ROBERT SHILLER: NOBEL PRIZE WINNING ECONOMIST

February 21, 2014

Robert Shiller, recent winner of the Nobel Prize in Economic Sciences, a Yale professor and the co-creator of the Case-Shiller Home Price Indices discusses the importance of psychology in the markets and what it’s telling him now.

WEALTHTRACK Episode #1035; Originally Broadcast on February 21, 2014

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Robert Shiller

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ROBERT SHILLER Sterling Professor of Economics, Yale University Author, Finance and the Good Society

Consuelo MackOver the years we have had the great privilege of interviewing Yale economics professor Robert Shiller. Shiller was one of our first guests, making the trip from New Haven as a favor to us when we were just starting out and not widely distributed.

For many of the ensuing years, the scuttlebutt has been that he would one day win a Nobel Prize for his ground breaking work on market psychology and bubbles. Last year he did just that. As the New York Times put it: “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.”

Shiller is all that and more. He is the Sterling Professor of Economics at Yale University and Professor of Finance at the Yale School of Management.  He is the author of numerous books and articles, including two editions of Irrational Exuberance in which he correctly identified the developing bubbles in the stock and housing markets.

His latest book, Finance and the Good Society defends the essential and mostly positive role finance plays in the economy and society as a whole. As a reviewer in The Economist put it, in the context of the current widespread criticism and condemnation of the financial industry, Shiller’s book “is so contrarian as to be shocking- and all the more so because its author, Robert Shiller, is no head-in-the-sand capitalist nor a highly paid Wall Street shill.”

In this week’s interview, Shiller describes himself as a skeptic, always asking “messy” questions and bucking the status quo, especially on Wall Street and in academia. How difficult was it and is it still to challenge the current financial orthodoxy of the efficient market theory? He will tell us.

Shiller will also give us his current views on the value of the housing and stock markets. He is, after all, the co-creator of the widely cited measure of U.S. housing prices, the Case-Shiller Home Price Index and creator of the Cyclically Adjusted PE Ratio, known as the CAPE ratio. The CAPE ratio is a price-earnings ratio for the S&P 500. It is based on average inflation-adjusted earnings from the previous 10 years, instead of the traditional PE which is based on one year’s trailing or forecast earnings. Many investment professionals consider it to be a much more accurate gauge of market value.

Professor Shiller is one of those extremely rare individuals who combine research and analytical brilliance with creativity, entrepreneurship, investing skills and a love of  teaching. And he is one of the nicest and most self-effacing people you will ever meet. You will thoroughly enjoy hearing this winner of the Nobel Prize in Economic Sciences explain why “economics is not an exact science!”

Also, in his EXTRA interview, Shiller will talk about the genesis of his inventive spirit and the financial innovation he is working on now.

Have a wonderful weekend and make the week ahead a profitable and productive one.

Best regards,

Consuelo Mathews Asia

Beware The Signs Of Irrational Exuberance And Market Bubbles Wherever They Occur

The signs are always the same: irrational exuberance driving prices far above the underlying fundamentals.

SHILLER: VIVA ITALIA!

iShares MSCI Italy Capped ETF (EWI)

Price: $16.66 on 2/20/14

52-week range: $11.54 – $16.73 EWI Chart

EWI data by YCharts

“Because their market is priced so low. Their CAPE as we calculate is among the lowest in Europe. Now, it’s come up a little bit since I bought, but I think it has a ways to go…. They’re going through a hard time right now, a definitely hard time. I just think they’ll be back, and that’s value investing, just looking at all the great things that have come from Italy, and here’s a chance.”

- Robert Shiller

No stock mentions in this episode.
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February 1, 2008

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Inventing New Financial Tools

The newest recipient of the Nobel Prize in Economic Sciences is also known for creating several breakthrough financial products including the widely followed Case-Shiller Home Price Index and the Cyclically Adjusted Price Earnings, or CAPE ratio. He discusses the genesis of his inventive spirit and his latest innovation.

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