加载中…哈佛经济系金融大牛John Y. Campbell2003年 对自己的耶鲁博士导师ROBERT J. SHILLER的专访
(2011-09-02 09:39:44)
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分类： 美国著名金融经济学家 |
http://www.economics.harvard.edu/files/faculty/photo/9.jpgY.
Interviewed by John Y. Campbell
Harvard
University
January
4, 2003
A recent article in The Economist
magazine divided economists into “poets” and
“plumbers,” the former articulating
radical new visions of the field and the latter
patiently installing the infrastructure
needed to implement those visions. Bob
Shiller is the rare economist who is
both poet and plumber. Not only that, he is
also entrepreneur and pundit. His work
has fundamentally changed the theory,
econometrics, practice, and popular
understanding of finance.
Starting in the late 1970’s, Bob boldly
challenged the prevailing orthodoxy
of financial economics. He showed that
financial asset prices often deviate substantially
from the levels predicted by simple
efficient-markets models, and he
developed new empirical methods to
measure these price deviations. In the early
1980’s, Bob went on to argue that
economists need a much more detailed understanding
of investor psychology if they are to
understand asset price movements.
He pioneered the emerging field of
behavioral economics and its most successful
branch, behavioral finance. At the end
of the century, Bob articulated his vision of
finance in a wildly successful popular
book, Irrational Exuberance. He became
so well known that TIAA-CREF asked him
to appear in a series of full-page
advertisements in the popular
press.
Although Bob does not believe that
investors use financial markets in a perfectly
rational manner, he does believe that
these markets offer great possibilities to
improve the human condition. His
recentwork asks howexisting financial markets
can be used, and new financial markets
can be designed, to improve the sharing
of risks across groups of people in
different regions, countries, and occupations.
He has explored risk-sharing
possibilities not only in journal articles, but also
in
business ventures and a 2003 book, The
New Financial Order: Risk in the 21st
Century.
It was a great privilege for me to
interview Bob Shiller. Bob’s arrival at Yale
when I was a Ph.D. student there set the
course of my career as an economist.
Bob reinvigorated the Yale tradition of
macroeconomics, with its emphasis on
the central role of financial markets in
the macroeconomy and its idealism about
the possibility of improving
macroeconomic outcomes. First as a thesis adviser,
then as a coauthor, mentor, and friend,
Bob showed me how to contribute to this
tradition.
The interview took place at the 2003
annual meetings of the Allied Social
Science Associations in Washington, D.C.
We met in a hotel suite, ate a room
service meal, and had the enjoyable
conversation that is reproduced below.
Keywords: Behavioral Economics,
Excess Volatility, Financial Innovation,
Induction, Risk Management, Survey
Methods
Campbell: Bob, I’d like to start right at the beginning by
asking you when you
first encountered economics. How did you get started with
it?
Shiller: The earliest memory that I have is Samuelson’s
Economics, his introductory
textbook. My brother is four years older than I. He took an
introductory
economics course in college and was assigned this book. He
brought it home on a
college recess when I was a freshman in high school; I
happened to find it and read
some of it. I discovered that elementary economic analysis has
great power when
applied to the major problems of the world and this discovery
was an unexpected
pleasure.
It may seem odd that I would read my older brother’s textbook.
I have always
been a voracious reader, and whatever is around . . . .
Campbell: You would just pick up whatever is there?
Shiller: My mother used to tell the story about when I was in
the early years of
elementary school. She had a minor foot problem, and went to
the library to get a
book on care of the feet. She left it on the table and I read
it.
Campbell: I’m surprised you didn’t become a podiatrist.
Shiller: I read just about everything, though not all things
made such an impression
on me as economics.
Campbell: Did you think then that you might become an
economics major in
college?
Shiller: No, not until much later. The formative experience
for me was more
with mathematics. When I was 14 years old I had a geometry
teacher, Roger Souci,
who inspired me in mathematics. And he gave me the idea of
doing research. We
had just learned formulas for the circumference of a circle
and the volume of a
sphere. From his inspiration, I wrote a paper for him in which
I derived the formula
for the length of a spiral. I hadn’t really had calculus yet,
but I thought of a limiting
argument. From this teacher I became excited about doing
quantitative research,
but the idea that it would be in the realm of economics did
not crystallize until I
was in college.
Campbell: So when you applied to college, you put down
mathematics?
Shiller: I put down physics, though I didn’t feel committed to
that. An interest
in physics is apparently very common among economists. I
didn’t decide on
economics until well into college. I tried to keep all my
options open for as long
as possible.
What really struck me at that age was the incredible range of
career choice that
our free modern society allows young people. No longer are we
expected to follow
in our father’s career, or anything like it, or even anything
like what we have seen
as children. This freedom to choose seemed such a precious
gift, an opportunity
to involve one’s inner purposes in a life’s work, a gift that
must not be squandered.
I did not want to let chance or inertia dictate where I
went.
I was very impressed by the gravity of the career decision,
and the schedule that
imposed on me that decision as part of choosing a major and a
field for graduate
school. In my junior year in college at the University of
Michigan I went on long
walks thinking about what I wanted to do with my life. I
became a wanderer on
campus. I remember getting a sore foot, and so I went to the
doctor. He told me
then that I had a stress fracture in a metatarsal, the kind of
thing that happens to
soldiers on long forced marches.
Campbell: So then how did you end up with economics?
Shiller: I could perfectly well have chosen another field, but
economics came
in because of a conviction that grew in me of an alignment of
my personality with
this field. Maybe it has to do with the emotional weights I
place on quantitative
reasoning, and an appreciation of the impact of economic
outcomes on our lives,
the importance of economic forces in our lives, and the
possibility of taking control
of them. I could feel a real sense of purpose in working in
economics.
Campbell: Were there people in college, economics professors,
who inspired
you to go to graduate school or otherwise influenced
you?
Shiller: At the University of Michigan, I remember getting the
Stolper–
Samuelson theorem from Wolfgang Stolper. I remember trying to
understand
the timing of devaluations with Robert Stern. Shorey Peterson
was a guiding
influence who helped me with my writing and with economic
reasoning. George
Katona gave me my first exposure to behavioral
economics.
I should say I was also influenced by fellow undergraduates,
who were heading
to business careers. I probably learned just as much from
talks with Bruce
Wasserstein, then but a teenager, but later to found the
investment bankWasserstein
Perella.
Campbell: But you decided to go to graduate school
straightaway from college.
Shiller: Yes, well we didn’t have a choice. We would either go
there or go to
Vietnam. I was adamantly opposed to our war in Vietnam, but
also I wanted to
get on with my immersion in economics. I had a National
Science Foundation
fellowship and so I didn’t see any reason not to go to it
directly.
Campbell: So, how did you decide on MIT for graduate
school?
Shiller: I didn’t put the same amount of thought into that as
I did of going
into economics. It seemed to be the place to go at the time. I
was certainly
impressed with the faculty there. I already mentioned Paul
Samuelson. I had also
acquired as an undergraduate an admiration for Franco
Modigliani and Robert
Solow.
Campbell: When you got to MIT what was it like? Was it what
you expected?
Also, what were the hot topics?
