The Practitioner’s Quant

As Paul Kaplan retires, we reflect on his profound legacy.

Thomas M. Idzorek 29 June, 2023 | 1:33AM
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Paul Kaplan retires at the end of June after 35 years at Ibbotson Associates (1988 to 1999) and Morningstar (1999 to 2023). His contributions the broader investing world are immense. 

While the Nobel Memorial Prize in Economic Sciences has always gone to academics, should it ever go to a practitioner, Paul should be in the running. Using Nobel speak, its statement might read “for his work in the theory of financial economics.” Or it could be “for his contribution to a theory of asset prices that integrates pecuniary and nonpecuniary factors.” Or “for his work on integrating lifecycle finance with single period optimization.” Take your pick. In all, Paul has made meaningful contributions in:

  • Portfolio selection
  • Mean-variance optimization
  • Liability-relative optimization
  • Alpha-tracking error optimization
  • Monte Carlo simulation
  • Asset pricing
  • Lifecycle finance
  • Holdings-based style analysis
  • Risk measurement
  • Financial planning
  • Annuities and insurance

Paul’s work has almost certainly touched most investment practitioners, though they might not realize it. Fortunately, his journey in financial economics coincided with the computer age, which enabled Modern Portfolio Theory to be transformed into real-world applications.

“Throughout his career,” Morningstar CEO Kunal Kapoor says, “The impact of Paul’s work has been broad and well aligned with our mission of empowering investor success.”

A Deep Expertise

After receiving his Ph.D. from Northwestern University, Paul was integral in the development of software tools at Ibbotson Associates that put sophisticated analytics in the hands of practitioners. His expertise in financial economic models permeated Ibbotson’s tools and offerings, including the Stocks, Bonds, Bills, and Inflation Yearbook, the Cost of Capital Yearbook, and EnCorr software system. In 2000, Paul and Roger Ibbotson wrote, “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?” which went on to receive the Graham and Dodd Award of Excellence for the top article in the Financial Analysts Journal.[1] 

Paul’s arrival at Morningstar in 1999 put robust investment decision systems in the hands of even more investors. Paul was essential in creating the methodology for many Morningstar investment calculations, including Morningstar ratings, holdings-based style analysis, the Morningstar Style Box, and Morningstar Categories. Anyone who has used, Morningstar Advisor Workstation, or Morningstar Direct benefited from Paul’s work.

In the 2000s, Paul led Morningstar’s quantitative research team and served as chief investment officer for Morningstar Associates LLC (an in-house registered investment advisor). He also played a pivotal role in Morningstar’s indexes business. Paul won a second Graham and Dodd Award for his 2008 article “Why Fundamental Indexation Might—or Might Not—Work.”[2]

“Paul was the quant heavyweight,” Morningstar’s head of index innovation Sanjay Arya says. “He helped create a new paradigm for indexing,”

In 2012, Paul published Frontiers of Modern Asset Allocation.[3] The book covers a vast array of topics, including an interview with the father of Modern Portfolio Theory, Harry Markowitz, a chapter on one of Paul’s (and Stanford professor Sam Savage’s) extensions of mean-variance optimization, which he dubbed Markowitz 2.0.

Paul is also a market historian of sorts, with a gift for understanding the degree to which historical returns have departed from the lognormal distribution. This has included optimization with nonparametric distributions with fat tails, the “kappa” measurement of downside risk-adjusted performance, and a “pain index” for measuring the severity of market crashes (which he calls black turkeys, a play on black swans, because crashes are not that rare).[4]

Back Together

I joined Ibbotson Associates after Paul had left for Morningstar, but I recall former Ibbotson President Peng Chen explaining how distraught Roger Ibbotson was when Paul left. From my perspective, Morningstar’s 2006 purchase of Ibbotson Associates had an unforeseen benefit—it reunited the research collaboration between Paul and Roger Ibbotson (along with myself, James Xiong, and others). Many of Paul’s most important contributions stem from these collaborations.

Asset pricing is considered one of the most important endeavors of financial economics. The development of an asset pricing model is rare; the development of a new general asset pricing model is extremely rare; the development of an equilibrium asset pricing model by a practitioner had never occurred until Paul did it! 

Back in the 1980s, Roger Ibbotson, Larry Siegel, and Jeff Diermeier put forth the New Equilibrium Theory.[5] In the 2000s, Roger and I developed the popularity asset pricing framework, which built upon the theory. It was Paul’s advanced modeling skills that moved us from a framework to a formal equilibrium asset pricing model: the popularity asset pricing model. 

