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9 Fascinating Insights From Nobel Prize-Winner Robert Shiller

World Economic Forum, Wikimedia Commons.

Congratulations to Robert Shiller, along with Eugene Fama and Lars Peter Hansen, for winning this year's Nobel Prize in economic sciences. 

Shiller, a Yale economist who predicted both the dot-com and housing bubbles, says he wasn't expecting the award. But talk to other economists, and they'll tell you they've expected this for years. Shiller's contributions to economics have been giant. He taught us to think about human emotions, not just numbers, and how to view markets through the long lens of history rather than the short-term news filter. 

I interviewed Shiller two years ago in his office at Yale. Here are nine insights he provided about economics. 

On predicting the housing bubble: "In the early to mid-2000s, I created a home price index back to 1890, and I just plotted that and looked at it, and I thought, wow, this is unusual, really unusual. This looks like a first-time bubble, the biggest bubble we have ever had.

"The strange thing is, nobody else had ever made a plot like that. I can tell you, no one had ever seen that picture. It strikes me as odd; why me, why now? People plot all kinds of data. Why wouldn't someone have done that? I still haven't figured it out. We have to always reflect, and maybe this is a Motley Fool-type theme; we have always to reflect that if you swim with the current, you will be thinking the same things as everyone else. You have to recognize that your own thoughts are not your own thoughts. They kind of filtered and percolated in from other people. It all seems like my own common sense, but it's just what everybody is saying now."

On real estate: "Home prices declined for the first half of the 20th century in real [inflation-adjusted] terms. Economists discussed that back then. Why are they going down? The conclusion, if there was any consensus in say 1950, was, of course home prices go down. There's technical progress. They are a manufactured good. Back in 1900, homes were handmade, you know, craftsmen. But now, in 1950, we can get all kinds of power tools and prefab, and they were just better in 1950 than we were in 1900, so of course they will go down.

"From that frame of reference, I think maybe that's exactly what we should expect, too. It's just a manufactured good, and progress is always happening. And on top of that progress, there's the outmoding, the out-of-style factor. So what kind of houses will they be building in 20 years? They may have lots of new amenities. They will be computerized or something in some way that we can't anticipate now. So people won't want these old homes. To me, the idea that buying a home is such a great idea is just wrong. They may very well decline for the next 30 years in real terms."

On the psychology of recessions: "The causes of the decline are very complex. This is history; this is not something that a simple economic metric model will describe. I think of society as a constant feedback loop. Certain ideas rise, and they become viral and they spread, and they become reinforced for a while and they get, they overshoot. So the idea that we have escaped from the risk of a depression, that we live in a wonderful prosperous time, gradually it sank in over the 1990s, just as it did over the 1920s, the roaring twenties. It's the same phenomenon. Then afterwards, we go through a long period of reassessment. So it's not simple to explain, and I wouldn't pin it to any one factor. In my book, Irrational Exuberance, I gave a dozen precipitating factors for the boom. I don't need precipitating factors for the decline from the boom because it's just correcting back down to a more normal state."

On why so many experts missed the 2008 financial crisis: "Experts have always missed big events like this. If you look at the record of statistical forecasting models, they tend to get to the recession when it's starting to come. A casual observer might start to worry about it. Forecasting it years out, they don't get; in particular, if you look at the Great Depression of the 1930s, nobody forecasted that. Zero. Nobody. Now there were, of course, some guys who were saying the stock market is overpriced and it would come down, but if you look at what they said, did that mean a depression is coming? A decade-long depression? That was never said."

On short-term thinking: "I think that there's too much faith in analysis of short-term data. You see some pattern, and you can do a statistical test and prove that will prove that it is significant or passes the smell test to a statistician. But the problem is, the world is always changing. It's not a stable thing. The underlying human parameters may be stable, but you can see that there is institutional and cultural evolution, and it's not something that you can quantify."

On homeownership: "Basically, if I were in the market right now because I wanted a house, I would buy a house. I think most people have a sense of what kind of life they want to live and where they want their family and where they want their kids to go to school, and they value neighbors, maybe. It depends on your position in life and what you are thinking, but quite likely you are living in a neighborhood with a street, with sidewalks, with a playground nearby, a school that's convenient, and you end up buying a house because you want those things. I wouldn't let speculative concerns dominate that decision."