FIGURE 2. Conference on Monetary
Mechanisms in Open Economies, Helskinki, 1975.
Speaker is Stanley Black. In foreground
with pipe is Franco Modigliani. Rowin foreground,
left to right: Robert Shiller, Benjamin
Friedman, Jacob Frenkel, and Edmund Phelps. In
back row, Harry G. Johnson (with dark
beard), diagonally opposite him, Karl Brunner (with
white beard).
Shiller: The rational expectations revolution was emerging,
long before the
Lucas Critique, and that was exciting.1 I well remember
Richard Sutch, who overlapped
one year with me at MIT, and who wrote a dissertation on the
term structure
of interest rates that involved testing whether the term
structure is consistent with
rational expectations and autoregressive forecasting equations
for interest rates.2
My own dissertation grew out of his, through the
intermediation of my advisor,
Franco Modigliani.3 Later, Franco and I wrote a joint paper
with some of these
results.4
But, in truth, I didn’t have a complete affection for this
rational expectations
theory. It was something to work on at that time. I didn’t
fully believe that people
could be so calculating in their expectations. There were
already elements of
behavioral economics in my thinking, if not in my published
research.
I met Jeremy Siegel practically on the day I arrived at MIT in
1967. I got to
talking with him since MIT had all the incoming students
scheduled alphabetically
for our chest X-rays and Siegel comes right after Shiller.
Jeremy impressed me
immediately. And he always had a marvelous way of putting
quantitative analysis
FIGURE 3. Poconos vacation, 1989. Left
to right, front row, Jeffrey Siegel, Benjamin Shiller,
and AndrewSiegel. Back row, Ellen
Schwartz Siegel,Virginia Shiller holding Derek
Shiller,
Jeremy Siegel, and Robert Shiller.
into a real-world perspective, something I have enjoyed in his
company ever since.
I have long since used him to test the reality of theoretical
notions.
Campbell: What was your first year like?
Shiller: I guess you could say that I spent that time
orienting myself to the role
of quantitative economics. It took me a while to consolidate
in my mind what role
it, and the assumption of rational economic agents, should
play.
Campbell: For the first year, you probably had star
faculty.
Shiller: I actually relished Samuelson’s lectures, which some
other students
found too much of a stream-of-consciousness. To me, they were
a delight. There
was no disagreement that Solow’s growth theory lectures were
gems. I also remember
M.M. Postan, the historian of Europe, who was visiting from
Cambridge
University at the time. He was anything but a technical
economist, but he inspired
and supported me. Later, Robert Hall arrived from Berkeley,
and rewarded us with
his original, unconventional thinking.
Campbell: I am wondering whether people or topics or people
that you came
across in graduate school influenced your subsequent
direction. You started to
work with Franco Modigliani.
Shiller: I was attracted to Franco because he was building a
really ambitious
model of the economy. There was something real and tangible
about his approach
to economics that I found appealing. Today, I still believe
that there is something
solid and important about these ambitious large-scale
econometric models, despite
the profession’s largely turning against them. Not so long ago
I did some work
with Ray Fair that showed that such large-scale model
forecasts do indeed contain
information not seen in vector autoregressive forecasts or
judgmental forecasts
either.5
Anyway, Franco also impressed me because he made known his
moral judgments.
The war in Vietnam was going on then and we talked about that.
There was
also some turmoil about the relevance of abstract economic
theory among other
students I associated with. What I tried to do with rational
expectations theory
was to make it relevant and believable. I thought that it had
some implausible
assumptions about people calculating too much. So, one of my
solutions was that
if people have a greater information set than economists, then
the projection of their
expectations onto the common information set must be the same
as the projection
of the actual onto the information set. Obviously, people do
not do elaborate
calculations, but it seemed plausible that they would do even
better than that.
Campbell: It would look as if they had estimated
autoregressions.
Shiller: Right.
Campbell: But that is not a response to this criticism that
they do too many
calculations.
Shiller: Well, it is in the sense that it relieves us of
assuming that they actually
do the calculations. The smart money do not run
autoregressions, but they do
think a lot about the data, and so it seemed plausible that
they could do even better
than the autoregressions with their own different methods.
That was the thought,
anyway. I was just trying to make rational expectations theory
somehow believable
to myself and to understand how it could be even approximately
valid. I attempted
in my dissertation to make the case that patterns of change in
the term structure of
interest rates matched up somewhat well with what we would
expect if investors
had such abilities.
The other thing I did formy dissertation was to develop a
distributed-lag estimator
based on smoothness priors.6 I thought that distributed lags
were an important
topic, since practically nothing in economic relationships
happens instantaneously,
and lags are likely to be distributed over time. The effect of
lagged variables may
even grow with lag, and then decline asymptotically to nil,
but the available econometric
theory for lag estimationwas just very arbitrary, and people
were estimating
relationships that I just could not believe.At theirworst,
theywould impose a single
one-quarter lag when using quarterly data, and a single
one-year lag when using
yearly data, letting the period of data collection dictate the
length of the lag. Robert
Solow had improved this practice with his rational lags, and
Shirley Almon with
her polynomial lags, but even these were really arbitrary
parameterizations. They
often produced funny lag patterns that were artifacts of the
procedure.
I was wondering what we really wanted to assume about
distributed lags. I
was thinking that the existing approaches didn’t capture our
information. Their
restrictions didn’t correspond to our true priors. We should
base our analysis on
a good representation of our prior information about the lag
structure, mostly
just that the lag structure should be fairly smooth through
time. So, I started
reading Bayesian econometrics, and launched off on
nonparametric estimation,
using what I called smoothness priors. I later found out that
Grace Wahba, in the
Statistics Department at Wisconsin, was onto a similar
smoothness idea, and her
approach was more thoroughgoing than mine, though not applied
to the estimation
of distributed lags. Also, later, the same idea of smoothness
was embodied in what
is now called the Hodrick–Prescott filter. Anyway, the
distributed-lag estimator I
developed at the time had a good application in my
dissertation to my study of the
term structure of interest rates.
Since then, a lot of others have developed nonparametric
estimation into a
significant field, and there has been a lot of activity in
Bayesian econometrics as
well. Unfortunately, even today, the economics profession at
large has not adopted
any such methods on a substantial scale for applied
work.
As far as I recall, no one had ever mentioned Bayesian methods
at MIT, though
I found Ed Leamer, an assistant professor at Harvard, who was
deeply involved in
using Bayesian foundations to adapt the scientific method to
economics.7
Campbell: Who taught econometrics?
Shiller: Franklin Fisher had written a book on the
identification problem in
econometrics. We went through that whole book, an elegant
treatise, but perhaps
too much on that topic.8 The econometrics course I had with
Edwin Kuh doesn’t
stand out in my memory, but I can say that he impressed me
about the importance of
regression diagnostics and of isolating influential
observations, practices that not
enough people implement even today.9 I learned the essential
lesson to be skeptical
of econometric results. I remember when Leonall Anderson and
Jerry Jordan came
to MIT in 1968 to present the “St. Louis Model” of the U.S.
economy.10 The results
were impressive, but not really received well at MIT. Later,
our skepticism was
borne out. Ben Friedman reestimated the same model in 1985 and
found that the
new data provided by the mere passage of time had destroyed
their results.11 There
are lots of ways econometric analyses can go wrong.