The PAPM subsumes the capital asset pricing model as a special case; it incorporates the two missing ingredients of the CAPM identified by Eugene Fama and Kenneth French—tastes and disagreement.[6] Not only does the PAPM deliver on the title of the CFA Institute Research Foundation monograph Popularity: A Bridge Between Classical and Behavioral Finance (cowritten by Paul, Ibbotson, Xiong, and myself),[7] it serves as unifying model and bridge for any and all views, perspectives, and preferences related to environmental, social, and governance investing.

Says Ibbotson, “Paul is a true genius, and I am grateful to have worked with him over several decades. When you have an idea that needs to be rigorously expressed, call Paul.”

Thanks to Paul, and given the strengths of the PAPM, my hope and belief is that the PAPM will become the de facto textbook asset pricing model.

A New Blueprint

Paul’s latest contribution to investing is another CFA Institute Research Foundation monograph, Lifetime Financial Advice: A Personalized Optimal Multi-Level Approach (cowritten with myself).[8] Building off the work of a number of Nobel laureates, the ideas in this book are arguably a blueprint for a new hybrid financial-planning and investment-management system. Major innovations include:

  • Lifecycle modeling and single-period optimization have remained distinct endeavors since their respective inceptions over 50 years ago. While the idea of bringing them together was anticipated by Paul Samuelson, Fama, and Robert Merton, to my knowledge, this new book is the first work that brings them together in a comprehensive way.[9]
  • The “net worth optimization” is a significant extension of mean-variance optimization that includes the investor’s liability and human capital modeled as asset-class combinations. In a single optimization, it jointly determines tax-efficient policy portfolios specific to taxable and tax-advantaged assets.
  • Finally, the book expands on the alpha-tracking error optimization problem to include a term that captures  investor’s nonpecuniary preferences, a trading cost term, and a realized tax term—creating the ability to simultaneously optimize across multiple accounts with multiple tax treatments. This innovation, thus, serves as an all-in-one active-versus- passive optimizer, a nonpecuniary (ESG, for example) preference optimizer, an asset-location optimizer, a rollover optimizer, a tax-loss-harvesting optimizer, and a tax-efficient client onboarding optimizer.

Each represents meaningful advancements in the implementation of financial planning. Linking them into a cohesive three-stage model is the basis for a new category of financial planning software integrated with investment management.

It has been a true honor and privilege to work with Paul. My parting hope is that Paul will have a fantastic retirement  but still periodically share his profound ideas and models for the betterment of investors. 

Thomas Idzorek, CFA, is chief investment officer, retirement, at Morningstar Investment Management LLC. He is a member of the editorial board of Morningstar magazine.


[1] Ibbotson, R.G., and Kaplan, P.D. 2000. “Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance?” Financial Analysts Journal, Vol. 56, No. 1, PP. 26-33.

[2] Kaplan, P.D. 2008. “Why Fundamental Indexation Might—or Might Not—Work.” Financial Analysts Journal, Vol. 64, No. 1, PP. 32-39.

[3] Kaplan, P.D. 2012. Frontiers of Modern Asset Allocation. John Wiley & Sons.

[4] Paul’s work on the “kappa” was done jointly with James Knowles. I may have contributed to what I called “pain pools,” but like much of the time, the heavy lifting was up to Paul.

[5] See Ibbotson, R.G., Diermeier, J.J. & Siegel, L.B. 1984. “The Demand for Capital Market Returns: A New Equilibrium Theory.” Financial Analysts Journal, Vol. 40, No. 1, PP. 22–33.

[6] See Idzorek, T.M., Kaplan, P.D. & Ibbotson R.G. 2023. “CAPM, APT, and PAPM.” Working paper.

[7] Ibbotson, R.G., et al. 2018. Popularity: A Bridge Between Classical and Behavioral Research. CFA Institute Research Foundation.

[8] Idzorek, T.M. & Kaplan, P.D. 2023. Lifetime Financial Advice: A Personalized Optimal Multi-Level Approach. CFA Institute Research Foundation. Forthcoming.

[9] In addition to the monograph, see Kaplan, P.D. and Idzorek, T.M. 2023. “Joining Lifecycle Models With Mean-Variance Optimization.” Working paper.

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About Author

Thomas M. Idzorek  Tom Idzorek, CFA, is chief investment officer and director of research for Ibbotson Associates.

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