On humans being rational: "I actually wrote my dissertation on rational expectations. But I have to say, right from the beginning, I didn't exactly believe in my own theory. It didn't sound right. It didn't have the ring of truth to it to me, and the whole efficient markets hypothesis. So for me, I spent decades in my life wrestling with these issues, because there was the general impression that there was a vast literature supporting sufficient markets. But as years go by, I have learned not to trust vast literatures and science. They can be wrong. I don't know that I appreciated fully the bandwagon effect when I was a young researcher, and I felt kind of intimidated by the great authorities who were saying that science has shown that markets are efficient. I was a little bit too slow to come to a negative opinion on that idea."

On advice to students: "My standard advice, is be respectful of history. Every time creates its own opportunity, and a time of great economic turmoil is a time of opportunity. You have to think creatively about that. I tell my students, my standard advice, is not to make the mistake of thinking too much in the framework of my life cycle -- I am at this age, it's time for me to take my exams and graduate, then I have to find a spouse, then I have to do such and such. Consider that opportunities come once in a lifetime. Zuckerberg dropped out and found Facebook. That is a good metaphor. I am not advising dropping out, but I am saying life is like that. You have to be alert to opportunities, and the opportunities often take the form of developing your human capital. Okay, I am getting expansive and excited about this advice. I really believe it, and I think that young people don't seem to know this."

On Lady Gaga: "Well, she fits into a new culture. I just got Sirius satellite radio and what strikes me most is the level of obscenities one can enjoy now. It's a new thing for me. Not exactly my style, but we are going through a cultural transformation, and she seems on the vanguard of it. And so I guess I would be bullish on her. She seems to have the kind of Elvis Presley-type reputation. People haven't forgotten him, so I guess; this isn't enthusiasm for her art, but it is a judgment. I guess I would be bullish on her."

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Read/Post Comments (18) | Recommend This Article (79)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 14, 2013, at 12:54 PM, bevantey wrote:

    TMFHousel, could you correct the spelling of "Noble" in the opening paragraph, to Nobel?

  • Report this Comment On October 14, 2013, at 3:30 PM, CoreAndExplore wrote:

    Great article. Reading about Shiller's distaste for the efficient market hypothesis, I was reminded of Graham's quote on the stock market: "In the short term, the stock market behaves like a voting machine, but in the long-run it acts like a weighing machine."

    It always struck me as odd that people find themselves in one of two camps on the issue. That is one of the reasons why I often have such a hard time getting anywhere on the Bogleheads forum, for example.

    At times, particularly during periods of moderate growth, normalized interest rates, and mild volatility, the stock market does appear to be "efficient." Whereas the market has a tendency to go in extremes at times as well - during panics and runs on liquidity or during speculative excess driven by artificially low (downside) volatility and fundamental complacency.

    Perhaps, someone could develop an equation/algorithm to determine the relative "efficiency" of the market at any given moment - something along the lines of the CAPE or Shiller PE10, but factoring in volume, VIX, price momentum, trailing beta, and trends in earnings estimates.

  • Report this Comment On October 14, 2013, at 8:20 PM, gkirkmf wrote:

    "Zuckerberg dropped out and found Facebook. That is a good metaphor."

    Bill Gates.....

  • Report this Comment On October 14, 2013, at 10:13 PM, doctrot wrote:

    great article, anyone read his book änimal spirits?

  • Report this Comment On October 15, 2013, at 6:56 AM, HanSoLow wrote:

    Didn't Zuckerberg "found" Facebook while still in school? He created forerunners to it and then created thefacebook in school, which his school mates claimed he stole from them. So the collaborative or idea rich atmosphere that Harvard provided probably helped Zuckerberg

  • Report this Comment On October 15, 2013, at 8:26 AM, alexf wrote:

    Good article. Loved his advise to students.

  • Report this Comment On October 16, 2013, at 7:16 AM, smartlyfoolish wrote:

    brilliantly honest when he says, "I didn't exactly believe in my own theory. It didn't sound right. It didn't have the ring of truth to it to me" i doubt how many people of his stature would be so up front about it!

    Strategy is a function of forecasting and often we get our latter wrong and blame the former...

