Lawrence D. W. Schmidt is the Victor J. Menezes (1972) Career Development Assistant Professor of Finance. He is an an applied economist working at the intersection of finance and macro-labor.
Schmidt’s research has developed new insights about the risk exposures and decision-making processes of households, institutional investors, and financial intermediaries, and in doing so has deepened our understanding of asset prices, financial policy, and the workings of the real economy. His research to date involves two interrelated strands. The first and most active strand studies fundamental risk factors impacting the value of human capital and the causes and consequences of imperfect risk-sharing in labor and financial markets. The second strand aims to understand the underlying drivers of financial markets by focusing on the interplay between individual decision-making, strategic complementarities, and information processing frictions.
Schmidt’s research tackles these questions by a combination of quantitative models and empirical work. This work leverages, and often creates, novel microeconomic datasets, advanced econometric methods, and cutting-edge tools for textual analysis. He specializes in working large, administrative datasets capturing detailed, longitudinal information on millions of firms and workers. His work often features quantitative models that help make sense of the data and better understand financial market dynamics, evaluate welfare, and inform better economic policy.
His research has appeared in the American Economic Review, the Journal of Finance, the Review of Financial Studies, among other outlets, and his research has won multiple awards, including the 2015 AQR Top Finance Graduate Award. Schmidt holds a BA from the University of California, Santa Barbara, and PhD and MA degrees in economics from the University of California, San Diego. Prior to joining the faculty at MIT Sloan, Schmidt was an Assistant Professor in the Kenneth C. Griffin Department of Economics at the University of Chicago and a senior consultant at Navigant Consulting, Inc.
Current Research Focus—Leveraging big data to uncover the critical role of risky human capital for asset markets and the real economy: For most people, human capital—that is, the present discounted value of future labor and/or entrepreneurial income—is their most valuable asset. One focus of Schmidt's work is on quantifying downside risk exposures that workers face, understanding economic forces which generate them, and capturing how exposures to them vary across different people. For example, Schmidt's recent work shows how new technologies are linked with worker earnings risk, as well as reasons for the concentration of losses from economic downturns upon a subset of workers. Since a primary way to insure oneself against income risk is by accumulating financial wealth, his recent work builds a case for a human capital-centric view of risk and return in financial markets. Limited risk-sharing helps to explain both why stocks earn high expected returns and why these returns vary over time. His work also illustrates how increases in risk premia propagate through the labor market to endogenously generate higher income risk. It also addresses the question of why some assets earn higher average returns than others, helping to rationalize the size and value “anomalies” in stock markets. Finally, his work on income risk raises important questions about optimal design of institutions intended to promote retirement savings and investment products targeted towards households.
