Paul Samuelson, and What We Owe Him

“A respect for evidence compels me to incline toward the hypothesis that most portfolio decision makers should go out of business.” – Paul Samuelson

Paul Samuelson, 1970 winner of the Nobel Memorial Prize in Economic Sciences, died today.

Samuelson had a tremendous influence in the field of economics. (And judging from Amazon sales ranks, his book Economics might be the single most-used economics textbook in print.)

The reason I’m writing about him here, however, is that he played a direct role in the creation of the first index fund.

In John Bogle’s Common Sense on Mutual Funds, he credits Samuelson’s article “Challenge to Judgement” as serving as an inspiration for his creation of the Vanguard Index Trust (the first retail index fund, now known as the Vanguard 500 Index Fund).

Bogle writes:

“[Samuelson] pleaded ‘that, at the least, some large foundation set up an in-house portfolio that tracks the S&P 500 Index–if only for the purpose of setting up a naive model against which their in-house gunslingers can measure their prowess.’…Samuelson had laid down an implicit challenge for somebody, somewhere to launch an index fund.”

It it weren’t for Samuelson, Bogle, and other thought leaders of that era, we might still be stuck constructing diversified portfolios stock-by-stock or paying the unwarranted fees (and shouldering the uncompensated risk) that come with active management.