Transcript of the talk, from the video's captions. Auto-generated: speaker names in particular are unreliable.
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# Consumption Strikes Back? Measuring Long-Run Risk

Authors: Lars Peter Hansen, John C. Heaton, Nan Li (interview with John C. Heaton, Chicago Booth, April 2012)  
Discussant: None  
Video: https://www.youtube.com/watch?v=txiNwV9xzfc&t=0s


## Talk (00:00:00 – 00:04:34)

[00:00:01] When this kind of research, what we're trying to do is find a stable long-run relationship between the broad economy and the markets. So, a lot of times when people are getting investment advice, they'll just look at stock market returns.  
[00:00:14] And what we want to do is look more broadly at, well, okay, but that stock market lives in a bigger economy. Will the economy be stable over time?  
[00:00:24] A problem when we use historical data is that it could be just been luck that this happened.  
[00:00:30] That it, you know, that this experience may not repeat itself. So, uh one example where that really came up was during the big stock market run-up in we've seen say 1995 and 2000  
[00:00:43] with such high valuation levels that we saw, such big prices, there were real concern on the part of investors, will there be high returns to stock investing going forward?  
[00:00:54] Right. So, as economists, when we look at that those kind of questions, what we're truly trying to understand is will the economy repeat itself and sort of on average? Will it be we call it stationary, but will it be repeating itself?  
[00:01:08] And so, really what we're trying to understand is what's the fundamental structure of the economy? Is it Are investors, the characteristics of investors going to be stable over time, the way they think about risk going to be stable over time?  
[00:01:21] What we're trying to do is find a stable long-run relationship between the broad economy and the markets. So, a lot of times when people are getting investment advice, they'll just look at stock market returns.  
[00:01:32] And what we want to do is look more broadly at, well, okay, but that stock market lives in a bigger economy. Will the economy be stable over time?  
[00:01:42] Um and the way investors think about risk, will it be stable over time?  
[00:01:47] How do we do this measurement of what investors think about us, what their well-being? And usually, we just use the quarter-to-quarter movements in consumption or GDP. And the idea in this paper is that's too narrow a view of the  
[00:02:01] way investors view their well-being. They don't think about just what they're eating now or consuming now when they're buying a car or investing in a house. They think about something happens to me today, say I get unemployed. Might Sure, my  
[00:02:15] consumption goes down now, but my whole future looks a lot different. And the important part of the work that tries to link the market to the broader economy is trying to look for more of that stability, you know, that that investors  
[00:02:30] aren't worried just about the market. They're worried about their jobs.  
[00:02:32] They're worried about their the businesses they might own. They're worried about their housing. They're worried about a whole host of other things. And if the way they think about those other things changes, then or if the volatility effects in  
[00:02:47] these other things shifts over time, the market will look a lot different.  
[00:02:52] People when they're young, um are often advised to put large positions into the stock market. And you know, often it'll be well, the statement will be well, you're young, you should take more risk. What does that mean? That means that you have  
[00:03:07] flexibility in your ability to adjust to circumstances. Right there, that's telling you that when you're young, you have ability to adjust your well-being by working more, changing your savings patterns  
[00:03:21] to weather stock market's movements up and down. So, that intuition about, you know, you care about your well-being and how that relates to stock market is in the standard investment advice that people get.  
[00:03:35] The typical investor on average is more like that young investor. All right?  
[00:03:39] They have this kind of thing called human capital that doesn't move as around as much.  
[00:03:44] So, we see that in the aggregate consumption measures. They don't move around as much with the market.  
[00:03:50] So, this has always been viewed as a puzzle.  
[00:03:53] And one implication would be that investors ought to put more money in the stock market.  
[00:04:00] In the run-up between 1995 and 2000, there was discussion within the profession and more broadly that maybe that's finally happening. Investors are becoming more comfortable stock investing. The market goes up. Maybe this  
[00:04:14] therefore what we're going to see going forward lower returns to stock investing than we saw historically.  
[00:04:21] Right. So, going back to why is, you know, what's the general question? The general question is trying to find a structure of to explain what's both what's happened historically and also help us to forecast.