The Science of Acorns

Littermans talk about the science and serendipity of succeeding, living well, and giving back.

When Mary (B.A. '74, economics, Ph.D. '80, agricultural and applied economics) and Bob Litterman (Ph.D. '80, economics) came to Minnesota in 1975--she as a returning Minnesota native and he as a transplant from California--they never dreamed how far the shared arc of their lives would take them. T hrough a mix of talent and drive, serendipity, and science (and perhaps a bit of alchemy), they turned their economics degrees into successful careers, their shared interests and values into a lifelong partnership, and their success into opportunities for others. Grateful for the good fortune that has come their way, the Littermans, now residents of New Jersey, have generously endowed a graduate fellowship in the Department of Economics.

Colleen Donahue, the development officer for the department, talked to the Littermans recently about their lives and family, their work, and their philanthropy.

Mary, are there professors who stand out in your undergraduate education in economics at Minnesota?

ML: Ed Coen was director of undergraduate studies when I was an undergraduate. He taught a great class and made it a lot of fun. I had many wonderful professors, and I received a great education.

Tell me how the two of you met and decided to come to Minnesota.

BL: Mary and I were officemates at UC- San Diego, where we were both graduate students. After one year in San Diego, Mary was offered a research assistant position in the agriculture and applied economics graduate program at the U, so we moved to Minnesota. At the time, I'm not sure I fully appreciated what a very, very special place Minnesota's economics department was.

Bob, I understand that you studied journalism as an undergraduate at Stanford.

BL: I did work one year as a journalist in San Diego after graduating from Stanford, but my undergraduate degree was in human biology. I guess the acorn doesn't fall far from the tree--both of our children are studying neuroscience. Our daughter, Nadia, is entering the graduate program at Harvard and our son, Adam, is studying molecular biology at Princeton.

So how did you end up in economics with Tom Sargent as your adviser?

BL: I applied to the economics program in late August 1975. They told me I could come, but they couldn't offer me any money. I was pretty good with computers, so I got a job at the U Computer Center. Tom asked me to do a problem set for one of his classes using computer simulations. I guess he liked what he saw, because he asked me to be his research assistant and work for him at the Federal Reserve Bank.

Tell me more about the partnership between the Federal Reserve Bank and the Department of Economics.

BL: The research taking place between the Fed and the U was absolutely first rate. In the late seventies, the Fed wanted to improve their economic forecasting models. I worked with Tom Sargent and Chris Sims and basically implemented an approach suggested by Chris called vector auto-regressions (VARS), and it became my thesis. I was extremely lucky to get the research assistantship, work at the Fed for three years, apply what I did, and have it become my dissertation.

What was your first job after you got your Ph.D.?

BL: My first job was as an assistant professor at MIT. After a couple of years, I realized that I didn't really enjoy the teaching part. So I called Tom Sargent and asked if there might be a job for me at the Fed in Minneapolis. Tom said that the Fed would love to have me back, so we moved back to Minnesota and I worked at the Fed for five years.

And then what?

Before Mary and I graduated from our respective programs at Minnesota, we had started up a small software business with Tom Doan, another graduate student in economics. Before the invention of the personal computer (which happened while we were at MIT), we sold our software through universities on mainframes, but the market was small. Once the personal computer was invented, there was a huge market burst in software and we began to advertise our software in PC magazines and business journals. Mary's parents were actually running the business out of our home, and it became a very good enterprise for us. As a matter of fact, we were making more money from our software business than from our two jobs combined.

But you left to work at Goldman Sachs?

At that point in our lives, our business partner wanted to go into the software business full time. It was a tough decision for Mary and me because we had two kids who were very young at the time. And then I got a number of calls, including one from Goldman Sachs. Three years earlier, they had hired Fischer Black, a well known economist, to help them figure out how to price derivatives, hedging, and all types of valuation models, so they were looking for "quants," people skilled in quantitative mathematics. We thought, "What the heck, let's give Wall Street a try."

