Clarifying Ambiguity: Undergrads Seek Out Advanced Economics

Curiosity is the hallmark of scholars at UChicago—even the youngest. So when Scott Lee, an economics major in the College, heard Lars Peter Hansen present intriguing but advanced economic models at a Friedman Forum Lecture on February 27, he wanted to learn more, by any means possible.

Lee and a few friends had already started an informal reading group to discuss economics research on their own. “While attending Professor Hansen’s lecture at the BFI, I became engrossed with the idea of applying statistical methods to economic models to make them more robust—that is, to make them perform well in the face of uncertainty, even when model assumptions turn out to be misspecified or wrong,” says Lee.

They tracked down Hansen, the David Rockefeller Distinguished Service Professor of Economics and Statistics and Institute Research Director, and asked him to lead a discussion on ambiguity aversion and robustness in economic models. He did, but the students wanted even more. They proposed starting a reading and research course specifically on ambiguity and robustness.

Lee teamed up with another like-minded student, fourth-year Valerie Michelman, who had been similarly inspired by Hansen’s references to ambiguity and robustness at the institute’s Research Experience for Undergraduates in July 2012. “I had dabbled in this topic for longer, and so I offered to make a reading list for him,” said Michelman. “Together we scoured the literature and pulled together a ‘syllabus.’”

“We brainstormed people who had previously expressed interest in ambiguity (or at the very least didn’t ask us to change the topic when we brought it up),” she added. A group of six gathered for the first meeting.

Response was enthusiastic, so Michelman worked with Grace Tsiang, codirector of the Undergraduate Economics Program, to recruit more students. Hansen agreed to continue to advise them, and a reading and research course was born.

The group of 15 began meeting each Wednesday evening to discuss how economists struggle to use probability to understand how individuals respond to risk, uncertainty, and ambiguity.

A recent session started with Lee solving the previous week’s assigned problem, calculating preferences between two gambles with unknown probabilities of paying off. He confidently filled the board with equations, explaining his work as he went.

Hansen followed this with an overview of recursive utility and a whirlwind, 10-minute lesson on asset pricing, with students firing off questions and clarifications.

Learning a Powerful Tool

“Taking a class with Professor Hansen on ambiguity and robustness has been an unparalleled experience for me,” Lee says. “His research on robustness is at the forefront of that field, and he has provided us with an expert’s insight into the literature on ambiguity as well as the statistical methods underlying them. These models serve as a powerful tool for economists to analyze complex economic situations which are poorly understood.”

For third-year Botao Wu, the reading group exposes him to ideas and skills he’ll need when working with Hansen this summer on how climate change affects the macroeconomy. “It will be useful when writing my bachelor’s honors thesis next year,” he added.

For Michelman, this is an opportunity to marry old interests with new. As a second-year student, she grew interested in the idea of how preferences toward ambiguity affected decision making. She scoured psychology research for useful avenues to pursue and was stymied. Economics gave her new ways to explore ambiguity aversion.

“When it comes to ambiguity, Lars wrote the formal models. The opportunity to explore the topic under his guidance is a privilege and a delight,” she said.

That enthusiasm is clearly shared among the group. After 90 minutes of equations and discussion at a recent session, the group was still up for more. Hansen asked, “Want to see an Euler theorem trick?” and the enthusiastic reply came back: “Yeah!”