A New York Times columnist, academic, author, and Nobel Prize winner, Shiller is also the son of Lithuanian immigrants and boasts excellent entrepreneurial skills. He founded a company to launch a housing price index.
Those close to him say two things about him: that despite being extremely busy, he can't say no to anything or anyone, and that he's very talkative. When we met him on the Yale campus, where he's taught economics since 1982, it was immediately clear why his wife, Virginia "Ginny" Shiller, a psychologist, believes he might have attention deficit disorder. There's that look in his eyes, as if his thoughts were following several threads simultaneously—never losing one.
Integrating psychology into economics
Shiller is one of the pioneers of behavioral economics, particularly behavioral finance. Together with two other economists, Daniel Kahneman and Richard Thaler, he created a new approach that profoundly changed existing thinking. For decades, he has emphasized the importance of taking a broader view and integrating other academic disciplines into economics.
I tend to see the behavioral economics revolution as a counterrevolution against excessive specialization and a return to a normal dialogue between the social sciences.
It's no surprise that a man described by friends as capable of showing interest in anything created a rift in the field of economics, extending his focus to other disciplines. When he began college, Shiller was still hesitant about which major to choose: "For me, it meant giving up my childhood dreams, when I wanted to do practically everything." Shiller talks about how difficult it was for him to choose, unsure if he would make the right decision, though today anyone would say he undoubtedly chose for the best. He ultimately chose economics, but his interest in numerous sciences would lead him to take a different approach to the subject.
Challenging the status quo
It was while attending the University of Michigan that Shiller first realized that psychological insights needed to be incorporated into economic analysis. Later, encouraged by his wife, he delved even deeper: "She was the one who got me thinking about psychology. Without her influence, I probably wouldn't have become the economist I am today." A central focus of his research was the idea that people's behavior and thinking drove finance and the global economy. In the 70s and 80s, when Shiller emerged on the scene, economists had become highly mathematical. Shiller believed it was wrong to be too rigid in what was a very human field.
Why financial markets are inefficient
"Economists watch the stock market, see it go up and down, and usually have no idea why. Convinced they need an excuse, they've devised a theory that excuses them for not knowing." Shiller is talking about the efficient-market hypothesis. He wanted to provide "a more faithful account," and this idea ultimately led him to write his first truly influential work in 1981. His longtime friend and colleague John Campbell of Harvard University still remembers reading it: he was waiting for a train at a station in New Haven, Connecticut, and immediately wanted to meet the author.
A radical idea
"Bob had this very simple insight," Campbell explains. "Stock prices appear to be much more volatile than the stream of future dividends they're supposed to predict, but if the forecast fluctuates too much, it means people are changing their minds in predictable, and therefore irrationally, ways."
Determined to take a bold stance at a time when rational expectations models prevailed, Shiller demonstrated a courage that attracted many young economists. But he also faced severe criticism. Ginny recalls how, at the time, he often returned home demoralized. It was a difficult path, due to the ongoing conservative revolution. Margaret Thatcher, the Iron Lady, governed the United Kingdom, and Ronald Reagan was president of the United States. There was, as Shiller points out, a general belief that "governments should simply stay out of markets altogether."
Many believed that markets should be viewed as oracles, capable of revealing a fundamental truth. Faced with a market movement, people wondered, "What could the market, in its infinite wisdom, have thought today?" But for Shiller, this wasn't the right approach. His view of finance was more skeptical; he argued that markets didn't accurately reflect all available information and were therefore inefficient.
Can the financial industry help create a better society?
There were times when Shiller wished he'd never written his 1981 essay, despite it being instrumental in winning the 2013 Nobel Prize, along with Eugene Fama and Lars Peter Hansen. Shiller continued to argue that the market is driven largely by "non-economic things, by people's fears and prejudices, by reactions to news, elections, and campaigns." And again: "To think that markets are best for human well-being—that's simply wrong."
