Ján Záborský | TREND Magazine
Lubos Pastor: How to do good research? Look around you
Lubos Pastor, 42, is a tenured professor of financial economics at the Chicago Booth School of Business. He also serves on the editorial boards of three top journals in financial economics. Over the past two years he has served on the Bank Board of the National Bank of Slovakia. He has received several prestigious best paper awards. He co-directs the Fama-Miller Center for Research in Finance. He is a graduate of the Faculty of Management of Comenius University in Slovakia and received his PhD in finance from the Wharton School at the University of Pennsylvania.
How to Develop Top Academic Minds
The whiteboard in his office resembles a prop from the Big Bang Theory—it’s covered with math. But a princess in a rainbow-colored dress stands out in the lower corner of the board. “My daughter visited me here recently,” explains the most-cited Slovakian economist. He says he spends more time preparing his classes at the best business school in the world than delivering them. He also explains how to succeed in the demanding academic environment of top universities.
Why did you come to Chicago? You could have also gone elsewhere, for example, to MIT.
In 1999, when I was finishing up my doctorate at the Wharton School in Pennsylvania, I went on the job market. This is a real market where doctoral students compete for job offers from universities. I was lucky to get job offers from Chicago, MIT, Yale, Columbia, and a few other places. Some schools, such as Harvard Business School, asked me whether I would consider an offer if they made me one. But Chicago dominated; to me, it was the number one school, far ahead of the others. This is where finance research was born. In 1952, Harry Markowitz wrote his dissertation about portfolio selection here and that’s how modern finance started. Ten years later, Nobel Laureate Eugene Fama wrote his textbooks about efficient financial markets. Then there was Merton Miller. All this happened here in Chicago. These top people were able to attract other top people, and to this day, Chicago continues to be the most desired destination for graduating doctoral students. When we make an offer to someone to come and teach, they almost always come. We compete with schools like Stanford and MIT but we usually win. For me personally, this was not a difficult decision. In the end, it came down to Chicago versus MIT. My wife and I visited both Boston and Chicago and I think we chose well. We have no regrets.
Can you tell us more about the academic job market? There is no such thing in Slovakia.
Not only in Slovakia but anywhere in Europe. Over the past 10 years, one of my responsibilities here has been to coordinate the recruitment of new faculty. I can log in here and see all of our job applications. Last year we received about 150 of them. These are already self-selected—only the best tend to apply here because they know our standards are high. People don’t apply unless they think their work is very good. Each application includes a resume, research papers, and recommendation letters from three or four professors. We invite 20 to 25 candidates for an interview. These interviews always take place at the meetings of the American Finance Association in January. This year, the meetings will be in Chicago, which is nice because I don’t have to travel. We spend up to 45 minutes with each candidate. The interviewers are colleagues who are experts in the relevant subfield of finance. For example, if the candidate’s research is in banking, we have five or six banking experts present. Then we invite eight to 10 candidates to our campus. When they come, they spend a full day here, they get 90 minutes to present their research, and they have half-hour meetings with colleagues. We also take them out to lunch and dinner. After all this, we usually make one or two offers, at most four. We then work hard to get these people because they are usually pursued also by other schools such as Stanford or MIT.
Do the candidates need to have published high-quality research?
Not necessarily. It can take two or three years to go through the whole publication process in our field. But you need to have promising results and a good paper. Some people do have published papers because it takes five or six years to complete a PhD. This is another difference between the U.S. and Europe, where earning a PhD generally takes much less time, only about two or three years.
All of this applies to students who want to become academics.
Not always. Some PhD students find industry jobs, often on Wall Street. But the best ones want to work at universities. Those who go to Wall Street usually could not find a good academic job.
You have been a tenured professor for over ten years. How does a school decide whom to give tenure? Is it similar to Slovakia where you have to meet a set of official requirements?
There are some official requirements here as well but what matters more is your “impact,” that is the influence of your work on your scientific area. After Luigi Zingales was promoted to a tenured professor, there was a long gap, some eight years, until 2005, when I was tenured along with two others. It works like this. After your PhD, you get a five-year contract as an assistant professor. When your term is up you are “up or out”—either you get promoted or you start looking for a job elsewhere. If you get promoted, you become an associate professor, something like “docent” in Slovakia. Five years later, you are “up or out” again. More than 50 percent of assistant professors at Booth get the first promotion. However, many fewer get the second one. The exact number depends on your area. Afterwards, you are a full professor with tenure. The whole process takes about nine years. Only a small fraction of our assistant professors become full professors here. But if they don’t make it here they usually become professors at other very good schools. You can find them at Harvard, Princeton, Stanford, or other top schools. I’m talking about finance, an area in which our school is particularly strong.
What are the metrics by which professors are judged for tenure?
To begin, you must be a good teacher. Students evaluate professors annually and every professor gets a rating. Your service to the school and the profession matter as well. But the most important thing, by far, is your research. How much you have published, in which journals, what impact you have had. You are evaluated both internally and externally. At the moment, I have two untenured colleagues who have received tenured offers from Yale and we have to decide whether to grant them early tenure or let them go. Our senior finance faculty re-read all of their research papers. Then we meet and try to arrive at a consensus opinion. If we like the work, we pass our opinion on to the dean, who creates a committee, which asks top people at other universities for their opinions. These people know the process and are able to write informative letters evaluating the quality of the work. Then their external views and our internal views are combined and the case is discussed among all senior professors at Booth. The school’s opinion is then passed on to the provost’s office at the university level. The provost usually agrees with our opinion. Each case is thus screened at several levels: the department, the school, and the university.
So you review and re-evaluate research papers that have already passed rigorous peer review?
