Lars Peter Hansen

Lars Peter Hansen (Illinois, United States, 1952) completed a degree in mathematics at Utah State University in 1974, and four years later obtained his PhD in economics from the University of Minnesota. From 1984 to the present, he has occupied various professorial posts at the University of Chicago. Since 2010, he is David Rockefeller Distinguished Service Professor.

He has been president of the Econometrics Society (2007), fellow of the John Simon Guggenheim Memorial Foundation (1996-97) and founding director of the Milton Friedman Institute (2009-11). Since 2014, he is director and cochair of the Becker Friedman Institute. In the United States, he is Fellow of the National Academy of Sciences, the American Finance Association and the American Academy of Arts and Sciences.

He has mentored numerous doctoral theses, and his book Large Sample Properties of Generalized Method of Moments Estimators (1982) is among the most cited publications in the economics field. Among his other well- known works are Advances in Economics and Econometrics: Theory and Applications (2003) and Robustness (2007). After receiving the BBVA Foundation Frontiers of Knowledge Award in 2010, Hansen was awarded the Nobel Prize in Economy in 2013.

Lars Peter Hansen, 2010 BBVA Foundation Frontiers of Knowledge laureate in Economics, Finance and Management, came earlier than most to the academic world. Son of a professor, he was born in 1952 in Champaign county (Illinois, United States), where the family lived on the University of Illinois campus, laid out in the style of Europe’s old universities. The father’s career later took him to Utah where the young Lars Peter entered the state university. It was there that he discovered skiing, which would more than once put his determination to the test, and had his first experience of management, helping the family run an eighty-acre farm planted with barley, alfalfa and oats. It was also in Utah where Hansen developed a passion for the three subjects that would absorb him throughout his academic life: mathematics, where his mentor was Mike Windham; economics, under the guidance of Bartell Jensen; and history, which he discovered thanks to a third teacher, Doug Alder.

He obtained his Ph.D. in economics from the University of Minnesota, where he worked alongside Thomas J. Sargent and Christopher A. Sims, two major contributors to macroeconomics and econometrics. Hansen’s experience at Minnesota in the 1970s shaped his approach to research and nurtured his interest in economic dynamics and time series econometrics. His first post, in 1978, was at Carnegie Mellon University, combining research and teaching duties. In 1982, he moved to the University of Chicago where he has held a series of professorships since the year 1984.

Among the influences working on Hansen at that time were the strides being made in mathematical statistics, which he was able to exploit for economic research ends. In contrast to the standard method of estimating macroeconomic models on the basis of a wide and exhaustive set of variables, he proposed focusing them on a single, concrete aspect: the relationship between changes in consumption over time and the behavior of interest rates or asset prices. This gift for drawing connections between economic theory and empirical evidence was among the qualities singled out by the Frontiers of Knowledge jury granting Hansen the award, although the specific contribution he is recognized for is a methodology derived from this analysis.

Possibly Hansen was more surprised than anyone to observe from his results that he could create a mathematical abstraction of the statistical method utilized, which could be reliably applied to the analysis of other questions. And he could certainly not have anticipated the stir caused by the paper in which he described his findings, published in 1982 in the journal Econometrica. Indeed his discovery, which he named the Generalized Method of Moments (GMM), is known among the economist community simply as the Hansen Method, and has gained an eminence that transcends even the article’s sky-high citation rate. Not only is it the textbook method in university lecture halls the world over, but it comes packaged into the standard software programs used by today’s macroeconomic and financial analysts.

Further proof, if proof were needed, of the importance of Hansen’s contribution was the decision by the influential Journal of Business and Economics Statistics to bring out a special issue in 2002 commemorating the twentieth anniversary of the publication of his original paper. And the Journal of Econometrics is even now preparing a commemorative edition to mark its first thirty years. Economists, it is plain, consider Hansen’s work as relevant as ever.

Hansen himself was clear from the outset that his method had utility for economic policy design. And time has proved him right. The GMM is currently in wide use by central banks for estimating the models employed to set the direction of interest rates. If the Generalized Method of Moments marked the first part of his career, the last few years have been given over to the pursuit of “robustness.” This second research line is in fact a continuation of the first, in that Hansen’s goal is to draw macroeconomic inferences from the performance of financial markets. Starting from the fact that financial asset prices reflect agents’ expectations for the economy as a whole, his work seeks to systematize the yardsticks that these agents are informally applying.

The goal is to establish robust decision-making rules that do not rely for their effectiveness on a given macroeconomic model. In 2007, Hansen published some of his findings in Robustness, co-authored with Sargent, and one of the books for which he is best known.

The Frontiers of Knowledge jury singled out Hansen’s “fundamental contributions to our understanding of how economic actors cope with risky and changing environments,” remarking that “the powerful statistical framework he developed to address this issue empirically, known as the Generalized Method of Moments, is now the standard textbook method in econometrics.”

“The powerful statistical framework he developed to address this issue empirically, known as the Generalized Method of Moments, is now the standard textbook method in econometrics.”

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On being informed of the prize, he offered the following clue to where his research is currently heading: “I am working on the different ways that macroeconomic fluctuations and growth are reflected in the price of securities.”

If academia has been a constant in Hansen’s life, so too has the contact with nature. Shortly after settling in Chicago, he sought out a woodland cabin to share with his family and friends. He remembers with pride how his father tended the garden and its two ponds stocked with fish, which soon attracted wood ducks, blue herons and snapping turtles. Some years ago, he swapped it for another countryside residence near some of the country’s most challenging ski slopes. In summer, his favored pastimes are mountain hikes, with views of moose and other wildlife, and road trips through Grand Teton and Yellowstone national parks.

Hansen currently divides his time between research, teaching, family, his various outdoor occupations and, since 2008, his responsibilities as Founding Director of the Milton Friedman Institute for Research in Economics at the University of Chicago.