It's been a great run with Goldman Sachs over the past 19 years. I became a partner in 1994, GS went public in 1999, and the partners did very well, so it worked out well for us. From 1994 to1997, I was the risk manager for GS, but in 1998, just before the Asian currency crisis and the collapse of LTCM (Long Term Capital Management, a large global hedge fund), I transferred to asset management--another stroke of good luck for me. That was a very tough time for risk managers on Wall Street.

Mary, what about your first job?

My Ph.D. thesis was on energy-- substituting other inputs for energy in manufacturing and agriculture--so when we moved to Boston in 1979, I began work as a research associate at MIT's energy lab. Many universities around the country had energy labs, since oil prices were incredibly high, and MIT's lab was one of the best. We researched such things as consumption, economic impact, and energy alternatives. I specifically worked on residential energy demand.

When we returned to Minnesota the fall of 1981, I became the state electrical analyst studying demand for electricity throughout the state. I testified in the certificate of need hearing for the Sherco 3 plant. After that, I took a position at Minnegasco forecasting natural gas demand.

After we moved to New Jersey, I sort of "retired" and served as a member of our local school board for nine years. It was an incredibly difficult and rewarding experience, but this past year I felt it was time to move on to other challenges.

BL: Milburn School District has been hailed as one of the best districts in the country so I think Mary did a great job handling the challenges of a school board president.

What challenges do you see affecting public education today?

ML: There are huge issues facing education today in the constant tug-of-war between needs and how to fund them. State colleges and universities are under a lot of funding pressure--they are being squeezed hard to reduce costs at all levels--so it is hard for them to attract and retain talent. Public education is a cornerstone of our society; it allows for social mobility and I think it has contributed to our success as a nation. If higher education becomes financially impossible for most people, then we have a very serious problem.

The two of you have been incredibly generous to the University and to the Department of Economics. What motivated you to support the department? And what do you hope your fellowship will accomplish?

ML: Our education enabled us to go on and be successful, and we really wanted to give back. Our hope is that the fellowship we created gives aspiring economists an opportunity to go to school and better themselves and really achieve something great.

Given your varied professional and life experiences, what advice would you offer our current students?

ML: There are lots of different opportunities out there and, regardless of your specific aspirations, getting an advanced degree really helps open up doors.

BL: We got a great education at Minnesota. The quality of the faculty was superb. Because we both took unusual paths after graduate school, we credit some of our success to good timing and luck. I think everything goes back to science. Even what we do on Wall Street is very focused on applying the science of economics to business. That's what helped me to be successful.

You both lead very busy lives. What do you do for relaxation?

BL: We go to our place in Steamboat Springs, Colorado, to ski in the winter and to hike, mountain bike, and golf in the summer. I am still working at Goldman Sachs, which is a pretty demanding career, and I probably travel half the time and do business with people from all over the world. Mary has started a business building homes in Colorado.

ML: Building homes is something that I really enjoy doing. I travel to Colorado once a month to meet with my partner, who does a lot of the design work. We've just completed our first house.

Whom do you admire most in the world?

BL: Well, first of all, the people who were my professors at Minnesota, especially Tom Sargent and Chris Sims. And Lars Hansen, who is now a professor at Chicago--he was a fellow graduate student at Minnesota when I was there. He was so incredibly talented at the time that he made the rest of us feel incompetent.

Another is Fischer Black, whom I first met at a seminar in Minnesota--we later became colleagues at MIT and Goldman Sachs. Being able to work with him on the Black-Litterman Global Asset Allocation model really changed my life; it was one of the highlights of my career. It applies the same basic Bayesian econometric approach that I used in my thesis on forecasting to the problem of portfolio construction. To this day I continue to use the intellectual foundation from Minnesota to make profits on Wall Street.

What words do you live by?

ML: I believe it is important to treat everyone that you come across in life with respect, and if you've been fortunate, to give back.



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This page contains a single entry by cla published on June 24, 2008 8:07 PM.

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