The P&Q Interview: NYU Stern’s Johannes Stroebel, Winner Of The Fischer Black Prize For Financial Research With Impact

Johannes Stroebel wasn’t planning to attend the annual meeting of the American Finance Association earlier this month. While he usually goes every year he’s in the U.S., the NYU Stern School of Business finance professor was on sabbatical this year in Europe with his family. They had booked a week of skiing.

Then he got a call from a colleague who’d noticed that Stroebel’s name wasn’t on the meeting program. It would, uh, be a good idea if Stroebel made an appearance, the colleague told him.

Good thing he listened. At the meeting, Stroebel was awarded the 2023 Fischer Black Prize, a prestigious award given every two years to a scholar under the age of 40. The award honors individual financial research perceived to have had the greatest impact. Stroebel is one of just 10 scholars to have received the prize.

TAKING RESEARCH RISKS

“We are extraordinarily proud of Johannes for winning this distinguished award,” says Raghu Sundaram, NYU Stern’s dean. “He is an exceptional colleague and a thought leader in the profession, including in important emerging areas such as climate finance and social networks, and this award is yet another testament to the enormous significance and impact of his research.”

Stroebel grew up between Germany and the United Kingdom. He once thought he might work in investment banking, and he did the usual undergraduate internship. But he didn’t enjoy it all that much.

He earned a Ph.D. in economics at Stanford University, and found the combination of researching really interesting questions and teaching inquisitive students appealing. He joined the faculty of NYU Stern in the summer of 2013.

Stroebel has devoted much of his career researching two obscure financial topics – topics some once thought might be risky for his career: The financial implications of climate change and the effects of social capital on economic mobility.

For the latter, he and the research team at Opportunity Insights dived into the privacy-protected data of 21 billion Facebook friendships to create the Social Capital Atlas – a database measuring social capital in each neighborhood, high school, and college in the United States. Communities can use the atlas to explore social capital in three categories – cohesiveness, economic connectedness, and civic engagement – to see how it connects to children’s chances of rising out of poverty. The research was recently featured this summer in an expansive project by the New York Times’ TheUpshot: “Vast New Study Shows a Key to Reducing Poverty: More Friendships Between Rich and Poor.”

Stroebel is an associate editor at both The Journal of Political Economy and Econometrica, and is the foreign editor at The Review of Economic Studies. He is a research associate at the National Bureau of Economic Research, a research affiliate at the Center for Economic and Policy Research, and a research fellow at the CESifo. He is winner of the Andrew Carnegie fellowship, an Alfred P. Sloan Research fellowship in economics, the AQR Asset Management Institute Young Researcher Prize and the Brattle Group Prize for the best published paper in the Journal of Finance. In 2022, he was named a Poets&Quants Best MBA Professor under the age of 40.

Poets&Quants sat down with Stroebel, the David S. Loeb Professor of Finance at Stern, to talk about his research, the Fischer Black Prize, and taking a chance on a couple of obscure financial topics. Our conversation has been edited for length and clarity.

What are your current research interests?

I spend most of my time on one of two topics. The first is trying to better understand the economic and financial implications of climate change. Obviously, climate change as a physical phenomenon has been studied for decades, but really understanding the economic and financial implications is a relatively new field to be studied at scale.

For example, trying to figure out the extent to which, say, housing prices and mortgage values might be affected by the physical manifestations of climate change – rising sea levels, wildfires, flooding, etc. Or the effects regulatory responses to a carbon tax will have on the economy and the extent to which you can use financial markets to share those risks between people. And then there’s other questions in that space: How do you finance a transition to a low carbon economy? What role can financial markets play in that?

That’s also how I’m spending a lot of my time teaching now along with a variety of policy advising roles.

And the second?

For about 10 years, thanks to a long standing research collaboration with Facebook/Meta, I have been trying to understand the effect that social interactions have on economic decisions. Most recently, we’ve tried to use data from Facebook to measure the different types of social capital across different U.S. counties, zip codes, high schools, colleges, etc., and trying to understand which types of social capital are important for upward income mobility.

