Robert J. Shiller, the Sterling Professor of Economics and Professor of Finance, discussed his research and career to a capacity audience in Zhang Auditorium at the Yale School of Management on January 16. Shiller, who shared the 2013 Nobel Prize in Economic Sciences with Eugene F. Fama and Lars Peter Hansen of the University of Chicago, reprised his 2013 Nobel Prize Lecture, “Speculative Asset Prices.”
Nicholas Barberis, the Stephen and Camille Schramm Professor of Finance, introduced Shiller. “Bob produced some of the most innovative work of any economist in his generation,” Barberis said. “He urges us not to follow the herd but to think independently, to have the courage to challenge the prevailing consensus.”
Fama, Hansen, and Shiller were recognized for their research showing that while the price of stocks and other assets cannot be accurately predicted in the very short term, more accurate predictions can be made over a period of years.
I just posed a question: Why is the stock market going up and down so much?
In his talk, Shiller described his research questioning the efficient market hypothesis, which holds that the prices of securities reflect all available information about them, as well as his longstanding, friendly rivalry with Fama, a proponent of the hypothesis. “I think it’s a half-truth,” Shiller said of the notion that markets operate efficiently.
Shiller said that Fama and he actually both believe that stock markets are somewhat forecastable. “We just have a different way of describing it,” he said. Shiller said he began his research in response to Fama’s early thesis that there is no way for an investor to consistently outperform the market. “I just posed a question: Why is the stock market going up and down so much?” Shiller said.
In a landmark 1981 paper in the American Economic Review, Shiller examined stock prices over the previous century, and found that they were too volatile to be explained by investors rationally forecasting future dividends. “This got me in a lot of trouble,” he said, explaining that he was accused of concocting a misleading picture of the stock market.
Shiller also discussed his work as co-creator of the widely followed S+P/Case-Shiller Home Price Indices. Created in the 1980s by Shiller and economist Karl Case, the index was the first to track repeat home sales in the U.S. Academic research had previously largely ignored home prices, Shiller said. Housing prices have proven to be even less rational than the stock market, he said: “It introduces a note of craziness into our lives.”
I’m not anti-markets...I believe finance is the infrastructure for our civilization.
These insights into complexity and volatility have changed the way the market is understood, Shiller said. “What’s happened as a result of some of this research is that we’ve had a behavioral finance revolution,” he said. Academics now recognize that sociological, psychological, and even neurological factors influence investor reaction to market conditions, and so impact the market itself.
Yet despite their unpredictability and the instability they sometimes engender, Shiller stressed that financial markets are good and necessary things. “I’m not anti-markets,” he said. “I believe finance is the infrastructure for our civilization.”
He pointed to the rapid economic growth transforming the developing world today, improving the lives of those in abject poverty. “Finance is really behind this,” Shiller said. “This miracle of economic growth coincides with financial capitalism.”