The 3rd Side of the Nobel Triangle
Sommer, Jeff, International New York Times
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 irrational.
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 approaches."
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 pages.
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. …