Lars Peter Hansen on Risk, Ambiguity, and Measurement

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4.7 • 4.4K Ratings

🗓️ 30 June 2014

⏱️ 60 minutes

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Summary

Lars Peter Hansen of the University of Chicago and Nobel Laureate in economics, talks to EconTalk host Russ Roberts about the power and limits of economic models and quantitative methods. Hanson defends the value of models while recognizing their limitations. The two also discuss quantifying systemic financial risk, how our understanding of financial markets has changed, the nature of risk, and areas of economics that Hanson believes are ripe for further research.

Transcript

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0:00.0	Welcome to Econ Talk, part of the Library of Economics and Liberty. I'm your host, Russ Roberts,
0:07.8	of Stanford University's Hoover Institution. Our website is econtalk.org, or you can subscribe,
0:14.4	comment on this podcast, and find links and other information related to today's conversation.
0:19.6	You'll also find our archives where you can listen to every episode we've ever done going
0:23.3	back to 2006. Our email address is mailadycontalk.org. We'd love to hear from you.
0:31.9	Today is June 12, 2014, and my guest is Lars Peter Hansen of the University of Chicago. He was
0:38.8	awarded the Nobel Prize in Economics in 2013. Lars, welcome to Econ Talk.
0:45.2	Thank you, my privilege. Our topic for today is measurement in the face of uncertainty
0:52.4	drawing on a paper you wrote last year on systemic risk and your Nobel Prize lecture along the way.
0:58.0	We'll deal with some issues that have come up on Econ Talk dealing with measurement in the scientific
1:02.2	nature of economics, if it is scientific. You opened the paper early on with a quote from Sir William
1:08.6	Thompson, also known as Lord Kelvin. I'm going to read the entire quote. I often say that when you can
1:14.2	measure something that you're speaking about, express it in numbers, you know something about it,
1:18.9	but when you cannot measure it, when you cannot express it in numbers, your knowledge is of the
1:23.3	meager and unsatisfactory kind. It may be the beginning of knowledge, but you have scarcely
1:28.2	in your thoughts advanced to the stage of science, whatever the matter might be. Close quote.
1:33.6	And as I mentioned recently in an episode, and as you mentioned your paper, it's carved in stone,
1:39.5	and the social science research building at the University of Chicago, it is hard to deny the truth
1:44.8	of that quote. What is your perspective?
1:49.6	So I do, I'm very sympathetic to the idea that economics at the end of the day should aim to be
1:57.7	quantitative and that should be our ambition. But we need to be quantitative in a sensible way.
2:05.6	So by quantitative, I certainly mean the fact that we could be able to use economic analysis to
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