We’ve been able to measure upward mobility in tax data for a while by linking children to their parents.You find these huge mobility differences, for example, between a kid that grows up poor in Salt Lake City to a kid who grows up poor in the South. The kid in Salt Lake City will have a much, much higher chance of becoming wealthy as an adult. There’s a big question about why that is the case. People have proposed a whole range of different explanations, but none of them had actually all that much explanatory power. One thing we kept hearing is that what’s different about these communities is social capital, but there hasn’t been a lot of quantitative work trying to actually see whether this is true. That’s largely because a lot of the meanings of the word “social capital” involve the structure of relationships between people. Those are just very, very hard to measure.

That’s why the Facebook data has so much potential. There’s a generation in which we have over 80% of the U.S. population active on the platform, so we can measure the structure of their relationships. We can better understand how social capital varies across the U.S. and which ones are important to mobility.

This capital includes connectedness – the extent to which people with different characteristics are connected with each other: Rich or poor, Republicans or Democrats, or whatever label you give people. Then there’s a second type that’s sometimes called bonding social capital, which is how tight are the links within the community? How many of your friends are also friends with each other? Finally, there’s a third one called civic engagement – how active are people in the community.

Facebook data allows us to measure all three, and how they vary for every high school in the U.S. We can measure whether poor and rich kids in that high school are actually friends with each other, or do they just happen to go to the same school without ever interacting. One of the things we found is that the strongest predictor of upward income mobility is the extent to which poor people are connected to the rich. We are trying to understand why it is that, in some areas, low-income individuals are more connected to high-income individuals. What connections – the friendships you make in high school, at church, or on sports teams – reach across class boundaries?

What about social capital do you find interesting?

I think there’s just so much more we need to better understand. I think students, particularly undergraduates, are very interested in it. A lot of them are thinking about issues of upward mobility, and I think they appreciate that even at a business school, there are at least some of us thinking about these topics too.

In many ways, there’s an opportunity with this idea about the importance of relationship building within communities. There’s been a huge focus on just giving resources and providing money to underprivileged communities. That’s obviously important, but it doesn’t by itself solve the problem. It raises the standard of living temporarily, but it doesn’t actually change people’s earning potential.

Similarly, when we think about social integration, where do these links form? Universities are a big part of it. There’s a big focus in integrating undergraduate classes and making them more diverse on a whole range of racial and socio economic dimensions. What our work shows, however, is that while there are many places that are very diverse on paper, there is essentially no links across these groups. Bringing people in and then having your great diversity statistics on your website is just the first step. The work doesn’t end there.

I think the next step is measuring social capital. That wasn’t really possible before – you could measure diversity statistics, but you couldn’t measure these network links. On our team’s website, socialcapital.org, you can look up every high school and every college and exactly see how many friendship links there are between different income groups. At the undergraduate level, for example, we can start looking at schools with similar income composition, but where for some reason, one school’s students interact much more across these different groups. What are they doing right? What can we copy at other schools?

I think focus needs to shift from just purely achieving what we call exposure. It’s necessary as a first step, but it’s not sufficient. If you’re bringing a low-income student to a high-income highschool, you need to make the high- and low-income students interact to get the most out of the social capital. There’s so much information flow that comes from that. We’ve heard so many stories about people getting advice on their SATs or internships from rich friends, but I think the most important thing is just aspirations. People can see another vision for their lives when they interact with higher income groups.

For all of these things to happen, it’s just not enough to coexist in the same space. You actually need to form these links. By putting this data out there, I hope we get universities to actually move beyond just posting some statistics on their website. Hopefully they can change the way they run the day-to-day to improve on these meaningful interactions.

In 2021, you launched a new NYU class on climate finance. Tell us about that.

It’s a pretty eclectic class, and I think that’s part of the appeal. There’s no textbook or anything and every time I teach it, the topics change.

