Recently, Nobel Laureate Bengt Holmström visited D-IAS and gave his Nobel Colloquium: “The Financial Crisis: The Purpose and Perils of Money Markets” in front of 200 people. Afterwards we did and interview with him about all the aspects of excellent research – including recieving a Nobel Prize.
INTERVIEW: Professors, deans and students were standing in line to hear the Professor in economics from MIT – Nobel Laureate, Bengt Holmström (US) giving his colloquium on the financial crisis in D-IAS at University of Southern Denmark. Afterwards we talked to him about recieving a Nobel Prize, being inspired to keep doing excellent research – and of course a little more about his focus on the finansial crisis:
First of all, what was it like receiving a Nobel Prize in economics?
Could you describe your reaction and how it has influenced your life? – both your professional life
as a Professor of economic research – and as a private person?
“I felt stunned and humble at the same time – and very grateful for having had the opportunity to work with fantastic people like Paul Milgrom, Jean Tirole, Oliver Hart, Roger Myerson, Milt Harris and many others. Life has been very much busier professionally after the prize. I’m traveling a lot and at the same time sorry that I have to turn down many interesting opportunities. As a private person, I hope I haven’t changed much at all. Family and friends still matter the most.”
How did you as an academic manage to take your research to this
extraordinary level of excellence? Besides of course being ambitious and
gifted – what is your ‘recipe’?
“I have always been driven in the first instance by curiosity. I enjoy reading about issues
and ideas often far from my own field. I’ve always been interested in how professionals
– in all walks of life – go about their tasks. So I end up asking a lot of questions. In
economics, I strive to see the big picture and express my work thinking in simple terms.
It is complicated and takes a lot of work to be simple.”
Which fields of research are you currently working on?
“Since the Great Financial Crisis, I’ve been working almost exclusively of diagnosing the
causes. Grappling with this question has been fascinating, frustrating, but also very
satisfying. There is nothing as exciting as having a good idea – an intellectual puzzle to
In Danish Institute for Advanced Study (D-IAS) we aim to inspire
groundbreaking ideas through the meeting of minds within all disciplines –
bringing outstanding researchers together in an inter-disciplinary center.
How do you see the future regarding research disciplines?
Does one need to work mono-disciplinary to be able to get to the high level, where you are?
Or have you yourself been inspired by other academic disciplines?
“Researchers have to decide what it takes to answer the questions they are interested in.
Interdisciplinary research cannot be mandated or forced on researchers. The power of the
underlying themes, problems, ideas has to drive interdisciplinary research. And invariably,
there has to be someone with the passion and skill to lead. I think this explains why D-IAS
has been so successful. Administrators, donors and politicians often want to put down big
money to stimulate interdisciplinary research and hope that good people will be attracted
by the money. But I believe ideas and dreams the researchers have to attract money, not
the other way around. That said, I am strongly in favor of teaching both in depth and
broadly. Students need to be exposed to a range of ideas so that they know where to look
for good questions and answers.”
“In the end, what matters is the people you get to interact with. You didn’t mention
Northwestern University, but the four years I spent there with a small, but great group
of young researchers, were very influential. This illustrates that one shouldn’t look just
at the reputation of institutions – especially early in one’s career – but seek out places
where young people are excited about something new. Stanford, Yale and MIT have all
been great places, but the ultimate reason has been the intellectual vibrancy of the
researchers I have gotten to interact with. At Stanford, my thesis advisor Bob Wilson
was singularly influential in bringing game theory and its application into the economics
profession. At Yale I got to work with Paul Milgrom, which was fantastic. At MIT I have
learned more broadly about economics (I wasn’t trained as an economist!) and the
sheer number of great minds has been very stimulating.”
Now that you have already received a Nobel Prize: What are your next
“I don’t know that I dream big. My best ideas have always started small. Something has peeked
my curiosity and I have begun playing with it. Occasionally, the small seed has grown into a
mature tree with many branches. Being attentive to the unexpected opportunity – exploring a
seeming side-road – has been my recipe. Failures and hurdles have also been very inspiring,
because you always learn something new when things don’t go the way you expected. That’s
when you may learn something really surprising – maybe even something big. Right now I
have a few things itching, but I can’t tell yet if something will come of any of them.”
