Doing something without doing everything

Lars Peter Hansen, the University’s latest Nobel Laureate, shapes the legacy of Chicago economics.

Lars Peter Hansen, the David Rockefeller Distinguished Service Professor in Economics, Statistics, and the College, has always been busy, but in 2014 he joked, “for some reason, I’m in more demand now than I used to be.” The reason is, of course, the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel he won in October 2013. He shared the 2013 Nobel Prize with UChicago economist Eugene Fama, MBA’63, PhD’64, and Yale’s Robert Shiller for their empirical analysis of asset prices.

Since then, it’s been more of a challenge than usual for Hansen to find time to conduct his research, attend conferences, and work with his graduate students. A few months after receiving the prize, he was still finishing up an overdue paper.

Although nonacademics find Hansen’s work hard to grasp, in essence it’s about simplifying. Hansen himself boils down his econometric research that contributed to his win by explaining, “You can do something without having to do everything.” In other words, he found a way to streamline complex economic models, identifying which variables could be safely left out without reducing the model’s statistical power. And, as the Royal Swedish Academy of Sciences put it, Hansen’s method “is particularly well suited to testing rational theories of asset pricing.”

“Lars’s work is best characterized by a relentless drive for simplicity,” says John Cochrane, the AQR Capital Management Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. One may need to learn some new math to completely grasp it, he adds, but essentially, formerly complicated things all fall into a beautiful and simple picture. Additionally, Hansen emphasizes rigorously testing economic theories. “With Lars, you can’t write a big complex abstract theory and then maybe make a chart or two,” says Cochrane. “He emphasizes that you have to find clear testable implications of economic models and then see how they match the data. He also dislikes the kind of broad speculating that goes on too often in research. That’s actually fairly unique.”

A MENTOR FOR STUDENTS

John Heaton, PhD’89, the Joseph L. Gidwitz Professor of Finance at Chicago Booth, has been Hansen’s student, protégé, and colleague. After taking some classes with him, Heaton became his research assistant and coauthor, experiences that shaped his career. “Lars has influenced people’s lives in a way I think he doesn’t appreciate,” he says. Heaton feels Hansen’s legacy lies in his philosophy toward economics (“Be a little simpler with your strategies”) and the way he grooms his students, who learn to be “serious in their questioning but never personally judgmental.” Cochrane lists the meetings, reading groups, and dinners Hansen provides his students. “How do you produce good children?” he asks. “The same way. Twenty years of hard work. Lars puts in years of constant contact, helping students, challenging them, working with them.”

After Hansen won the Nobel Prize, several former students threw a conference at the Reva and David Logan Center for the Arts to celebrate his work. Toni Shears, managing director of communications at the University’s Becker Friedman Institute for Research in Economics, notes that in addition to the appreciation paid to Hansen, the conference displayed a diverse set of work. “His students are forging interesting new paths,” Shears says. While some of the presenters work in econometrics (Hansen’s field), “others have branched out into areas like corporate finance structure and the financing of human capital.”

Despite his busy schedule, one commitment Hansen does make time for is his position as research director of the Becker Friedman Institute, where he was appointed founding director in 2008. The institute, named for previous UChicago Nobel laureates Gary Becker, AM’53, PhD’55, who served as its chair, and Milton Friedman, AM’33, was launched to solidify the University’s place as a global intellectual destination for economics research. Its original goals included encouraging interaction across emerging areas of research and giving economics students and faculty access to the best research around the world.

“I think in many respects, we’ve achieved that,” Hansen says, citing the 20 to 30 speakers per year the institute has hosted and the lectures made available to students. For example, in late 2012 three regional Federal Reserve chairs spoke as a group about their jobs and traded opinions on monetary policy. “When you have over 100 undergraduates in the audience hearing this stuff, it’s a very nice opportunity for them,” says Hansen. With a laugh, he adds, “But we also provide free food.”

A RESEARCH COMMUNITY

Cross-pollination and collaboration are equally important for faculty. “Good research doesn’t happen just by going to your cell and thinking big thoughts,” says Cochrane. The Becker Friedman Institute provides a platform for collaboration, not just within departments but also across its four partner units—the Law School, Chicago Booth, the Harris School of Public Policy, and the Department of Economics.

The institute also broadens the research community: “We have a Nobel Prize winner in every area, which is great,” Cochrane says, “but not everybody who is great can have a job at the University of Chicago. We need a larger conversation.” Fundamentally, Cochrane believes, the institute will provide the foundations that lead to better economics research. “When we say to some young person, ‘Come to UChicago,’ we want them to drop everything and say, ‘This is where I’m going to have great ideas.’”

Hansen particularly wants the institute to build bridges between economics subgroups. He cites the macro financial modeling group he and MIT’s Andrew Lo are leading to bring macroeconomists and finance experts together to build better models to address the deficiencies of models used for quantitative and empirical investigations. Many young econometricians (Hansen’s field) focus on the mathematical side of statistics, he says, while they should also strive to adapt or build new methods to study economic questions. “To do that effectively, they have to know something about some subfields to appreciate what the challenges are there.”

Hansen intends the institute’s work to be just as broad based. “It’s not like he’s molding it in his research image,” Heaton says. “He seems to be doing activities that are for the greater good, for the University, and for the researchers.”

Hansen is particularly proud of a 2010 institute conference that measured economic development in sub-Saharan Africa. “At the end of the day,” recalls Hansen, “Princeton’s Angus Deaton, one of the top development economists in the world, said, ‘Hurray for the institute. The type of issues we talked about here would not typically be covered anywhere else.’”

In summer 2014 the Becker Friedman Institute, along with the Department of Economics, took another step forward, moving into their new home in the Saieh Hall for Economics. Hansen looks forward to bringing in more visitors to the once “virtual” institute. He has envisioned a place where “we could bring both senior and young scholars from elsewhere together on campus and rotate themes for different years,” but that goal was difficult to implement without a physical home. In the renovated building, located at 5757 South University Avenue, he says, “we can now invest more in longer-term visitors.”

The new location also can facilitate both formal and informal interaction among faculty from economics, law, business, and public policy. “Chicago’s had a long-standing tradition of having faculty with multiple interests, and not just some narrow focus,” Hansen says, a characteristic he sees as key to the institute preserving UChicago’s economics legacy. “I’ve been at this university for a long time,” he says, “and I’d like to think of economics at Chicago as continuing to be something special.”

Story originally published in the Spring/Summer 2014 issue of Dialogo.