Robert Shiller on Market Bubbles-and Busts

but one theme that runs through your work is that people tend to make mistakes and they seem to make mistakes over and over again now that's quite different than what I learned when I took economics in college that people were rational how did you get to this thought how did you get to the point of thinking about people's mistakes where they're not necessarily rational well I think when you went to college the economics profession had reached an unnatural State academics are a bit fetish like everyone else and then the efficient market hypothesis was elevated mathematical models of rational behavior became the the rage and it was just an abnormal time so I think that I was reading more widely and wanting to come back to reality was there something you saw in reality that you knew that economic models couldn't explain that legend does well bubbles that was that I just didn't believe that the story about bubbles was that the markets appear random but that's only because new information is always unpredictable they respond only to new information and new information about what but they seemed it seemed to be almost like a mythology to me no it's the suggestion was that it's new information about fundamentally important real things and I just didn't believe it the idea that people are so optimizing so calculating and so ready to update their information you know that's true of maybe a tiny fraction of 1% of people but this is not it's not gonna explain the whole market so the story you told about the housing market in advance famously was that we were in a bubble that you were one of the people perhaps one of the most prominent people to identify this but you know one prediction doesn't make a track I know do you do you think it's possible for in stock markets and housing bubbles to know in advance that this is a bubble or is it kind of a gut and you sometimes you're right sometimes you're wrong well you will be wrong sometimes certainly there might be a story and a real reason that that that would be the efficient markets theory that it appears mysterious but that's mysterious only because it's not concrete yeah and the people are sensing something and so there is some truth the efficient markets hypothesis is not totally wrong it's in fact something that I teach and I think it's an important insight it's just that it's been carried too far I remember in the late 90s when the stock market was looking a little frothy you went down to the Federal Reserve and made a presentation and I remember that your wife wrote a Christmas letter in which she said that you expressed concern that you were the one that planted the idea of irrational exuberance and Alan Greenspan's head and contributed to his use of that phrase and then the market tanked so was that a true story what you said is absolutely right Greenspan said the words irrational exuberance in a evening speech in Washington and the Tokyo market immediately which was still open at that time immediately crashed and then it spread well by 4% oh yeah and it spread over the whole world as the markets open and that's why the word irrational exuberance is famous Greenspan didn't coin it I didn't coin it Green it was an old phrase but he just happened to use that phrase and the market immediately Crabbe did you really feel responsible well I well I came home and told my wife I might have started a worldwide stock market crash I just said it's sort of joking but I half believed it she said your ego is getting way out of control but then when I actually there was an article about me on the front page of The Wall Street Journal a couple days later about just the same issue they didn't say whether I did or didn't and my wife said ok I apologize but see the thing is the markets are that crazy it's the power isn't in me it's in Alan Greenspan right but I had his ear I spoke before the Lord and then I had lunch with him and I was talking here so it's possible but this this is a method of thinking about the economy that's very different it makes the economy is unstable and affected by people individual people do you think that bubbles are always a bad thing or do you think they have some good effects well yeah well first of all it's a free world and people can do what they want so I'm not you know I'm not proposing that we put the straitjacket on these things the other thing about it is that human nature does need stimulation and people have to have some sense of opportunity and excitement it motivates them to action I think profits are an important motivator so in the long run it's hard to say that bubbles are really bad they take the internet bubble of the 1990s what that did is it generated a lot of startups some of them foolish some of them failed but others survived so is it a bad thing I I find it hard to think what would the alternative be we could have had a Fed that tried to lean against this I'm talking about the 1919 stock market bubble or in the early 2000s against the real estate bubble and I think that would be a good thing the problem is we don't have any it ultimately our policies in economics are somewhat intuitive and their models are not accurate enough to tell us what the right policy is so I'm thinking that probably we've been better off if we had tamed these bubbles but there's no way to be sure and we certainly don't want to do draconian things that would upset the whole system to present bubbles right

Channel: Wall Street Journal

Views: 15,661

Rating: 4.8421054 out of 5

Keywords: Alan Greenspan, Robert Shiller, Deeter, ROBERT SHILLER NOBEL PRIZE, NOBEL PRIZE, ECONOMIC, ECONOMY, MARKET BUBBLES, IRRATIONAL EXHUBERANCE, DAVID WESSEL, ROBERT SHILLER INTERVIEW, Federal Reserve, Central Bank Intervention, Monetary Policy, Economic News, United States, North America

Id: -iqd7rKzPLc

Length: 6min 29sec (389 seconds)

Published: Thu Mar 27 2014