I then started reading time-series analysis on my own. I never
took a course in
that.
Campbell: Did you read Box and Jenkins?
Shiller: I certainly did, but I wanted to combine it with
Bayesian methods.
Arnold Zellner at the University of Chicago somehow discovered
me; he invited
me starting as a graduate student to a series of Bayesian
econometrics conferences.
It was at one of these conferences in 1972 that I first met
Sandy Grossman, then
only 19 years old, and already a dazzling intellect. I was
fortunate to have the
opportunity to work with him later on several papers.
I tend to attribute my interest in Bayesian statistics and
time-series analysis to
my physical-science orientation, which had been with me since
childhood. I have
long admired scientists. I thought that the Bayesian methods
would help adapt the
scientific method to economics, help us to base our analysis
on what we do know,
and let the data speak for what we do not know. The kind of
science that appealed
to me was the kind that was based on careful observation
followed by induction
that allowed you to discover a general principle. It was that
discovery process that
excited me. Bayesian econometrics appealed to me then as a
good approach since
it didn’t impose some arbitrary model. In fact, the prior was
supposed to come
from some previous analysis; your prior was your earlier
posterior.
I also thought that science is, at its core, really intuitive.
Charles Darwin didn’t
follow a research program that was outlined for him. He was
trying to think how
this whole thing works and observed everything he could.
Leamer referred to
“Sherlock Holmes inference,” in response to that fictional
detective’s attention to
all the details, but I would prefer to call the ideal “Charles
Darwin inference.”
Campbell: You started to mention the Lucas Critique.
Shiller: When I first read Lucas’s paper in 1975, I thought
that therewas nothing
new in it. The idea of rational expectations was already
prominent at MIT, through
Modigliani and Sutch.
Campbell: But they didn’t actually cause you to change your
mind about
econometric modeling. Their papers assume a fixed
structure.
Shiller: If you were to take Franco aside then, and ask him,
“isn’t there a risk
that if policy changes, the expectations structure might
change,” he would say,
“obviously.” But, Lucas presented this in a very forceful way
. . . . Lucas is a great
writer.
Campbell: Another idea that was floating around at the time
was the efficientmarkets
hypothesis. Did you come across that in graduate school?
Shiller: Well, that was already well established.
Campbell: I am just wondering if that was a big part of the
discussion in
graduate school at the time?
Shiller: My dissertation was about the expectations theory of
the term structure,
which was an efficient-markets model. We talked a lot about
efficient
markets.
Campbell: Did you at the time already have seeds of the
critiques that you later
mounted so effectively?
Shiller: Well, as I just said, it didn’t seem to me that
ordinary people were
estimating autoregressions aswas represented in those models.
There were already
seeds of my later views of excess volatility in my mind. I
noticed that when I
estimated autoregressions, if I constrained the sum of
coefficients to be one in
the short-rate autoregression, that is, to have a unit root, I
could come close to
explaining the volatility of long rates. It bothered me that
the difference between
this sum and one wasn’t well estimated, in other words, there
seemed to be great
uncertainty about whether there was a unit root. As you know,
this has turned out
to be a very contentious issue.
Campbell: This was before Dickey–Fuller and any of the other
unit root literature
in econometrics.12
Shiller: The issues of unit roots were very much bothering me
then. I thought
that maybe there was excess volatility. In the case of the
term structure, if there
is not a unit root in the short rate process, then there would
appear to be excess
volatility in long rates. That unit-root–excess-volatility
issue is not in my
dissertation, but I was wrestling with that as I wrote
it.
Campbell: Let’s move forward then for now. You left graduate
school. Your
first job was at Minnesota. What happened there?
Shiller: I had some wonderful colleagues there, such as Tom
Sargent and Chris
Sims. But, for me that was the slowest period of my life in
terms of academics. I
didn’t publish for several years. I felt that I had to get on
with my personal life.
The biggest thing then was that I met my future wife Ginny.
Now we have been
happily married for almost 27 years.
Campbell: Then you picked up the theme of excess volatility
after a few years.
Shiller: I had written about a rational expectations model of
the term structure,
but, after thinking about it intuitively, wondering what is
causing the big
movements in long rates, I cast about for other
interpretations.
Campbell: The first paper was on long-term interest
rates.13
Shiller: It seemed tangible and real to me that the long rates
were not moving
only for rational reasons.
Campbell: How then did you carry the analysis to the stock
market?
Shiller: That was a very simple transition. As you know, the
expectations theory
of the term structure is a present-value model, and the
efficient-markets theory of
the stock market is also a present-value model. I thought that
the stock market
might be an even better example of excess volatility. Another
advantage to the stock
market was that one could get a lot of data. I found the
Cowles data, and created
from it time series of price, dividends, and earnings back to
1871. That was what I
needed, since the present-value relation extends over so many
years, as you know.
Campbell: As I learned from you! That is an interesting point,
that you were
doing work on historical financial data, very early on. Also,
Jeremy Siegel has
become known for that. I wonder if the two of you discussed
that.
Shiller: Well, we did. Using only a short recent sample period
seems scientific
to many people, because they think that the best data, which
are collected with
greatest accuracy, should always be used. So, people thought
that you should rely
not on long historical time spans, but rather on high
frequency of sampling. You
can get daily data more recently, while if you sought long
historical time series
the best you could get further back was monthly, or annual.
So, people wanted
to stay with these recent data, and perhaps they thought that
doing so was being
very “scientific.” But, I had a different concept of what
“scientific” means, and I
thought, from my own reading in science, that scientists have
to look at discrepant
data, at things that are not so well measured.
Campbell: You also were aware that with the long span of the
present-value
relation, the testing required a long sample.
Shiller: Well, that seemed very intuitive to me. My student
Pierre Perron
and I wrote a paper presenting a Monte Carlo study on power of
tests as frequency
of observation goes to infinity, holding the sample length,
measured in
years, fixed.14 In the cases we studied, power does not appear
to go to infinity as
the number of observations does. Later, Pierre teamed up with
Peter Phillips and
developed a real theory confirming this.15 Also, I should
mention the work that
my student Andrea Beltratti and I did to extend the excess
volatility framework to
consider excess covariance between assets’ prices.
Campbell: So as you look at it now, some 20 years since the
excess volatility
work came out, how do you think it has affected the field of
finance?
Shiller: I thought that excess volatility was an especially
important anomaly
regarding the efficient-markets theory. It certainly pointed
to a possible failure of
efficient markets.
Behavioral finance has emerged since then, but what exactly
caused that I do not
know. Excess volatility is an anomaly that is very different
from other anomalies.
The other anomalies, such as the Monday effect, or the January
effect, do not
seem fundamental. If you read Fama’s “Efficient Capital
Markets,” he talks about
anomalies, but the ones he talks about sound like the result
of a little bit of friction
disrupting the otherwise precise predictions of the model.16
But, you wouldn’t
think that friction would cause excess volatility. Friction
ought to slow things
down or smooth them out, and the volatility seemed excess by a
wide margin. It
also accorded with intuitive feelings that people who look at
the market have, and
I wanted to try to show that there might be a scientific basis
for those feelings.
