised that he received the Nobel for something so obvious, he quipped, "Yes, but remember, we proved it rigorously."

Born in Boston, Miller graduated from Harvard University in 1943 and received his doctorate from Johns Hopkins University in 1952.

Miller worked at the U.S. Treasury Department and the Board of Governors of the Federal Reserve System before receiving his first academic appointment at the London School of Economics in 1952. From there, he worked at Carnegie-Mellon University in Pittsburgh. In 1961, he joined University of Chicago's business school where he taught with and to renown economists for almost 40 years.

In addition, Miller was the author of eight books and served as a public director on the Chicago Board of Trade from 1983 to 1985 and at the Chicago Mercantile Exchange from 1990 until his death.

Autobiographical sketch
Books by Merton Miller