What first attracted you to studying at the LSE?
I was finishing my undergraduate studies at Harvard and applied for a Marshall Scholarship. Everyone told me to go to the LSE to study with Mervyn King, who ran LSE’s Financial Markets Group back then. Once I was awarded the Marshall Scholarship there was no doubt that I would go to the LSE.
What was the most interesting or rewarding aspect of your time at the LSE?
Sitting in Mervyn’s group, learning how he thought about the world and discussing interesting problems was probably the best part of my experience at the LSE. I had a lot of fantastic courses and enjoyed my interactions with many amazing faculty, including Tony Atkinson, Margart Bray, Charles Goodhart, Chris Pissarides, and David Webb.
My fondest memory of the LSE is working in the Financial Markets Group. At that time we had an office on the roof of the Old Library. It was one part tin shed, one part London penthouse suite (based on its rooftop locale). It was a fantastic little place and we spent a lot of time in the shed working on problems and out on the roof having fun.
This is a broad question, so feel free to take in any direction, but I’m curious as to your thoughts on the state of economics.
I probably have a little different perspective than most. I don’t think that you can say any school of economics did particularly well from the recent economic crisis. With the exception of Robert Shiller, who for a decade had been warning about bubbles in asset and housing markets, I think it has been tough for economists to come out of the crisis looking good. Shiller clearly gets an A+ and Raghuram Rajan and Kenneth Rogoff also stand out as economists who warned us far in advance that there were profound risks in the system. Other than a few examples here and there, economists by and large failed to see the crisis coming, didn’t grasp it while it was happening and don’t fully understand it even now. That does not mean that we just throw away economics, but we do need to think about it in different ways.
How do you think behavioral economics can help? What will its role be going forward given what we have just come through?
Behavioral economics is a very vibrant area of research right now and I think it can help in not only influencing the academic debate, but also in shaping policy. It won’t replace classical economics, nor should it. Behavioral economists have a lot to add to the discussion, but they don’t have all the answers. Classical economics has enormous strengths and I think if they take behavioral economics on board the science as a whole can benefit.
Would you tell us a little about the research that you are currently working on? Are you working on any new applications for your models of time inconsistent behavior?
There are four big questions that I am currently thinking about. The first is how we can help people think about accumulating wealth while they are working and decummulate wealth by spending their nest eggs in retirement. The second stage of spending nest eggs in retirement has become more important since society is growing older on average and income from pensions or social security does not provide enough resources to sustain households through retirement.
The second question, which really dwarfs the first one, is how to get people to make better decisions about their health. In the face of rising health care costs this could offer enormous savings for society. Most people say that they are going to eat better or exercise more, but the reality is that people don’t live up their own rhetoric. If we can figure out how to get people to do simple things, like visiting a physician regularly, taking their pills on time, or maintaining a better diet, than we can improve health in a cost effective way.
On a different path, I am also working on regulation. There is this tremendous push right now for a regulatory overhaul and a lot of it seems to be driven by populist sentiment. A lot of the proposals being bantered about don’t seem to be supported by data. I think we need to engage in fundamental analysis, taking into account some of our findings from behavioral economics and consider the by-products of regulation before we implement anything. Too many times we create policies that solve one problem, but create two or three new ones.
The last area of research on my agenda right now is the behavioral economics of bubbles. I think an aspect of the recent crisis that has received relatively little attention is the bubble in the residential housing market. Everyone knows in hindsight that we had a residential real estate bubble, but I think there has been more focus on studying the big banks, rather than what led people to believe that these inflated prices were economically sustainable. I think if we can build models to understand bubbles, then we might be able to lean against the wind the next time asset prices get radically out of line with fundamentals.
What advice would you have for current LSE students considering a career in academia? What aspects have surprised or challenged you the most in you academic career?
In some ways it’s the best job in the world and in others it’s the worst. It’s the best job because you get to work with brilliant students and you get to think about interesting problems all day long. It’s the worst job, because you work seven days a week. If thinking about economics seven days a week (plus a bit of grading and committee work) sounds like fun, then an academic career is perfect for you! I love it, but most non-academics think I’m crazy.
Any plans to return to the LSE for a guest lecture?
Not at the moment, however I am giving the Richard Stone lecture at Cambridge University on May 20th. I’ll be talking about asset bubbles. LSE students are welcome to attend.
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