Campbell: You mentioned behavioral finance, which is probably
the big theme
of your career. So, let us move beyond the excess-volatility
work. But, then what
you really did do was develop an alternative perspective. If
the excess volatility
grew out of your thesis with Franco, how did this alternative
view develop?
Shiller: Well, I met Ginny in 1974. Soon after we married, she
enrolled in a
Ph.D. program in psychology at the University of Delaware, not
far from the University
of Pennsylvania where I taught at the time.We lived in Newark,
Delaware,
and I commuted to Philadelphia. So, by day I was an economics
professor, but by
night I was living amongst a whole community of young
psychologists. Some of
their thinking made an impression on me.
Since our days together in Delaware, Ginny has accompanied me,
first to
Cambridge, Massachusetts, where I visited the National Bureau
of Economic Research,
and then to MIT, and then finally, in 1982, toYale, where she
got an appointment
at the Yale Child Study Center. Over all these years, I have
talked a lot with
Ginny about my work, and her work. She was a big influence on
me. She still is.
The next event was that I met Dick Thaler in 1982. I was
invited to give a talk
then at Cornell, where he was associate professor, and we
immediately hit it off.
He has a remarkable ability to put economics in a broader
perspective than we are
accustomed to seeing, a perspective informed by psychology.
And over the years,
his stature has grown and grown. I believe he was already
connected then with
Daniel Kahneman and Amos Tversky.
Campbell: So you learned about them through him?
Shiller: No, actually, Kahneman and Tversky’s prospect theory
appeared in
1979, and I had heard a lot about that paper before I met
Dick.17 But, I think that
Dick jumped onto their inspiration much faster than I, and had
a lot of insights to
convey to me.
Thaler’s dissertation at Rochester in 1974 had been about
measuring the value
of a life for economic purposes, assuming that everyone was
rational.18 It was
somewhat later that he met Kahneman and Tversky, and that set
the course of
his career. He turned fundamentally against his earlier work.
I did not have any
such epiphany. I never came as close to psychology proper in
my research as he
did. My research remained more quantitative and centered more
on conventional
economics.
Dick Thaler and I have been working together since 1991 to
organize a series
of NBER conferences on behavioral finance, sponsored by the
Russell Sage
Foundation. Also, out of this grew a series of NBER
conferences on behavioral
macroeconomics that George Akerlof and I have been organizing
since
1994.
Campbell: Well, there was this other strand in your work, the
consumptionbased
asset pricing, the material with Sandy Grossman. Looking back
on it, it was
innovative.
Shiller: That research was very exciting to me, though I had
doubts about
that too. I thought there was some truth to the
consumption-based asset pricing
model, but again I didn’t fully believe it. I had long talks
with Sandy,
and discussed models, and I remember saying that I just don’t
believe this
model.
Campbell: And he said that he did believe it?
Shiller: Well, I can’t summarize his thinking. He is a pretty
practical guy, too.
It becomes a subtle question of the philosophy of science, how
far to pursue a
model. This is an interesting model, and it seems to explain
some things, as some
of my work with Sandy revealed.19 But there were also
substantial problems with
the consumption-based asset pricing model.
For example, I had derived an inequality that showed a lower
bound on the
variance of the intertemporal marginal rate of substitution,
and found that this
appeared to be widely violated by the data.20 Lars Hansen and
Ravi Jagannathan
later did a splendid job of establishing the scope and
significance of such a
violation.21
Beyond this, I just wanted to move on to something else. And
Sandy has moved
on to something else, too.
Campbell: He certainly has. In the early years when you were
doing behavioral
finance it was extraordinarily controversial, and there were
big fights. So, do you
have any stories from that early time?
Shiller: This excess volatility got quite a hostile response.
Well, I should say
that a lot of people were quite friendly about it, but I think
it was costly to me to
do this. People didn’t really receive it well. It was
politically incorrect somehow.
Campbell: I remember you had a Brookings paper in 1984 where
you laid out
what has become the standard paradigm of behavioral finance,
where you laid out
the importance of social contagion and looked at the
interaction of noise traders
and rational arbitrageurs.22 Did that get a hostile reception
at Brookings?
Shiller: No, not at Brookings, I don’t think. The hostile
reception that there
was, was subtle. It was not that people started shouting at
me, or, as you can testify,
later, at you and me. Instead, some tried to marginalize or
ignore what we were
saying. They tended to try to dismiss the theory without even
looking at it. They
often described it as if we had made some egregious error, a
stupid error. On the
other hand, I didn’t think it was a totally bad reception,
even from the beginning.
Our profession indeed includes a lot of open-minded people,
who really look at
the evidence, even though their own published work may not
make obvious to
readers the breadth of their understanding and personal desire
to pursue the truth.
I remember from that 1984 Brookings paper that I had a
paragraph that highlighted
an important error in economists’ thinking. If markets are
perfectly efficient
and expected returns exactly constant, it implies that price
is exactly the
expected value of the present value of expected future
dividends. That is true. The
widespread error is to assume that, from the assumption that
expected returns are
approximately constant, it follows that price is approximately
equal to the present
value of expected future dividends, approximated equally well.
That error has
inclined people to think that, given that short-term stock
market returns are hard
to forecast, the level of the stock market itself must be
equally hard to distinguish
from its fundamental value, the present value of expected
future dividends. They
conclude that every movement in the stock market must have a
rational foundation.
In that Brookings paper, I said that this error is “one of the
greatest errors in the
history of economic thought.” Someone at the Brookings
conference where I
presented the paper said afterward that I should take that
provocative line out
of the paper. I asked Bill Nordhaus, who was also at the
conference, for advice:
Should I really delete that line? Bill said “No no, don’t take
it out!”
Thinking about approximation error led me further to examine
how inadequate
appreciation of the low power of some tests of market
efficiency had misled
researchers. It led them into widely accepting a theory, the
expected present-value
model for aggregate stock prices, that is egregiously
wrong.
Campbell: That is an interesting story because I remember
seeing that line
about the greatest error in the history of thought in the
paper and thinking that
most people are more aggressive in person than they are on
paper, and thinking
that perhaps you are the exception that proves the rule.
Shiller: Well, maybe I am a more aggressive person on paper. I
think I become
a different person when I am writing. That is, in part, why I
have kept a diary all
my life, continually since I turned 12 years old. Writing just
stimulates my mind. I
believe that people are stimulated by conversation: that is
the way the brain works.
Keeping a diary and talking in it to oneself creates a more
idiosyncratic view.
Campbell: So, having a social influence on yourself.
Shiller: It seems to work that way. Do you keep a diary?
Campbell: I don’t, but maybe I should.
Shiller: It seems to elevate my thinking, in the sense that
writing down my
thinking makes it come to fruition. If I am not writing it
down, my mind would
just drop it. It helps me to think things through
systematically and adopt resolve
to take action, and it reminds me of my own past
thinking.
Campbell: Another thing that you started in the late 1980’s
was using survey
methods. I remember you did surveys around the time of the
1987 stock market
crash. And, many economists had been skeptical about surveys.
Was that an
influence from Ginny? How did you get started in this
direction?
Shiller: It probably was in part an influence from Ginny. She
gave me support
in pursuing a line of research that made little sense from a
career standpoint, but
that I (or, should I say, we) really believed in.
