EconTalk Lars Peter Hansen on Risk, Ambiguity, and Measurement
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Jun 30, 2014 
Lars Peter Hansen, a distinguished economist from the University of Chicago and Nobel Laureate, engages in a deep dive into the nuances of economic modeling and risk assessment. He discusses the limitations and benefits of quantitative methods in understanding financial systems, especially after the 2008 crisis. The conversation highlights the psychological biases affecting risk evaluation, the need for balanced data and theory in economics, and the implications of fiscal policy in crisis management. Hansen advocates for strategic infrastructure investments and critiques simplistic views on government spending.
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Quantitative Economics and Model Limitations
- Economics should be quantitative and guide policy based on models and empirical evidence.
- Models are always simplifications of reality, making it crucial to assess their limitations and potential impact on policy.
Systemic Risk and Financial Crisis
- Systemic risk, though a prominent term, lacks precise definition and understanding, hindering effective financial oversight.
- The financial crisis of 2008 exposed this lack of understanding and the limitations of existing models with passive financial sectors.
Model Limitations and Policy Design
- Acknowledge limitations in models, especially when dealing with complex policy challenges.
- Avoid overconfidence in complex models and consider simpler approaches, as excessive reliance on incomplete models can be detrimental.