Lars Hansen has been in the shadows as the press focused its attention on fellow Nobel laureates Eugene Fama and Robert Shiller. I’m pretty sure Lars is fine with that, but as a fan of his work, it bugs me. Stan Zin and I know Lars’s work pretty well — at least, that’s what we tell ourselves — but it’s technical work, not easy to summarize for a nontechnical audience.
So I was thrilled to see an interview in the Times in which Lars did the job himself. Some of the highlights:
- The thing to remember about models is they’re always approximations and they will always turn out to be wrong at some point.
- You could imagine that in order to study the linkages between financial markets and the macroeconomy you’d have to build full-fledged models, with all the intricate interaction. We can’t really do all of that very well yet. So I was particularly interested in methods that allow you to do something without having to do everything.
- When you relax rationality, here’s the challenge: If you announce things are irrational then that alone doesn’t get you very far.
I recommend the whole thing, it’s really thoughtful. The interviewer, Jeff Sommer, has done a number of these, and he’s really good at it.