I remember reading Milton Friedman’s Essays in Positive
Economics, where
he argues against relying on what people say when they explain
their motives for
their economic actions.23 There is even a tradition among
psychologists against
doing that. There is obviously a tradition there against
asking people “Why did
you do that?” and taking what they say at face value. That is
not economics and it
is not psychology.
But, on the other hand, economists, such as Milton Friedman,
seemed to assume
that is the only thing one could do with surveys, and to
advise instead that
economists should rely exclusively on formal optimizing
models, and test them
statistically using price and quantity data. But it seemed to
me that economists
often seemed to live in a rarified world. Often, there are
very simple explanations
of why people do what they do, and economists ignore them. We
should ask
people about what they do, at least find out the focus of
their attention and the
assumptions they were making, though still not take their
answers at face value.
Economists often impute thoughts to people, implicitly in
their optimizing
models, that are not really in people’s minds at all, it
seemed to me. So, I thought
we should find out what people say they were thinking, that
this is interesting
research. I viewed this as not career-optimizing research for
me. But, I already
had tenure when I began this research, and so I thought, this
is what tenure is for.
I do not have to do the same things others are doing.
There was a big stock market drop on September 11th and 12th
of 1986, and
I immediately thereafter did a little postcard questionnaire
asking investors what
they were thinking on those days. I learned from the reaction
that I got from this
and subsequent research that probably nobody else in the world
was doing such
research on what people think during crashes. Merton Miller
later pointed me to
a Securities and Exchange Commission interview study of
participants in a stock
market crash in 1946, but apparently no one else had ever done
such a thing since.
Iwas thinking that science involves a lot of herd behavior:
Too many scientists do
the same thing. There are career reasons why they do, but
scientists are often most
effective for the long term when they move independently. From
this perspective,
I was noticing the volatility, and thinking about it.
Campbell: So you were ready when the crash happened.
Shiller: Yes, and when this big crash came in 1987, I thought
that this might
be the chance of a lifetime for research on speculative
bubbles. I first worried that
maybe somebody else would do such a survey about what people
were thinking
on the day of the biggest one-day stock market crash (and
still today, biggest to
date), making mine unnecessary. But, on further thought, I
thought maybe not. I
had learned that there was no organization that was set up to
do this very fast.
I concluded that there was a chance that no one else would do
it. Months later,
President Reagan’s Brady Commission did do a survey of
investment professionals
as part of its report on the crash, but not only was it late,
after people were possibly
in a different frame of mind, but also it did not really ask
what they had been
thinking on the day of the crash.
To arrange this survey, I stayed up practically all night on
both October 19th and
20th, 1987. I was exhausted, but happy to see the survey in
motion within days of
the crash: 2,000 questionnaires were mailed out to individual
investors and 1,000
to institutions. Between the two, I got almost 1,000
responses.
I didn’t even try sending this to a scholarly journal. I
thought it would be
rejected. I put it in my book, Market Volatility.24
Campbell: Now, I don’t know a whole lot about psychology, but
I amimpressed
that there is a trend away from strict behaviorism, toward
studying what goes
through people’s minds. You seem to be saying that you are
pursuing that same
line of thought within economics, that if we have models that
ascribe certain
purposes to economic agents, we should look to what they say
they are trying to
do. So, maybe there is a parallel with psychology.
Shiller: I suppose . . . .Yes, there was a trend within the
social sciences of
studying intentions. It has been called interpretive or
hermeneutic social science.
Of course, intentions are part of classical economics. An
optimizing model is a
representation of intentions, but there is traditionally no
attempt to collect data on
what intentions, or associated world views and popular models,
are. Economists
try to observe actions rather than intentions to test these
models.
In 1987, I thought I should do my survey since otherwise the
chance would
forever be lost. Even though it wasn’t being used by
practically anyone else in
economics proper, I thought it would someday be useful.
Campbell: And then you found other applications of it.
Shiller: And then I found Chip Case. He has been a great
colleague. A year after
the stock market crash, in 1988, we did a questionnaire survey
of recent homebuyers
to study a housing bubble in California, and the end of a
bubble in Boston.25
We compared across cities, boom, postboom, and nonboom, in
Milwaukee. We
learned some very basic things. For example, we learned that
Milwaukeeans are
very uninterested in real estate. Fascination with and
attention to speculative
markets is something that varies geographically, presumably
because of different
market experiences.
Campbell: So, that is something that leads to my next
question. How did you
get interested in real estate? Was it just a natural idea,
“Oh, there is volatility in
real estate too so let us look at that too?”
FIGURE 4. Red Square, Moscow, 1989, left
to right, Alan Auerbach, Robert Shiller,
Lawrence Katz, David Wise, and Lawrence
Summers.
Shiller:Well, partly my sense of herd behavior influences a
lot of my thinking.
Economists themselves are herdlike in their research
directions, and so there is
a lot to be gained by staying away from these common topics.
Well, maybe not
career opportunities, but intellectual opportunities, to go
off onto topics that no
one is studying. So, I did a survey of the literature to see
what was known about
the efficiency of real estate prices. Are they a random walk?
In my survey of
the literature, there was almost nothing about the efficiency
of home prices. And,
when you think of it, real estate is just about as important
as the stock market, in
terms of total market value. Why was there all this study
about the stock market
and not of real estate?
Campbell: So, did you look for a housing economist?Was that
how you found
Chip?
Shiller: He was connected with Ray Fair, who was writing a
textbook with
him. Also, Chip is a kindred spirit: he had written an article
in 1986 about the
Boston housing market, looking at all the fundamentals, and
concluding that
there was nothing there that would justify the nearly 40%
increase in housing
prices in one year in the mid 1980’s.26 He was a great
collaborator, and I
think we learned a lot about what was going on in people’s
minds during this
bubble.
FIGURE 5. Founders of Case ShillerWeiss,
Inc., 1991. Front row, Robert Shiller and Charles
Longfield; back row, Karl Case and Allan
Weiss.
Campbell: So, then, in the real estate context, you went
beyond academic work
and started a company.
Shiller: Well, my student at Yale, Allan Weiss, after he
graduated in 1989,
wanted to work with me on the producing the indexes Chip and I
had developed,
to produce these on an ongoing basis as a commercial
enterprise. Also, Allan had
been thinking about how to manage real estate risk, and he
thought that getting
into the index business might somehow be a way to make take
these thoughts
into action. We set up Case Shiller Weiss, Inc., in 1991, and
Allan was president;
Chip and I were board members. We initially hoped to make the
indexes the
basis for futures contracts, but that still hasn’t happened.
We became forecasters
of housing prices. We expanded the company to be a provider of
an automated
valuation model, an econometric model that provides instant
online valuations of
homes. We were lucky in our timing, for our first efforts here
coincided with a
rapid transition to online lending in the mortgage and home
equity loan industry,
and so these lenders became our customers. Allan made this
company a big
success. In 2002, we sold the company to Fiserv, Inc., but it
continues to function
independently as Fiserv CSW, Inc.
