BFI NewsOct 14, 2013

Lars Hansen, Eugene Fama, and Robert Shiller Share 2013 Nobel Prize

Institute research director Lars Peter HansenEugene Fama of the University of Chicago Booth School of Businessand Robert Shiller of Yale University share the 2013 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

The Royal Swedish Academy of Sciences recognized the trio for their empirical analysis of asset prices. Hansen developed a statistical method that is particularly well suited to testing rational theories of asset pricing, including Fama and Shiller’s influential work.

“I was very surprised. I’m still processing all this. I wasn’t expecting it,” Hansen said after receiving the call from Stockholm shortly before 6 a.m.

Hansen, David Rockefeller Distinguished Service Professor in Economics, Statistics, and the College at the University of Chicago, works at the boundary of economics and statistics. He has developed statistical tools and methods used to understand connections between the financial markets and the macroeconomy. “Economists build models to try to understand risk aversion and how it affects prices. My work tries to understand ways those models work and the ways they don’t,” Hansen explained.

In the 1980s, Hansen became the leading contributor to the development and application of rigorous estimation and testing methods for financial data. His 1982 Econometrica paper, “Large Sample Properties of Generalized-Methods of Moments Estimators,” outlined time series statistical methods that made it possible to investigate one part of an economic model without having to fully specify and estimate all of the model ingredients. Known as GMM, this method fundamentally altered empirical research in finance and macroeconomics.

“When you do analysis of these models, it’s nice to be able to study some things without having to study a full, fleshed out view of all parts of the economy,” Hansen said. John List, chairman of the Department of Economics, called GMM “an elegant method requiring fewer assumptions” that has been widely adopted in the social sciences.

Hansen’s recent work focuses on uncertainty and its relationship to long run risks in the macroeconomy. He explores how models that incorporate ambiguities, beliefs, and skepticism of consumers and investors can explain economic and financial data and reveal the long-term consequences of policy options. Along with 2011 Nobel laureate Thomas Sargent and others, Hansen has recently developed methods for modeling economic decision-making in environments in which uncertainty is hard to quantify.  They explore the consequences for models with financial markets and characterize environments in which the beliefs of economic actors are fragile.

Currently, Hansen is coprincipal investigator on a research initiative that works to develop macroeconomic models with enhanced linkages to financial markets, with the aim of providing better policy tools for monitoring so-called systemic risks to the economy.  He is also contributing his expertise on decision-making under uncertainty to a collaborative effort as part of the Center for Robust Decision Making on Climate and Energy Policy (RDCEP) headed by Ian Foster, Arthur Holly Compton Distinguished Service Professor in Computer Science, to develop dynamic economic models in which economic activity could influence the climate.

Fama, the Robert R. McCormick Distinguished Service Professor of Finance at the University of Chicago Booth School of Business, has been a member of the UChicago faculty since earning his MBA and PhD here in 1963.  Widely considered the father of modern finance, hedeveloped the efficient markets hypothesis, which broke new ground in understanding how markets use information and how that affects pricing.

With these awards,12 active University of Chicago faculty have won the Nobel Prize in Economics–more than any other university. Several former faculty members and alumni have also gone on to win.

At a press conference following the award announcement, both Hansen and Fama credited the University of Chicago intellectual environment and their colleagues for their success.

“The environment here is really something special. I learned finance from my colleagues. When I first arrived here I got a lot of  feedback from (Nobel laureates) Bob Lucas, Gary Becker, and Jim Heckman,” says Hansen. “They were intimidating but valuable role models.”

“For them, economics was supposed to do something. It was supposed to explain the world. I think that’s a critical part of the Chicago school,” he says, adding that he continued to learn from his colleagues and his students. Celebrations notwithstanding, he planned to hold his scheduled workshop with students later in the day.