February 21, 2014

CONSUELO MACK:  This week on WealthTrack, financial thought leader and Yale professor Robert Shiller won the Nobel Prize for economics for his ground breaking work on market bubbles. Where does he see bubbles developing now?  Robert Shiller is next on Consuelo Mack WealthTrack.

Hello and welcome to this edition of WealthTrack, I’m Consuelo Mack. Over the years we have had the great privilege of interviewing Yale economics professor Robert Shiller on WealthTrack. And for many of those years the scuttlebutt was that Bob would one day win a Nobel Prize for his ground breaking work on market psychology and bubbles.  Well last year he did just that. He won the Nobel Memorial Prize in economic sciences. 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 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 which correctly identified the developing bubbles in the stock and housing markets. He is 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 which is a price earnings ratio for the S&P 500 based on average inflation-adjusted earnings from the previous 10 years instead of just one year’s earnings. Because it includes ten years of earnings many consider it to be a more reliable gauge of market value. Bob is one of those extremely rare individuals who combines research and analytical brilliance, with creativity, entrepreneurship, investing skills and a love for teaching. Plus he is one of the nicest and most self-effacing people you will ever meet.


A classic example: this winner of the Nobel Prize in economic sciences laments that “economics is not an exact science!”


ROBERT SHILLER:  That term, “economics is not an exact science”, goes back over 100 years to Alfred Marshall who said that, and I’m trying to piece together what he meant, but it seems to me that economics is … the approximations in any theory are much greater, and they are theories about people, so economic forecasting is very different from, say, forecasting the weather or forecasting sunspots or whatever because people can just change their mind and defy you. People are smart and they have feelings. Economics is usually some kind of story that we tell that we think approximates reality, but we can get carried away with our stories.

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