All of this happened because, in the late 1980’s, Chip and I
had to create real
estate price indexes for our purpose of testing real estate
market efficiency. At that
time, there were really no available real estate price indexes
that could be used to
test market efficiency. The available median price was
extremely choppy through
time, and we thought that was due to the changing mix of
houses sold. Chip, in his
FIGURE 6. Robert Shiller in his office
at Yale University, 2003, with colleagues, left to
right, William Goetzmann, William
Brainard, Stefano Athanasoulis, and Carol Copeland.
article in 1986, had created a repeat-sales price index for
Boston. I discovered that
while Chip had independently discovered that method, there had
been a treatise
on the repeat-sales price index in the early 1960’s by Martin
Baily, Richard Muth,
and Hugh Nourse.27 But, they never seriously implemented it.
Twenty-five years
had gone by and there were still no repeat-sales home price
indexes produced on
a continuing basis or for any substantial geographic areas.
So, we had to develop
them.We improved the repeat-sales method, found the data, and
started producing
indexes. My studentWill Goetzmann wrote his dissertation here
at Yale on repeatsales
indexes, which he applied to the market for paintings, and he
is now back at
Yale as my colleague, and head of the International Center for
Finance here.
Chip and I hadn’t expected to get into the index number
business, but we
published an article on real estate price indexes, for four
cities. Then, we tested
(and soundly rejected) the efficient-markets hypothesis for
single-family home
prices using these indexes.28 We found some very substantial
momentum in home
prices. It seems as if my excitement then was not entirely
unlike that which
Leeuwenhoek must have experienced when he looked through the
microscope
for the first time. We saw from our plots what real estate
prices were doing,
that they behaved very smoothly through time, unlike stock
prices. People must
have intuitively been assuming that there was price inertia,
but they had never
actually seen it. One cannot clearly see home price movements
without some
careful econometrics, because of the noisiness of individual
home prices and the
incommensurability of dates of sale of houses.
My student Allan Weiss thought there was a business in
providing real estate
price indexes. He started the business, and pursued all the
difficulties of creating
a kind of business where there was no prior model to copy. I
was an advisor.
Well, I was more than an advisor. I did all the econometrics
initially and wrote the
computer program to construct the indexes, the same program
that our company
still uses today. I worked with Allan and Chip on developing
applications for
our indexes. The three of us made a tour of futures exchanges
and other risk
management companies to try to get markets for real estate
risk started.
That was an interesting experience. For an academic economist,
it is a good
experience to run a business. Allan would discuss with me
everything about the
business. In the early days, Allan and I even had to loan
money to the company
so that we could meet the payroll, so we really experienced
the anxieties of the
business world, and I believe this has affected my thinking
about economics.
Campbell: I would like to talk now about the stock market
overvaluation of the
late 1990’s, and the fact that you were watching the market in
light of your earlier
work and a concern that the market was becoming
overvalued.
Shiller:Well, my book, Irrational Exuberance, is a case in
point.29 Well, before
that, of course, in 1996, you and I were invited to testify
before the Federal Reserve
Board.
Campbell: My impression, for what it is worth, is that
Greenspan had already
been formulating his opinion about irrational exuberance
before that meeting.
Shiller:You are no doubt right. Howcould he really have been
suddenly swayed
at that meeting, there were so many different opinions
expressed there. So, . . . .
Yes, this reminds me, we have skipped over our collaborations.
I have written
over a dozen papers with you, more than with anyone else. You
were a very big
influence in my life. You made my analysis rigorous.We
developed vector autoregressive,
and cointegrated, models, and you helped deal very much with
various
criticisms, notably the unit root criticisms. It was your
idea, I believe, to have a
cointegrated vector autoregression, involving the
dividend-price or earnings-price
variables as an information variable.
Campbell: Yes, I remember when I was on the job market going
to San Diego
and learning about cointegration. Robert Engle and Clive
Granger were just doing
this stuff on cointegration. They were thinking about it in
terms of disequilibrium
adjustments, or partial adjustments, to an equilibrium that
relates to the long run
and not the short run, and I remember thinking it needn’t be
that way. The same
economic model that generates the long-run equilibrium might
also determine the
short-run adjustment to that equilibrium. It fit very nicely
with the issues that were
being raised by critics of your excess volatility.
Shiller: That was in a sense the final step. My work on
testing for excess
volatility never progressed further after that. That led to
your decomposition of
returns into a component relating to new information about
future dividends and
a component relating to information about future
returns.
FIGURE 7. Robert J. Shiller and John Y.
Campbell, 2003, at Littauer Center overlooking
Harvard Square.
Campbell: Well, that was another thing in our joint work. The
loglinearization
we developed together allowed us to think of a present-value
model with timevarying
interest rates.30 And let us now give credit to you, you came
up with that
extension that allows a loglinearization in terms of interest
rates, and I ran with
it in different directions, in terms of consumption and all
that. But, the idea that
you could loglinearize the equation was fundamental. That was
an eye-opening
moment for me, an epiphany for me.
Shiller: That was a beginning of a number of papers.
Campbell:Well, let’s go back though to the late 1990’s. After
going public that
we thought the stock market might be too high, there were
several years when the
market kept going higher. By 1998, we published a paper saying
that the market
was perilously high; we published that in the Journal of
Portfolio Management.31
Shiller: That was our joint testimony that we prepared for
publication. That
was when we first really went public with it. That was when
there weren’t so many
caveats as in our earlier statements.
Campbell: I guess I’m just asking whether it was personally
hard for you to
stick to your guns during this period. I certainly found it
hard. You stuck to your
guns with a vengeance, and you wrote Irrational
Exuberance.
Shiller: I felt propelled by the market, and the collective
delusions about the
economy we were experiencing then, to write something against
it. The book
came out in March 2000, the very top of the market. That
timing was luck. Well,
it wasn’t entirely luck; I had a sense this market had to come
to an end soon, and
so I rushed to write that book.
Campbell: With a feeling that it was now or never?
Shiller: I wrote that book at breakneck speed.
Campbell: And I believe that Jeremy Siegel encouraged you to
do that.
Shiller: That’s right. I had been thinking of coming out with
another edition of
my collection of papers Market Volatility, and Jeremy said I
should just write a
whole new book, and this was the time.
Campbell: Did he say this was the time because he too thought
that the market
was overvalued?
Shiller: I think, . . . interesting question . . . he did say
it was the time for me
to write this book. I think that he did share some of my
concerns. Nine months
later, in March 2000, he wrote a Wall Street Journal piece
about the overpricing
of technology stocks.32 He sounded very much like me then,
except that he was
confining his attention to a certain class of
stocks—technology stocks—rather
than to the whole market.
Often, a lot has been made of our differences, that he is the
bull and I the bear,
but as a matter of fact we were very much on the same
wavelength in many ways.
I think that what he was saying was “I don’t know if you’re
right Bob, but this is
an interesting argument and this is the time to get a book
out.” Maybe he thought
with my book I would produce something that focused only on
technology stocks.
Note, too, that the latest edition of his book Stocks for the
Long Run, contains a
chapter on behavioral finance.33
I have a philosophy that one must start big projects
immediately on inspiration;
otherwise, one will never start them. So, after the phone call
with Jeremy, I started
writing the book immediately.
Campbell: Like the survey after the stock market crash.