Climate change is such a systemic shock, that it really affects absolutely everything. So the broad big picture is how climate change affects financial markets, and we spend the first two or three classes thinking about physical risks, transition risks, and how those would differ across industries. What does it do to sovereign debt markets when you’re going to have some countries that might actually be flooded? What about oil markets in the Middle East? What industries might benefit from climate change?

We have some classes on what cities can do at a very micro level in terms of adaptation measures rather than mitigation. We have a club where we talk about the geopolitical implications of climate change. For example, as the Arctic ice caps melt, some trade routes will no longer go through the Suez Canal, but they’re all going to go above. So what does that do to the geopolitical stability of Egypt?

Similarly, we’re going to have 200 million people leave Africa by some estimates. Where are they going to go? It’s just a lot of different topics where climate change, through a variety of mechanisms both direct but somewhat more indirect, are going to affect financial markets.

Is this primarily an MBA course?

It’s usually offered in the MBA and the undergraduate curriculum, but I’ve also taught it across a range of executive education courses and across the masters science programs. I think there’s demand across all programs for more of that type of material. It’s hard to scale up, and particularly if you want to have it taught by research faculty, because they’re not many of us really thinking about these questions.

What are some of the research questions in the climate space that you’ve recently worked on?

One set of questions I spend a lot of time thinking about is how you might use financial markets to hedge against these realizations of climate risk. So when the transition risks of climate change gets bad – like a huge carbon tax, for example – or when the physical climate gets bad, how can you make adjustments to your portfolio to reduce the impact? You’d have to think through very carefully about industries that might do particularly well or particularly bad, and then you want to overweight those industries in your investments.

One of the things we did in a recent project was to study what mutual fund managers do when they change their perceptions of climate change. We looked at public data and their strategy statements where they describe to their investor base the big factors that worry them. One thing that surprised me was that the automotive sector was actually a big winner in climate transition. If you’d asked me up front if a carbon tax would be good or bad for the automotive sector,I would have said it would probably be bad, particularly for the incumbents. One of the things that we kind of kept hearing is that a carbon tax would make them transition a lot faster, which means they’d sell a lot of electric vehicles. The Tesla’s and the startups in the world are not producing nearly enough vehicles, so it’s going to be the incumbents – the Fords and the GMs – that are going to be selling twice as many cars in the next decade than they normally would.

Was the Fischer Black Prize something you aspired to for your career?

Not really. There’s so many factors that play a role, so I don’t think it’s something you aspire to. You want to do the best work you can, and it’s nice when it has impact. With both the climate and the social capital work, I think we spend a lot of time actually making sure there’s real world impact.

On the climate side, we do a lot of advising the federal government, for example. The social capital work is actually a very different target audience because the measure is such at the micro level, that you’re really actually talking to school superintendents. You’re looking at why one zip code is so much better than another, what to do in terms of building public infrastructure, etc.

Having impact is generally the objective, and it’s kind of fun if what you find exciting on the research side has some sort of more immediate applications.

So how did it feel to win?

I mean, it was nice. To be honest, I have three young kids and, in December, everyone was sick all the time. It was more about me trying to deal with the logistics of getting to the meeting than anything else.

When I learned who was on the prize committee, I did think it was really nice that this group of people recognized my work. In some sense, your colleagues are your primary audience; Academia is a little bit inward looking. Over time, you try to find policy and student audiences as well, but the research community is the primary audience for the development of research. An award that comes from within the community, I think is very rewarding.

It’s also nice because all these topics that I’m working on are not at the core of finance research tradition. There have been moments when people were skeptical: Was it sensible for me to be spending so much time on these obscure topics? Isn’t social capital more like sociology? The social capital papers were published in Nature – not a traditional outlet for financial and economic research. At least initially, when I started thinking about climate change, the financial markets were not thinking about it all. It was very obscure. So, I think it was a risk, but it was a risk that paid off.

Finally, it’s a nice signal from the research community to other researchers that it’s worth thinking about some of these new topics, rather than just continuing to work within the existing frameworks. It’s a validation for the work and encourages other people to go into those same fields. I think there are so many open questions, we need more people studying them rather than fewer.

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