Alfred Cowles: The Origins of the Standard and Poor's 500 Index

Alfred Cowles: The Origins of the Standard and Poor's 500 Index

Alfred Cowles

In 1932, Alfred Cowles established the Cowles Commission for Research in Economics with the motto, "Science is Measurement." He also funded the Econometric Society's journal, Econometrica. (see these great papers) The Commission moved to the University of Chicago in 1939 and later to Yale University in 1955, where it was renamed the Cowles Foundation. Many U.S. winners of the Nobel Prize in Economics have spent time with the Cowles Commission.

In need of a measurement stick, Cowles created a market index in 1938, which became the basis for the 1957 introduction of the Standard & Poor's 500 Index. The goal was to establish a stock market index to represent the average experience of stock market investors. After sweeping failures in forecasting the 1929 crash, the prominent Colorado businessman and investment counselor wanted to focus his considerable statistical skills on analyzing stock market forecasters' ability to choose a portfolio that beats a market average or index.

Cowles reviewed approximately 12,000 recommendations and four years of transactions by twenty leading fire insurance companies and published his results in a July 1933 article titled, Can Stock Market Forecasters Forecast? His conclusion was, "It is doubtful." His extensive study of stock market data provided an early demonstration of the "random walk" in stock price movements and the beginning of the Efficient Market Hypothesis. Cowles published a follow-up study in 1944, reviewing 6,900 market forecasts over a period of 15.5 years. Once again, he concluded there was no evidence supporting the ability of the forecaster to predict the future of the market. His studies were the first of over 200 in the area of active manager performance measurements.

Cowles determined that despite his research and the research of countless others after him, investors would continue to listen to market forecasters, because they truly wish to believe that somebody, anybody, knows what the future will bring. Most people think that a world in which nobody has a clue is genuinely frightening.

(Photo: The Cowles Commission in their original Colorado Springs office. From left; Professor Gerhard Tintner, Dickson H. Leavens, Dr. Harold T. Davis, Herbert E. Jones, Alfred Cowles.)

The motto "Theory and Measurement" was first adopted in 1952. It succinctly captures the mission of the Cowles Foundation, which is the development and application of rigorous logical, mathematical, and statistical methods of analysis in economics and related fields. This motto replaced the original Cowles Commission original motto "Science is Measurement," reflecting the importance of theory that became clear early in the history of Cowles. Over the years Cowles scholars have made important contributions to economic theory, to econometric theory, and to a broad range of fields of economics through work that combines economic models with statistical methods of measurement. The mission of "theory and measurement" is reflected in the broad range of Cowles activities today, including those of its four core research programs in Econometrics, Economic Theory, Macroeconomics, and Structural Microeconomics.