Shiller: Yes, in a way, it was impulsive. Fortunately I didn’t
have any appointments
that afternoon. I immediately went on a long walk, thinking
about this idea,
and I started writing before I lost the inspiration, so that
it would be framed in
my mind as a going project. Then I started calling publishers,
including Peter
Dougherty at Princeton, who became an important formative
influence on this
book.
I was writing a different book at the time, and I abruptly
dropped it. That is an
emotional thing to do: when one is writing a book, one doesn’t
want to stop it, and
one fears that it will never be done.
Campbell: What other book was that?
Shiller: That is the book that was finally entitled The New
Financial Order:
Risk in the 21st Century, and appeared in 2003.34 I started
that book in 1997, so
I had been working a year and a half on that book when I had
to set it aside.
Fortunately, I was later able to rekindle my enthusiasm for
that book, with Peter
Dougherty’s encouragement and help. Doughertywas a terrific
editor for Irrational
Exuberance, and I am very lucky to have him again with New
Financial Order.
A really good editor can offer subtle guidance that makes all
the difference in the
final product. I should add that my wife, Ginny, also read and
marked up the entire
manuscript, and helped me organize my thinking for that
book.
Campbell: Do you think that Irrational Exuberance has affected
people’s understanding
of the stock market?
Shiller: Well, at least it affected mine, in the sense it was
writing up, consolidating,
my thinking. I thought about all the different things that I
had studied
over the years, and tried to state their relevance to the
current situation. I don’t
view it as a popular book. Some people would say that it was a
popularization.
But it was a popularization only in the sense that I left the
math out. It was a
bit like the discussion or conclusion to one of our joint
papers, John. There are
actually two equations in Irrational Exuberance, though they
are buried in the
endnotes.
In a sense I was writing this book for myself. It was just
exactly my thinking. It
reflected the inner thoughts I have when I try to put
financial research in a broader
perspective. So, I was surprised that the book ended up on the
New York Times
nonfiction bestseller list. This is a very unusual event for a
university press book.
The only significant thing that I did to appeal to a broader
audience was just to try
to make it interesting, interesting to me.
There is something to be said for a very broad focus in
economics. Economics is
different from a lot of other fields. One thing is that it is
harder to compartmentalize
and be useful. In chemistry, one can take some particular
compound and do an
analysis of it, but, to be useful in economics, one has to
have a broader perspective.
There seems to be a greater risk in economics than in
chemistry of doing something
useless.
Campbell: Yes, I think that is right. There are some
disciplines where there are
many little bricks that have to be assembled to make the wall,
but perhaps less so
in economics.
Shiller: Yes, of course we have data collection, like that
done by the Census
Bureau, lots of very little bricks put together for a
foundation. Then we economists
build on these foundations some very flimsy superstructures,
some tenuous economic
models.
Campbell: You talk about economists being useful. Some of the
things you
have done advocating financial innovation are certainly
potentially very useful.
And maybe your work on inflation indexation . . . .
Shiller: Some of that is joint with you.
Campbell: Some of it is. You also did some work on inflation
with Jeremy
Siegel very early in your career. And you have solo work on
inflation. So, how did
you first get the idea this was an important topic?
Shiller: That is another question that I can’t answer
exactly.Well, I keep getting
back to things that I was taught about science. Getting back
to physics, one of
the most important things that I learned there was the
importance of getting your
units right. And, in economics, some of the most important
fallacies in the history
of thought have had to do with problems of units. The
nineteenth century wage
fund theory is an example, where economists confused a fund
with a flow. My
instructor, Shorey Peterson, at Michigan, stressed this, but
it was also my physics
professors that stressed to me the importance of units of
measurement. We write
most of our long-term contracts in terms of dollars, a unit of
measurement that
changes through time, and that is just a changing yardstick.
It is odd that we in the
twenty-first century would be using such archaic
measures.
Now, the history of thought on this is interesting: The first
person to propose
the compensated dollar was Simon Newcomb, an astronomer, in
the 1870’s.35 He
was an expert on systems of measurement.
And then Irving Fisher, another formative influence on me
(though I never met
him), also emphasized human foibles in designing monetary
policy.36 And this is
the real beginning of behavioral economics.
It strikes me that, so often, economists build models that
portray people as
effectively paying attention to certain quantities that I
suspect they are not even
looking at. People are not even thinking in those terms, but
are using an entirely
different system of coordinates.
So much of the theory of the term structure of interest rates
is a theory
of real interest rates. When you point out to theorists that
we have not had,
until very recently, a term structure of real interest rates
to observe, they sometimes
say that a theory of the nominal term structure would be
messy, inelegant.
Nominal interest rates involve an inflation component that is
not elegant to
model.
Given the difficulties people have in behaving as economists
assert they ought
to behave, it has just seemed to me that the world should be
more indexed, indexed
in a way that is very easy for them. We should define an
inflation-indexed unit of
measurement, like the unidad de fomento in Chile. That way, we
change people’s
psychological frame of reference. And, in fact, we should at
the same time establish
units of measurement for many such things. This is in my new
book, The New
Financial Order. As well as an inflation unit, there should be
a wage unit that
reflects the average wage. For this, we need better wage
indexes. Wage indexes
today are not repeated-measure indexes, and so they do not
accurately reflect
changes in individuals’ compensation. Then, we would have also
a productivity
measure, different market baskets for the elderly, etc. And
you should be able to
write a check measured in any of these measures, not just in
terms of currency,
use your credit card with these units, and so on.
I wanted to call the unit that is indexed to inflation
“baskets,” referring to the
market basket that underlies the consumer price index, and so
ideally one could
write a check in terms of baskets instead of dollars. Writing
such a check for 10
baskets, say, would be like handing over 10 baskets of an
array of real goods, and
so, the name would help people to understand that in writing
such a check they
were in fact doing just this.
Campbell:Well, that is sort of like going back to the Middle
Ages where feudal
dues were specified in hogsheads of agricultural
products.
Shiller: And yet, it draws on economic theory. Index number
theory is an
important area of progress in economic theory that I think
ought to be applied so
that it can yield more tangible benefits to society. The
indexed units of account
may in some sense seem like going back to the middle ages, but
in fact it would
be going forward with some very sophisticated theory.
Campbell: Back to the future.
Shiller: Yes indeed. It also relates to new electronic
technology. Irving Fisher,
when he proposed his compensated dollar, assumed that we
needed to base our
transactions on a hand-to-hand currency.37 It was difficult to
conceive of a way
to make the real value of currency absolutely stable. Irving
Fisher was worried
about the calculations required by indexation: One cannot
expect people to do
complex calculations every time they buy a newspaper. His way
to solve this
problem was the compensated dollar. Today, it is much easier
to achieve that with
electronic money, where the real value of the unit can be
defined in terms of an
index that is computed automatically and continually by
computers. Now, with
credit cards, smart cards, and the like, we really ought to
have sophisticated units
of measurements that are taught to children and established in
our economy, so
that it is easy to make sensible contracts. These are themes
in New Financial
Order.
