A Nobel recipient in economics says computer models often can be
wrong, but that does not make them useless.
Lars Peter Hansen understands why he is being asked, but he isn't
comfortable with the question. "Are financial markets efficient or
irrational?" repeats Professor Hansen, a University of Chicago
economist. "I don't really know how to answer that."
Yet since being named last month as one of three recipients of
the Nobel Memorial Prize in Economic Science, he has been saddled
with this question repeatedly. It's an odd one for him because he
has spent decades working with complex mathematical models of
financial markets and the overall economy, and he isn't sure that it
is important to label the behavior he is modeling rational or
But he shares the Nobel with Eugene F. Fama, a fellow economist
at Chicago, and with Robert J. Shiller, an economist at Yale, and
their dispute over this terminology has commanded attention.
Professor Hansen puts the matter positively: "A common theme in
our work is that we've all characterized the puzzling implications
that emerge from financial market data. But we take different
That's an understatement. In fact, the other two laureates don't
see eye to eye on some basic issues and have engaged in an unusual
public debate -- recently, in interviews and in a column in these
Professor Shiller, a frequent contributor to The New York Times,
stresses the irreducibly human, irrational elements found in asset
bubbles and busts. Professor Fama, known as the father of the
"efficient markets hypothesis," says market behavior can be
explained quite well without any need to call it irrational.
Professor Hansen, 61, doesn't want to become embroiled in this.
"Shiller and Fama can speak for themselves," he says. But in a long
telephone conversation this month, he was happy to speak about his
own, rather different perspective. It was formed, in part, at the
University of Minnesota in the 1970s with the help of two economists
there. They were Thomas J. Sargent, now at New York University, and
Christopher A. Sims, now at Princeton -- the recipients of the Nobel
two years ago.
The committee that awarded the Nobel to Professors Sargent and
Sims also cited Professor Hansen's contributions, and he continues
to collaborate with Professor Sargent. In a symposium on the current
prizes held this month at the University of Chicago, James J.
Heckman, also a Nobel laureate, said that this year's Nobel was, in
a sense, "Lars's second Nobel prize."
The Nobel committee recognized Professor Hansen this year for
developing a statistical technique, the generalized method of
moments. He described it as "a method that allows you to do
something without having to do everything." For example, it's still
impossible to come up with a complete and entirely coherent model of
either the overall economy or financial markets, to say nothing of
combining the two. …