Nobel winner Robert Shiller talks about the forces that made him a questioning, data-driven economist

Robert Shiller: A Skeptic and a Nobel Winner


OCT. 19, 2013

Robert J. Shiller, a professor at Yale, learned on Monday that he had wonthe Nobel Memorial Prize in Economic Science, along with Lars Peter Hansen and Eugene F. Fama of the University of Chicago. The Nobel committee described Professor Shiller as a founder of the field of behavioral finance, an innovator in incorporating psychology into economics and a pioneering analyst of speculative bubbles in the stock and real estate markets. He is also one of a group of eminent economists who write the Economic View column for Sunday Business, and has contributed 60 of those columns since August 2007. As the editor of that column, I have talked to him often about his work, and on Wednesday, he called me from the airport en route to a lecture at the Dutch central bank in Amsterdam. Here is an edited, condensed version of that conversation. Q. Bob, congratulations! What an honor.

A. Thank you!

And now, I wonder, what are you thinking about for your next column?

Ha. Well. I’ll have more to say. I don’t know right now. You know, I have to write a Nobel lecture and have only until Dec. 10 to write it. And I have heavy teaching responsibilities, so I’m going to be pressured!

Who asked for this Nobel thing, huh? It’s a lot of trouble!

I know, I know. But it’s wonderful.

Did you know, I’m going to be involved in teaching more and more. I’m going to be doing a new Coursera course online in January. It’s called “Financial Markets.” I’m told I have 50,000 students signed up at this moment, and I think it’s really important. This is a mission of mine. I’m also teaching the freshman economic course at Yale next semester, and I’ll have 300 or 400 students. Somehow talking to young students brings you back to reality — it should, anyway.

We’ve got to summarize your life’s work in a few sentences. It’s brutal. But would you try?

Well, I’ve been at it a long time. You’re looking for themes? One is something that I got from my father: an appreciation for invention. I’ve always wanted to devise new instruments. My very first publication was an estimator — this was a statistical procedure — a kind of invention. My father got a patent and started a business; it wasn’t successful, but maybe I have some of him in me.

You’ve done a lot of measurement in your career — sifting through data, deciding what should be measured and how. You’re one of the founders of the Case-Shiller indexes, which measure real estate prices. You’re known among financial people for what’s called “the Shiller P/E” — a way of using price and earnings to measure whether the stock market is overvalued. You’ve been connected to the Cowles Foundation for Research in Economicsfor 31 years, and there’s been a lot of data collection there. Why is this kind of measurement important?

Our founder, Alfred Cowles, was a money manager who became disillusioned and skeptical. Money management has been a profession involving a lot of fakery — people saying they can beat the market and they really can’t. He suspected that colleagues on Wall Street were just faking it, that they had no ability to predict the market. He wanted to have real economic research, genuine research. And he collected data.

I have the same skeptical nature. When I was a child, my Sunday school teacher complained to my parents that I had a bad attitude. I didn’t believe anything that this guy said.

It’s still with me, that I’m just naturally skeptical of people who look impressive — but I’m naturally wondering if it’s real. I guess that’s what motivated Cowles and pushed him to collect data. There’s an attitude in the profession that collecting data is for lesser people. That it’s like janitor work; it would dirty our hands. There’s social climbing in academia. So if you write a paper computing an index, that seems low-prestige, so you don’t want to do that.

Well, you’ve done that along with many other things — you’ve worked with theory and data, you’ve mixed it up.

Yes, some of the best theorizing comes after collecting data because then you become aware of another reality.

And along with Richard Thaler, the University of Chicago economist who is another of our Economic View columnists, you were one of the people who brought psychology into the theory of markets. How did that happen?

Well, I married a psychologist [Virginia M. Shiller, a clinical psychologist in private practice in New Haven and a clinical instructor at the Yale Child Study Center], that’s one thing! Also, I found there were certain gaps in the efficient-market theory, which was the orthodoxy of finance, that just didn’t make sense.

The economists who came up with this theory said everybody in the markets was doing calculations, present-value calculations. That’s crazy, because you know that 90 percent of the population doesn’t even know what this concept is: they’re not doing any calculations. Then the theorists say, well, really, it’s not like everybody’s doing all of the calculations but the market is behaving efficiently because people are getting expert advice and money management.

That’s obviously wrong, too. I mean, maybe some people are doing that. But not everybody or even most people. It becomes ritualistic — we have a certain model that people believe because other people believe it, and so on.

How does “Irrational Exuberance,” the title of one of your books, affect the stock market, and how does that fit into the efficient-market theory?

Well, the efficient-market theory is a half-truth. The half-truth is that it’s not easy to make a lot of money fast, and that you can go for years losing money, even if you’re a very smart person.

Where the theory goes wrong is that it says you should just assume that there’s no point in trying to beat the market — or that you should guide economic policy under the assumption that there aren’t any market bubbles.

So, are there bubbles?

Yes, they happen all the time. Most of the action in the aggregate stock market is bubbles. That wouldn’t be as true for individual stocks, but it’s true for the overall market.

You’ve been writing in your columns about real estate bubbles — like the bubble that burst and led to the financial crisis that we’re still recovering from now. You’ve found that real estate prices generally move more slowly than stock prices. Why is that?

It’s been true until now, anyway. One reason is that real estate is mainly a market of amateurs; it’s not easy for people to move quickly.

There’s a lot of momentum in that market. But professionals are coming in, and it could change.

Eugene Fama is often known as the founder of the efficient-market theory, and as we’ve been discussing, you’ve been a critic of it. I’m not surprised that Gene Fama has won the Nobel or that you’ve won the Nobel. But is it odd that you’ve won it together?

Well, Gene and I have a lot in common, more than you might think. He collects data and he shares it and I use it all the time, and I use many of his theories. Not all of them, of course. But he’s a very good guy.

It’s like having a good friend who is a devout believer in another religion. You can learn a lot from a friend like that, even if you don’t pray in his church.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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