Shiller Says Markets Have Become More Prone to Bubbles

The Nobel laureate contends that investors need to study human nature and history, and avoid falling victim to groupthink.

February 27, 2014

By Robert Stowe England

Robert Shiller doesn’t live in a bubble. Last December the Yale University economics professor shared the 2013 Nobel Memorial Prize in Economic Sciences for his contributions to empirical analysis of asset prices. His two fellow laureates are from the University of Chicago: Eugene Fama and Lars Peter Hansen. Fama is father of the Efficient Market Hypothesis, which states that share prices always incorporate all relevant information, making it impossible to beat the market without taking on extra risk. In his 2000 book Irrational Exuberance, a classic of behavioral economics that appeared just as the tech bubble burst, Shiller showed how strongly he disagrees with Fama. The co-developer of the Standard & Poor’s Case-Shiller Home Price Indexes, which track the prices of U.S. single-family residences, also flagged the buildup to the 2007–’08 housing crash. Shiller, 67, weighed in on the wisdom of the market with Contributing Writer Robert Stowe England.

Institutional Investor: Do you see any signs that asset bubbles are forming?

Shiller: The first thought I have is to be clear on what is a bubble. There hasn’t been a really precise definition that has been agreed on. When I was at Nobel Week in Sweden in December, I had repeated arguments with Gene Fama, who refers to the word “bubble” as “that nefarious term.” He’s a smart guy. I’ve always admired him. I think he can’t be completely wrong. Fama thinks of the bubble as a term used by newspaper people — I’m not quoting him exactly — to hype the news. He thinks it means that asset prices will go up exponentially. They go up every day. Day after day they go up and up and up, and bang, it pops. Then it’s all over, and it’s for the history books, and people remember it 50 years later, like they remember 1929. Of course, 1929 wasn’t quite like that because it didn’t go up steadily. And it didn’t pop completely. It took two and a half years to reach its bottom, then it rallied again. Even 1929 doesn’t fit that story. And so Fama is right: That [kind of bubble] doesn’t happen.

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Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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