Shiller opposes the idea that markets should be left to their own devices and advocates various types of regulation, as well as the creation of new markets and institutions in the world of finance. He recognizes that after the 2008 financial crisis, people still lack trust, not to mention the risk of another crisis. However, he doesn't simply condemn the financial industry, but rather sees it as a powerful tool for creating a better society. "What we need is a society that encourages financial innovation rather than being hostile to it, but that at the same time expresses its skepticism and engages government regulators who will monitor any deception." Shiller has often described how, throughout human history, finance has contributed to the well-being of society through various inventions. That's why he's now looking for ways to use finance to address the enormous inequalities so evident in many countries.
“However thorough his studies of financial markets, Shiller has always been more interested in the well-being of society,” says Peter Dougherty, editor of his writings for Princeton University Press.
How to use financial instruments to address inequalities?
Shiller particularly fears that technological progress could threaten our jobs in the future and create even greater inequality. To illustrate this, he cites an example from Russian-American economist and Nobel Prize winner Wassily Leontief. "Think about horses. They used to be everywhere. Where have they gone now? I'll tell you what happened to them: they're dead, we don't need them anymore. The same thing could happen to people who somehow fall outside the modern economic framework."
Future-proof work against the machine age
Shiller has a radical proposal for the new machine age, a new way to insure individuals. Insurance for premature death and disability has been widespread for decades, but it may not be suitable for the high-tech world of the near future.
The risk of losing your job because of a computer is greater than the risk of losing it because you were hit by a car and left paralyzed.
Shiller has suggested changing the system by developing new financial instruments such as long-term insurance against job losses caused by robots. He firmly believes that future prospects for the second machine age should be discussed now, but he fears that people may focus too much on more pressing events instead of thinking about tomorrow. This is a problem for politics and politicians, according to Shiller.
Predicting financial bubbles
Shiller knows his tone might sound alarmist, but he's not worried. After all, his ability to predict market crashes is what made him famous. In a 2005 interview, he told a reporter that real house prices would fall by 50%. "That same day, the reporter called me back and said, 'I'll write that you said that.'" Was he sure of what he'd told the reporter? "I thought about it for a moment and said, 'I mean what I said, so yes, go ahead.'" Shiller suspects that many more economists agreed with him at the time, but they weren't willing to risk exposing themselves by saying the same thing.
The idea of a housing bubble was considered, so to speak, unprofessional. Newspapers could report it, but academics couldn't.
"The phenomenon of speculative bubbles reflects human nature," Shiller comments. "When prices start to rise, people get excited, and some rush to buy, so prices rise even further. But the situation is unsustainable, and eventually the bubble will burst."
This is what Shiller believed was happening, and he was willing to take the risk to assert it. It seems like a bold undertaking, but Shiller has a good explanation: "I attribute it to a philosophy I've acquired over time," he says. "It's morally important to take risks. Someone might humiliate you by finding something you hadn't considered, a counterargument, but you have to do it anyway."
The idea of a Nobel Prize winner willing to admit he's not always right is very reassuring, and Shiller says so with the utmost conviction.
"Bob has always been driven by his curiosity and an open mind," says his colleague William Goetzmann. "Unlike many others in this profession, who think long-term about their reputation, I saw in him only the enthusiasm of a person who doesn't so much think about where the boundaries are, but rather lets his interest in human nature inspire the questions he asks."
Robert J Shiller
Date and place of birth: 1946, Detroit, Michigan, USA
Field of studyFinancial Economics
Award winning work: empirical analysis of asset prices
Favorite episodes of his life: a car lost in a parking lot; a D in citizenship at school; extreme enthusiasm in doing anything; a general interest in the most unusual topics (such as bird migration to South America)
The best wife in the world: allowed him to mortgage their house to invest in his company (fortunately successfully)
Most recurring theme in his work: fighting for a new financial order
Lesson learned: never leave an economics professor and a cameraman alone on a humid day, they will come back completely soaked