Exactly. We do not automatically accept something just because it has been published in a journal, even a renowned journal. You may have published 13 or 17 papers. We take these papers, read them again, look at their citations, and discuss their impact. We are looking for work that is truly first-class. Let me put it like this: if you are the best in the world in your cohort, that helps. It may or may not be enough. We do not promote someone to a tenured position every year. There are about 25 of us and only about half have tenure. We cannot promote someone every year.
Sounds like tough competition.
And global competition. There is demand for the same people from London School of Economics or Paris School of Economics. You can try to evaluate people quantitatively, through the number of publications and the like, but that is not enough. In ice hockey, some players do not have many goals or assists but they are great players nonetheless. We try to move beyond quantity and evaluate quality. Some research might not have enough citations yet because it’s ahead of its time, because it opened up a new field. But the potential is there and we might think it will be heavily cited in 20 years. Such as when Gene Fama started the theory of financial markets half a century ago.
Why did you choose financial markets? You grew up in Slovakia where financial markets are fairly underdeveloped.
As a kid, I was interested in math and also the world around me. I was looking for a connection. Economics provides a natural connection as it aims to rigorously explain what is happening around us. When I was 19 or 20 years old, I read a lot of economic literature while looking for “my” area. What I found fascinating about finance is the element of luck, when things happen beyond your control. You can predict changes in interest rates or stock prices to some extent, but not completely. I found it stimulating to think about uncertainty. My first specific research ideas started forming during my doctoral studies. I dived into portfolio selection; that turned into my dissertation and a publication in the Journal of Finance. I built on the ideas from Harry Markowitz’s work at Chicago in 1952. I brought in some thoughts related to parameter uncertainty. Americans have a good word for this: “serendipity.” You let yourself be carried away by what you like and run into some random discoveries.
You are interested in the element of luck. But your passion has been math, which means unambiguous control…
There is a bridge between the two. As a boy, I played chess competitively until I was about 16. In chess, you can rigorously calculate many steps ahead but there is also an element of luck—the human factor. Your opponent can make a mistake, things can change. I have never been overly deterministic.
What do you think about the influence of computers and technology in chess?
Magnus Carlsen is playing Sergey Karjakin right now. Carlsen became a grandmaster at the age of 13. Karjakin reached that level at 12. That would have been unthinkable in the past. Computers can dramatically speed up chess education.
You talk about math and portfolios. How do you see the future of decision making in this area? It seems that a simple algorithm could create a portfolio that meets a client’s requirements. You don’t need a human advisor, do you?
We are indeed heading in that direction. The fintech industry includes so-called robo-advisors. They create algorithms that offer investments, mostly to index funds, at low fees. They consider how much money you have, when you plan to retire, how risk-averse you are, and the computer generates your portfolio. But that does not mean that finance will be sidelined. Portfolio selection is only a small part of finance.
You are also a member of the Bank Board of the National Bank of Slovakia. Why? It is a time-consuming job. Don’t you visit Slovakia at least once a month?
I always wanted to do something for Slovakia, find some kind of a role. I welcomed the opportunity to help in an area that I know something about. Indeed, I fly to Slovakia about once a month. I also spend some time there every summer.
Have you ever considered teaching in Slovakia?
I wish that I had more time. I have a full-time job at Chicago. I am also active in two academic financial associations. When I add the NBS work, it is not easy to juggle everything. I also have four children. Sometimes I feel I’m already sacrificing too much.
How do you find the balance between research and teaching?
Despite everything I do, research remains my number one priority. Yes, I teach, I do some administrative work, recruit people, run a research center, serve on committees. But research remains my priority. This year I managed to publish two papers in top journals. I try to bring research into my teaching. In my classes, I often use research papers to bring my students the latest and most relevant ideas.
What do your classes look like?
Before each class, my students read one or two case studies. We then discuss them in class. Each student arrives already having an opinion. I add a few thoughts. Let’s say I arrive at the conclusion that a particular investment fund made a wrong decision. Some students will disagree, arguing that I’ve made wrong assumptions. I also try to combine real-world examples with new theories which I bring to class. I pass around my handouts, about 10 pages. We discuss about 10 studies in each class. I add some recent news and examples. I post all research papers on the Internet so that students who want to learn more can do so after class.
How long does it take you to prepare for your classes?
Longer than the classes themselves. When I teach, I teach nine hours a week, plus I have office hours for students and review sessions, which are run by my assistant. But the preparation can last 20 hours a week. In quarters when I teach, teaching itself is a full-time job when I add administration and email communication. I do not teach this quarter so I have more time for research.
How do you choose research topics that will have an impact?
There is no single golden path that will lead you to a good idea. My advice is to look around you. Read newspapers, magazines, pay attention to what’s happening around you, look for topical issues. I do the same. You also need to be up to speed in the academic literature so that you can move the boundaries of knowledge. A great research topic moves beyond the boundaries of latest research and at the same time addresses current events. After the crisis, I became interested in political uncertainty because I noticed the large amount of uncertainty about governments’ future decisions. My colleague and I tried to formalize this uncertainty. We created the first theoretical model about the behavior of markets in the presence of political uncertainty.
Is this model applicable even now after the elections?
It is, but my ongoing research is even more closely related to elections. It focuses on political cycles—when people vote for Republicans or Democrats. Others have already found that markets react positively when Republicans are elected and vice versa. It looked like this year was going to be different. But when the current new president was elected, the market went up again. In my new research, my coauthor and I analyze not only the markets’ reaction to the election outcome but also how markets behave afterwards. Stock returns have historically been higher while Democrats were in power. Economic growth has also been faster under Democrats. We are looking for a model that would explain both of these phenomena.
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