  • Report this Comment On October 18, 2013, at 11:47 AM, leepatti wrote:

    Shiller doesn't understand real estate. Houses if built properly can always be updated, modernized, retro-fitted. That's one reason the prices don't go down. Secondly, there is only one house in that location. When the value of the location goes up, the house on it goes up. Thirdly, they are not making any more land (except maybe in Holland). So real estate land becomes more valuable as there becomes less land left for new development.

  • Report this Comment On October 18, 2013, at 12:04 PM, kwl1763 wrote:

    But the argument is that your l house at best holds it value and depreciates without reinvestment (improvements, etc). The land is another issue. It should go up with inflation and even faster since as you say as long as there is population growth it becomes a shrinking supply. If you are lucky enough to be in an area where people want to live and move to that drives that land price up. The house is just sitting on the real long term asset.

  • Report this Comment On October 18, 2013, at 11:56 PM, Netteligent09 wrote:

    Our long term investment, saving, and retirement wiped out within 4 years. Take a closer look majority of Americans and their families today.

    - US government cutting retirement benefits, raise retirement age, and next generation will not survive with little incomes.

    - Our mutual funds and 401k wiped out in half.

    - Outsource job overseas and bailout create unequal incomes.

    - Outsource jobs oversea.

    - No job. No Money. No Honey. No Spending.

    - Recovery will be tough road ahead.

  • Report this Comment On October 19, 2013, at 12:11 PM, jazzbox wrote:

    I'm puzzled by Shiller's comments regarding homes built in 1900 versus those built a half-century later. Having invested in residential real estate for over 25 years, I've seen many well-maintained neighborhoods with century-old homes appreciate steadily in value, whereas mid-century and later developments have been a mixed bag; this might be because the rapid adoption of Levittown-style home construction led to the building of more poor-quality houses compared with the craftsman orientation of the early 1900s. Also, certain buyers a hefty premium on houses in historic neighborhoods.

  • Report this Comment On October 19, 2013, at 12:12 PM, jazzbox wrote:

    Sorry, last sentence should read "certain buyers place a hefty premium. . . ."

  • Report this Comment On October 21, 2013, at 11:40 AM, 2001cchspd wrote:

    Still, you might not be buying historical homes in Detroit.

  • Report this Comment On October 21, 2013, at 2:03 PM, WaltFrench wrote:

    @leepatti and @jazzbox: Shiller is, (if I understand correctly!) talking about the inflation-adjusted value of a home. Yes, if inflation is at some steady rate, say 3% a year, then housing will steadily rise — over the long term, anyway — at a similar rate. But that assumes the owner is keeping up the house, etc.; it'll go up faster only when (a) you put in for a major renovation, say that lovely kitchen, or (b) there's rampant speculation about housing, which unfortunately, unlike the $75K you put into the kitchen, can go down as quickly — or even quicker! — than it went up.

    Shiller gets housing in the way that people in the Real Estate industry can't, because they can't see the forest for the trees.

  • Report this Comment On October 21, 2013, at 2:09 PM, cmfhousel wrote:

    <<Shiller doesn't understand real estate. Houses if built properly can always be updated, modernized, retro-fitted>>

    True, but this costs money. If the value of your home increases by $20,000 after you spent $20,000 on repairs, you've gone nowhere.

  • Report this Comment On October 29, 2013, at 6:57 PM, miteycasey wrote:

    People who say we are running out of land should visit Montana.

    If you don't like the cold visit the urban sprawl that is Dallas, Tx, or Houston, Tx.

    See Las Vegas as a history lesson for bubbled real estate. The valley isn't half full of homes yet.

  • Report this Comment On November 10, 2013, at 2:47 AM, bodybag2006 wrote:

    I predict a monetary crisis due to the Feds' continued printing of money...I wonder if I can win the next Nobel.

  • Report this Comment On December 11, 2013, at 4:23 AM, Ragingmoose wrote:

    As a real estate broker, I always tell my clients that buying a house is buying a quality of life, a neighborhood and a discipline to of saving. I know that.

    If someone ask me ''Does this triplex is a good investment ? '' The only honest answer I can tell is

    ''I don't really know'' I know where the good schools are, the football field and the amenities. Don't ask me where the cash is in the real estate. That's forecasting. I won't take that responsability.

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