Suddenly, everything becomes quite simple: For the past six months, Rüdiger Weber has held the endowed professorship in Alternative Investments at the Faculty of Economics and Business, which means he now represents the field of finance at Goethe University. Speaking to his conversation partner in this interview nearly made her dizzy with all the talk of public equity, private equity, options, futures, forwards, asset pricing, venture capital, and aggregation…
Now he is explaining what he means by the aggregation of assets: “Imagine Adam and Eve in paradise. Each day they receive either one or two apples – but they don’t know in advance how many. That uncertainty is their risk. At some point, however, they notice that whenever Adam gets two apples, Eve only gets one – and vice versa.” If the two were to form an aggregate and share their “apple harvest”, Weber says, they would receive three apples per day between them. And because they would be insuring each other through sharing (against apple scarcity), there would be no risk remaining for either of them.
Of course, economist Weber deals with a market economy that is much more complex than a two-person economy in the Garden of Eden. Still, he assumes that the economy he studies exists in general equilibrium – not in the sense that prices don’t change, but that price developments can always be traced back to real-world dynamics. Prices are determined endogenously and reflect environmental influences such as natural disasters and wars, as well as human behavior.
Classical and Alternative Investments
Weber’s academic home is the valuation of assets. He has, for example, investigated why stock prices typically fall during a recession, or why stock returns tend to be higher on average than those of bonds. More recently, his research has expanded to alternative investments. He explains: “The equity in classical investments is traded on the stock exchange and referred to as public equity. The capital of an alternative investment, on the other hand, is not distributed among many investors – which is why we refer to it as private equity.”
Weber describes how a private equity firm operates: “It buys a privately held company – say, for example, a shoe manufacturer – with the aim of improving its performance.” The firm typically holds the company for several years, during which it tries to restructure operations, optimize the product range, or sharpen up management – often requiring managers to invest their own capital in the business.
To study corporate behavior and its financial consequences, Weber primarily uses empirical methods: “I analyze data on security prices and returns, on cash flows, and so on. The data has been collected and digitized by others – either by commercial providers, regulatory bodies, or government institutions.” Using existing models – some of which he adapts to specific scenarios – he applies statistical methods to test whether the relationships match economic theory.
“Incredibly Diverse Research”
Time and again, Weber is struck by how deeply fascinated he is by his field: “I’m interested in the prices of assets – which reflect the preferences of the people trading them, and how the societies work in which this trading takes place.” This, he says enthusiastically, is something he felt from the very start of his studies: “Economics contains so much – ultimately everything related to human behavior. You could almost say: Economics explains how the world works.”
Weber’s research aims to describe and explain how the world works, and in the coming months and years, he plans to focus on a key topic in this context: risk-sharing among heterogeneous agents. He explains with another return to Eden: “Let’s once again imagine Adam and Eve in paradise. Suppose, in addition to a steady apple harvest, they have two pear trees that produce a random total number of pears. If Adam is more risk-averse than Eve, he’ll gladly give her the right to a larger number of pears in exchange for a fixed share. But if Eve develops a pear allergy, she’ll lose interest in the pears entirely – leading the value of the pears and the pear trees to drop dramatically.”
Before Rüdiger Weber fully committed to studying economics to better understand how the world works, he had enrolled in Scandinavian Studies as a secondary subject during his first semester. Today, he is passing his love of Nordic countries on to the next generation: his two-year-old daughter is delighted whenever he reads to her from the Swedish picture book classic “Peter in Blueberry Land”.
Stefanie Hense
