By Rob Mitchum // November 16, 2013
When the 2013 Nobel Memorial Prize in Economic Science was awarded last month to Eugene Fame, Robert Schiller and CI Senior Fellow Lars Peter Hansen, much of the attention went to the first two winners. Fama and Schiller. The two economists stand at opposite poles of one of the defining arguments of modern economics: are markets rational or irrational? That they shared the same Nobel made for an irresistible media angle, but left Hansen’s contributions somewhat on the sidelines.
That oversight was remedied by Jeff Sommer in the New York Times, who throws the spotlight on Hansen’s work developing statistical methods and models for economic research. Hansen, a primary investigator on the CI’s Center for Robust Decision Making on Climate and Energy Policy, defers on the question of market rationality, diplomatically telling Sommer, “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.” Elsewhere, Sommer highlights and explains Hansen’s most famous contribution, the generalized method of moments, and Hansen explains why models are useful even though — or even because — “they will always turn out to be wrong.”
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. But his methods help make it possible to study some of the elements and connections in a statistically valid way. “The idea is to make progress,” he said, “even if you can’t do it all now.” And his approach is in wide use in other areas of social science.