Due Diligence

“Question not only everybody else’s work, but question your own work as you do it, let alone after it’s done.” – William F. Sharpe – Nobel Laureate in Economics

William F. Sharpe’s advice—to “question not only everybody else’s work, but question your own work as you do it, let alone after it’s done”—reflects the relentless intellectual self-scrutiny that has defined his career and shaped the field of financial economics. Sharpe delivered this insight in a 2004 Nobel Prize interview, recalling how the discipline of constant self-questioning was instilled in him by his mentor Armen Alchian at UCLA. The ethic to act as one’s own toughest reviewer permeated Sharpe’s approach to research and innovation, driving his work to the highest standards of analytical rigour throughout a career that upended how global markets understand risk and return.

Sharpe’s journey began in Boston in 1934 and traversed the turbulence of war-era America, eventually landing him at UCLA, where changing his studies from medicine to economics would alter the trajectory of his life. Inspired by Alchian’s rigour and by J. Fred Weston’s introduction to the still-nascent field of portfolio theory, Sharpe was quickly drawn to the beauty of mathematical logic applied to real-world economic problems. He honed his analytical skill during years of study and early research at RAND Corporation, where he encountered Harry Markowitz, whose pioneering work on portfolio selection laid the groundwork for Sharpe’s own breakthroughs.

It was Sharpe’s drive to question assumptions and his openness to self-critique that enabled him to distil Markowitz’s complex mean-variance model into the elegant Capital Asset Pricing Model (CAPM). This model became the backbone of modern finance, fundamentally altering how the risk and return of risky assets are priced and giving birth to the now ubiquitous concept of “beta.” Published in 1964 after initial scepticism from academic gatekeepers, Sharpe’s work, completed in parallel with Jack Treynor, John Lintner, and Jan Mossin, revolutionised both theory and practice. The CAPM forms the intellectual infrastructure for everything from index fund investing to performance benchmarking, nurturing a global culture in which prudent risk-taking is measurable, comparable, and improvable. Sharpe’s subsequent innovations, including the Sharpe Ratio, reinforced his belief that rigorous, repeatable self-examination is essential for practical financial decision-making as well as academic advancement.

Sharpe’s career is remarkable not just for his theoretical contributions, but for his insistence on connecting model with reality. He split his time between academia (with appointments at the University of Washington, Stanford, and elsewhere) and hands-on consulting, founding Sharpe-Russell Research to advise some of the world’s largest investors and co-founding Financial Engines, an early pioneer in digital investment advice. Throughout, he has focused on making abstract models relevant for individual and institutional investors, and on adapting theory to the rapidly evolving realities of global capital markets. His Nobel Prize in 1990, shared with Markowitz and Merton Miller, formalised his status as a founder of modern financial economics.

The backstory of Sharpe’s impact is inseparable from the broader evolution of risk and investment theory in the twentieth century. Harry Markowitz, often considered the father of modern portfolio theory, provided the first quantitative framework for balancing risk and return through diversification. Markowitz’s work enabled rigorous measurement of portfolio variance and set the stage for Sharpe’s insight that only systematic, market-related risk is priced in rational markets. Merton Miller, the other co-recipient of the 1990 Nobel, contributed critical insights into corporate finance, market efficiency, and capital structure, further solidifying the empirical and analytical basis for much of today’s investment practice.

Sharpe’s quote, therefore, encapsulates the ethos of the scientific method as it applies to finance: progress is made not through mere acceptance or simple iteration, but through persistent, honest, and sometimes uncomfortable dialogue with one’s own assumptions and results. This disposition has not only underpinned Sharpe’s seminal achievements—transforming how markets price risk, fostering the index fund revolution, and shaping the metrics by which investment success is measured—but also compelled subsequent generations of theorists and practitioners to perpetually test, critique, and refine the frameworks upon which the security of trillions of dollars depends.