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Utah State Nobel winner: Uncertainty a key part of economics

Published March 7, 2014 9:54 pm

Not even the best models can predict the impact of human interaction, says USU alum Lars Peter Hansen.
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Logan • Lars Peter Hansen is an economic model-builder, but he's just as interested in the unknown and uncertain spaces in the construction.

"Models … at the end of the day they're wrong. They're simplification, they're abstraction," he said. "You need to know if they're wrong in important ways or interesting ways."

Hansen, who went to high school in Logan and graduated from Utah State University, won the Nobel Prize for economics in October. Along with two fellow American winners, his work sounded warnings about the Internet stock bubble and housing crisis. Hansen spoke Friday at USU on "Consequences of Uncertainty."

Hansen is in the business of studying, explaining and predicting how the complex global system of buying and selling works, but he knows his models have limitations — and that's where things get interesting.

"Financial markets may look very cautious some days and very bold other days," said Hansen. "What controls those? I think it's a very fascinating problem."

The perfect model that would explain precisely how, say, a revolution in Ukraine would affect natural gas prices in the U.S. isn't exactly the goal, he said. Because even with a flawless academic explanation, playing things out in the real world inevitably makes them messier.

"We have to stick people inside our models, and people add uncertainty," he said.

Instead of trying to eliminate the unknown, he said, we should acknowledge it. After the financial crisis hit, for example, many said the massive, complex problem needed an equally intricate solution.

Hansen disagrees, especially because it wasn't immediately clear exactly what went wrong.

"It may well be that complicated problems … with limited understanding require more simple approaches, ones that are more transparent and easily understood," he said. "This notion of uncertainty and of limited knowledge should play much more of a central role in policy than it does now."

That rang true for senior Jacob Sanders, one of more than 400 people who filled the USU Performance Hall Friday.

It can be "hard to even follow or apply [policy] if you don't know what it means," Sanders said. "If we understand it better, we're able to accept it or reject it."

The international studies major and Logan native said he was proud to hear about Hansen's Nobel.

"It's not just a local school," he said. "We have people who go above and beyond in their fields."

Hansen wasn't always a model student. Despite having a father who was a biochemist and provost at USU, Hansen's high school teachers docked him for lack of respect for authority. He didn't land on economics until his junior year at USU.

"For me, what's been very good about this educational system is it allowed me to be a late bloomer," he said. "It's even more important what you do after you get in college than where you go."

The fact that he's now the recipient of one of the world's top honors is still sinking in.

"I'm the same person, but somehow people treat me differently, so I'm still sorting through some of that," he said.

Going forward, he wants to create models that could help regulators better avoid future financial crises, and study how uncertainty surrounding climate change could affect the economy.

And continuing the theme of uncertainty, the Nobel Prize-winning economist was stumped this week by a group of fifth-graders at Adams Elementary — when they asked him how much money the prize was worth.

"I've actually forgotten!" he said. For the record, it's $1.23 million. "I tried to recover by saying, 'The money really isn't the important thing,' but I'm not sure they bought that at all."

lwhitehurst@sltrib.com

Twitter: @lwhitehurst