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John Leahy

Allen Sinai Professor of Macroeconomics Looks at Models of Mistakes in His Current Topic of Research

Deciding to change institutions is a tough and complicated decision to make, made even tougher when you have a family. For Macroeconomist John Leahy, U-M was an institution that he couldn’t pass up. He was attracted by the broadness of the areas in which U-M economics excels and by the imaginative and creative work of both the faculty and students.  “A lot of economics can quickly become very technical, and people fall in love with the technicality. U-M is different than most departments in this way. Having the data centers, science research centers and big surveys housed at Michigan, means that we are closer to the data than most places. At many schools, a thesis will start with students learning a bunch of mathematical techniques. Once they have mastered those, they look for a question, then they try to build a model, and only then they look for data.” He continues, “Here things tend to start more with the question, the data, and the model all happening together. We’re much more in the answering questions mode rather than building technical solutions. This tends to produce very idiosyncratic, original, and creative work relative to what people do in many other places. Because of this, U-M theses often look different than ones from other universities and that sells well on the job market, partly because they are more imaginative.”

In addition to his work at U-M, John is a co-editor of the American Economic Review. The journal is run by the professional society for economists, the American Economic Association, and is the premier journal in economics. With roughly two thousand paper submissions a year, John will receive an average of four a week to make a decision on. Only seven to eight percent of the papers received are published. As for advice on creating a successful paper, “In some sense, the papers that are successful are similar to the way U-M theses get written. There’s an idea, there’s some model that shows that the idea works in theory, and there’s some data that shows that it works in practice. It’s that complete package that tends to work best.”

John is currently finishing up two papers that model mistakes. He elaborates, “In classical economic theory, people know their world, they make choices, they have constraints, and they choose the best thing they can from the available options. But we all make mistakes. So how do you model somebody that is trying to do the best they can, but often failing? We’re working with models of imperfect information processing. There’s the world out there and there’s the world inside your head, but given inattention and imperfect information, the world inside your head might not be the same as the world out there. You may be doing the best you can given the world inside your head, but that will often time run into contrast with the world that’s out there.” Riding on an elevator, getting off on the wrong floor that you believe is the correct floor, is an example of this clash between perception and reality. He continues, “So the question is, how to put some discipline on these choices in the sense that, once you have things going on inside the head that are different then the world out there, anything can happen. You can basically rationalize any choice just by saying that the person thought that was the right thing to do. How do you put structure on beliefs so that the external and internal worlds can be different but not too different? These are the types of models we are developing. Once you have a model, then you try to develop testable implications and check to see whether they fit the data or not. If not, you adjust the theory.”

In the past John has worked on beliefs, aggregation, imperfect information, and learning. In identifying future topics of research, in lieu of a model of inspiration to help him choose his research topics more easily, they usually come about from conversations he has with colleagues. “Colleagues are so important in that sense. I always like working with co-authors. Its always nice having somebody else who thinks what you’re doing is interesting. Almost every project goes through a phase where you question whether it is working or not. Having somebody else who is also invested, helps to get you over these humps and things get done,” he explains.

John has dual appointments in the Department of Economics and the Gerald R. Ford School of Public Policy. He was a math and history major during his undergraduate.  He went on to earn a Master of Science in Foreign Service from Georgetown University; it is here where he fell in love with economics. It perfectly combined his interests in math, history, and current events. With this newfound direction, he went on to earn his Ph.D. from Princeton University with a focus on Macroeconomics. At the time, there was a great deal of innovation going on in Macroeconomics that he was attracted to. “Macroeconomics is important because everything has to add up. It teaches you to think about the whole system together, rather than the individual pieces. That often leads you to think about situations completely differently,” explains John.

If you are going to have John as a professor, he wants you to remember that, “You can never know too much math and that you should ask questions.  If you aren’t asking questions you probably aren’t learning.” 

Find out more about John here!