In D-IAS we educate young and promising researchers. If you were to give
some advice to the next generation of researchers. What would it be?
“Follow your curiosity. Seek out interesting students and researchers – even when they
aren’t directly in your main field. Once one gets started on a career (post thesis) most
people will be locked into the area – especially, if they are successful. I wrote my thesis
on incentives and contracting and forty years later, I still work in this field (broadly
construed). I’ve been lucky that my original interest in incentives proved so popular. In
the beginning, I didn’t dream about that possibility.”
In Denmark, the financial crisis was further accelerated by the overheated real
estate marked. Do you think that this was an essential part of the global
financial crisis as well? And how do you see the future regarding this?
“All financial crises involve excessive debt. Debt is inherently tied to collateral (explicitly or
implicitly). The greatest source of collateral in all developed economies is real estate or
derivatives of real estate. So overheated real estate prices are more often than not at the
center of financial crises. Debt is designed to be information insensitive, in order to be a
cheap and safe form of funding. When debt becomes information sensitive, the trust in a
range of debt instruments (sometimes even the currency of the nation) breaks down.
Calamity and panic may ensue. This will surely happen again. We have learned to deal
with panics, but we are woefully bad at seeing them coming. The reason again is the
purposeful lack of information in debt markets. Building buffers, using stress tests,
regulating banks in a constructive way to keep short-term, safe debt within bounds is
useful, but not a guarantee.”
How do you see Denmark – as a small but open economy – avoiding a
financial crisis in the future?
“Rapid growth in credit should be a warning signal, but what is too rapid growth and how
could it be curtailed seems difficult to predict. Denmark has a unique mortgage market
design (covered bonds), which I think tends to protect against financial crises erupting as
easily here than elsewhere. But no small, open country is protected from world-wide crises
like the one we just have seen (Australia was an exception).”
Denmark and Norway is not a part of the eurozone – is that, in your
perspective, an advantage or a disadvantage? What are the pros and
cons of the eurozone?
“There are advantages and disadvantages, depending on prevailing times. I wouldn’t
recommend the euro to anyone outside it right now. But in the beginning it was good for
many countries including my own country, Finland. If the Eurozone doesn’t have a lender
of last resort (more explicitly), I think it will face challenges in future.”
In your opinion: Has anything good come out of the crisis? Have
our western governments learned enough from it?
“For economists it has been a very edifying time. I think we have revisited old themes and now have a much improved understanding of the financial system in use. The consequences have been painful for
many people and on societal level we have seen a loss of trust in our financial and more importantly
perhaps, political institutions. The full costs of that cannot be assessed yet and we have to fight hard to
keep the political problems from escalating further.”
Bengt Robert Holmström is currently Paul A. Samuelson-Professor of Economics at Massachusetts Institute of Technology, where he was head of the Economics Department from 2003-2006. He holds a joint appointment with MIT’s Sloan School of Management. He is an elected fellow of the American Academy of Arts and Sciences, the Econometric Society and the American Finance Association, and an elected foreign member of the Royal Swedish Academy of Sciences and the Finnish Academy of Sciences and Letters. He is a research associate of the National Bureau of Economic Research (corporate finance). In 2011, he served as President of the Econometric Society.
He received his doctoral degree from Stanford University in 1978. Before joining MIT in 1994, he was the Edwin J. Beinecke Professor of Management at Yale University’s School of Management (1983-94) and associate professor at the Kellogg Graduate School of Management at Northwestern University (1979-82).
Holmström is a microeconomic theorist, best known for his research on the theory of contracting and incentives especially as applied to the theory of the firm, to corporate governance and to liquidity problems in financial crises.
He holds honorary doctorate degrees from the University of Vaasa, Finland, Stockholm School of Economics, Sweden, and the Hanken School of Economics, Finland. He was awarded the Banque de France-TSE Senior Prize in Monetary Economics and Finance in 2012, the Stephen A. Ross Prize in Financial Economics and the Chicago Mercantile Exchange – MSRI Prize for Innovative Quantitative Applications in 2013, and the Distinguished CES Fellow award from CESifo, Munich.
In 2016, as mentioned, he received the Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. He is a board member of the Finnish Business and Policy Forum (EVA) (2005-), and a former board member of Aalto University in Finland (2010-2017) and the Nokia Corporation (1999-2012).