PII: 1057-0810(91)90002-G


From the Editor 

Many people date the origins of modern finance theory to the publication 
of Harry Markowitz’s 1952 article, “Portfolio Selection,” in the Journal of 
Finance. It is therefore appropriate to begin our new journal with an article 
by that same author who shared the 1990 Nobel Prize in Economics for his 
work. 

Professor Markowitz seeks to apply portfolio selection theory to the 
individual investor. He reveals that his original work was focused on an 
investment company, a much simpler entity than an individual or family. In 
dealing with individual financial management, one must recognize the inherent 
illiquidity of important assets, such as the home and its furnishings. 
Furthermore, given the random nature of events that might affect a family, a 
single plan must give way to adaptive decision rules. Professor Markowitz 
concludes by suggesting ways in which the “game of life” may be simulated, 
and encourages the Financial Services Review to “publish research with various 
approaches to various aspects of its topic area.” He concludes by saying that 
“Such pluralism is desirable in research, as it is in politics and the marketplace.” 

In starting this, the first scholarly journal to focus on individual financial 
management, the Academy of Financial Services formalizes the creation of a 
new subdiscipline of finance. However, unlike other subdisciplines-such as 
investments, banking, real estate, and insurance-the scope of individual 
financial management focuses not on instruments and institutions but on the 
application and effect of all aspects of finance on the individual. The “pluralism” 
described by Professor Markowitz encompasses both theoretical and empirical 
studies which seek to explain individual financial behavior and present ways 
in which the welfare of families and individuals may be improved. 

This inaugural issue reflects the pluralistic approach of both the journal 
and the new field, and serves as a model for subsequent issues. The second 
article, by Professors Tom Potts and William Reichenstein, asks the rather 
practical question whether it is better to tax shelter assets designated for 
retirement in a pension account or maintain them outside of such a shelter. 
Surprisingly, the answer depends on whether the owner of those assets intends 
to manage the nonpension portion actively or passively. 

Y 



vi FINANCIAL SERVICES REVIEW, l(1) 1991 

A somewhat related issue is considered empirically in the next article, by 
Professors Robert Kleiman and Anandi Sahu, in which they ask whether 
individual investors are better off putting their funds in equity portfolios of life 
insurance companies or in mutual funds, and conclude that there is very little 
difference in risk-adjusted performance. This implies that variable annuity 
contracts offered by life insurance companies may offer an advantage over 
mutual funds to some investors by deferring taxes. 

The fourth article, by Professor Neil Murphy, examines household 
financial behavior in the payments area. His article uses the Survey of Currency 
and Transaction Account Usage conducted by the Federal Reserve System to 
find out why increased use of automated teller machines has not reduced the 
number of checks written by consumers. He concludes that checks are written 
for necessary third party transactions, while ATMs are merely a convenient 
way to obtain cash from one’s bank. Therefore, the only effective method of 
reducing the number of checks written by consumers is the imposition of a 
marginal cost for each check written. 

Next, Professor Peter Chinloy examines the extent to which real estate 
income influences the location decisions of individuals. Since real estate 
constitutes more than 50% of the personal (non-human) wealth of Americans 
and since, as Professor Markowitz points out (above), it is rather illiquid, 
expected returns to the real estate component of the portfolio should be an 
important component of job relocation decisions. His empirical results support 
this assertion. 

The last article is a review piece by Professor Larry Cox that raises some 
major questions relating to disability insurance and assesses the adequacy with 
which each is addressed. As we develop the field of individual financial 
management, it is important to review what has already been done and what 
still needs to be done. For that reason, we plan to run a detailed review article 
as a regular feature, and encourage scholars to contact us with subjects. 

Given the diverse nature of the fields which constitute individual financial 
management, it is difficult to stay abreast of developments which might affect 
it. To help readers with this problem, our review editor, Professor Phyllis Myers, 
presents abstracts of articles relating to individual financial management that 
have appeared in other journals. This, also, will be a regular, ongoing feature 
of the Financial Services Review. 

-Lewis Mandell