Campbell: So, you mentioned the book, but that is just part of
the whole
research agenda, and the mission to promote new financial
instruments to enhance
risk sharing. And you had your earlier book, your Clarendon
Lectures book on
macro markets.38 Some people would say: Isn’t it surprising
that the same Bob
Shiller who argues that markets are excessively volatile is
also promoting the
further extension of financial markets. How would you respond
to that?
Shiller: Yes, well it would be oversimplifying in the real
world to say that just
because there is excess volatility, we should not have
markets. You know, no one
has proposed, and I never proposed, that in response to excess
volatility we should
shut down the stock market.
Campbell: Well, Alan Blinder once told me that he thought that
the stock
market should be open one day a year.
Shiller: Well, that is a bit of a “sand in the wheels” theory.
Jim Tobin might
have gone along with that, but even Blinder is not advocating
shutting the markets
down. Excess volatility is just one example of how the
inconsistency of human
behavior is a potent force. The human mind is incredibly
powerful; it is capable
of computations that can dazzle you, but can also be very
blundering and
foolish at times. So, we have to design things so that they
work well for real
people.
For example, airplanes are designed so that they are very
stable, do not go
wildly off course when there is a minor pilot error.We have to
design our financial
institutions in the same way. It is a difficult problem, how
to achieve this. One has
to engineer around human limitations, and make it possible for
people to do what
they can do very well. Most people are quite capable of
managing their lives and
their own risks, and so we want to create the vehicles that
enable them to do this,
but also to have default options set up so that if they do
nothing they will still fare
fairly well.
So, excess volatility is a manifestation of a certain
inconsistency in human
behavior, and that same inconsistency has other
manifestations, even things like
wars, rebellions, things that have nothing to do with markets.
So, I think that,
overall, expanding markets is the right thing to do.
Campbell: You have also sought to expand markets, create new
markets, partly
through your company, and through efforts at persuasion.
Shiller: A lot of things are happening now. I get phone calls
from many people
who are thinking of creating some new derivative market or
some new way of
achieving social goals through incentives. That would go on
whether I had been
here or not, but one will never know what influence I had on
that, if any.
Campbell: So, do you feel you understand the obstacles, from
talking to people
at futures exchanges, for example, or talking with people
through the company
you and AllanWeiss recently created, Macro Securities
Research? You’ve become
perhaps more savvy about the obstacles, the inertia that
prevents these markets
from becoming successful.
Shiller:Yes, Allan and I, and nowSam Masucci, who is Chief
Operating Officer
of Macro Securities Research, have been working for years to
try to make better
risk management happen. And we have learned very much about
institutional
inertia.
One reason why I wanted to create a more sensible system of
indexation is precisely
because of such institutional inertia. We were thinking of
creating vehicles
for people to hedge the value of their houses. When we went to
futures exchanges
to propose that, it occurred to us that a simple risk
management product for homeowners
should be one that protects the real value of their home, not
its nominal
value. For if people hedged the nominal value in a time of
uncertain inflation,
they could be creating bigger fluctuations in the real value
than they would have
had if they had not hedged. I asked people at these exchanges
if we could create
a hedging vehicle that was defined in terms of real values,
and they just looked
blankly at me. “What are you talking about?” So, it seemed
that one could not do
anything sensible if we have to make all of our economic
contracts in terms of
some crazy unit (money), so that people cannot manage such a
simple construct as
indexation. That is an example of what I observed from trying
to get these things
started. So, we need to set up an economic infrastructure that
will make these
things more possible.
Campbell: You have this new book coming out, The New Financial
Order.
So, how did you come to write that book? You started it back
in 1997, and then
dropped it.
Shiller: Well, I wrote Macro Markets in 1993. That book had a
very technical
side, where I talked about repeated-measures indexes, for
example, and sources of
volatility. But it also got into a side that is broader, about
how institutional change
will transform our markets and our lives. It was reviewed in
the New York Times,
and the reviewer, Peter Passell, called me up and said that I
should really write a
version of this book that is accessible to a broader audience.
He said, all that math
is intimidating and not necessary for the basic ideas. But, I
told him that I didn’t
know how to write a book for a broader audience on this topic,
which seemed to
be an inherently technical topic. So, I put that idea on the
back burner. I didn’t
think I could do it.
Some years went by.My student Stefano Athanasoulis and I
advanced the mathematical
theory of fundamental risk management in the context of
institutional
design in several papers.39 Working with Stefano really was
very productive; we
have a much clearer idea of the theory of these new risk
markets now. We have
written four major papers on this topic, and continue to work
together. He has
been a very important force in my work in this area, and has
given me many ideas.
At the same time I began to think that there is in fact a lot
to say without
reference to these technical issues. Again, I started to write
the book for myself,
to try to understand the issues better myself.
Part of my motivation is that, after I wrote the book Macro
Markets, people for
the most part just did not react to it. They didn’t see that
it contained a good idea,
an idea that was workable. So, I needed myself to come up with
better arguments,
and that meant integrating the risk management notions into a
bigger picture.
Handling the real obstacles to risk management was the basic
motivation. I
wanted readers to see how analogous innovation has fitted into
history, to see
that radically new financial innovation is not unprecedented,
and that it is not
implausible that we would find ways to deal with barriers in
human psychology,
especially if new institutions are designed right to work
around human foibles. I
wanted it to be a serious book, and I thought I could put the
vector autoregressions
somewhere else. Anyone who wants to read about that can read
some of our
papers, for example.
I really got very excited about this book, but it has been
very hard to write. In
contrast, I wrote Irrational Exuberance basically in nine,
months. Though there
were some notes I incorporated that I wrote in 1987, the basic
project really took
only nine months. Writing The New Financial Order was very
hard, and took a
long time.
Campbell: One of the things that you say in the preface to
your new book is
that your 20 years at Yale have had a certain influence on
your thinking.
Shiller: Well, I came to Yale because I admired a number of
people there:
Jim Tobin, Bill Brainard, Bill Nordhaus, and others. There was
the Brainard–
Dolbear article that talked about hedging risks to
livelihoods.40 And that is the
earliest reference I could find to that idea. Tobin is
implicit in his work about
hedging idiosyncratic risks. He was concerned a lot about
institutional change.
He was the inventor of the Yale Tuition Payment Option, the
institution that allowed
student loan contracts to work toward managing lifetime income
risks. And
he made it happen, albeit only on a small scale. He got Yale
University to implement
it.
Campbell: But this has backfired for the University because
people who owed
big payments under the program are people who would otherwise
give big donations
and they are claiming to be so annoyed at the bills they get
that they refuse
to give money.
Shiller:Well, so they ended the program, and finally forgave
the rest of the loans.
The original plan had some shortcomings. Another problem is
that the payments
were defined by a line on the Federal Income Tax form.
Unfortunately, when
people married later, they wound up taxing the spouse. People
hadn’t anticipated
this, and it seemed unjust. Now, there is a big question about
how to handle that.
Campbell: You could be married and file separately.
Shiller: Well, but that is costly under current tax law. It
will be easier once
the income tax is more computerized, and you can push a button
and the forms
can come out in different ways. The reason that the Yale TPO
had to be defined
in terms of a line on the tax form is that they didn’t have
this technology. Now,
one of the points of my new book is that technology is
advancing so fast that the
complexity of our institutions can go very far forward
now.
Campbell:Well, if you look at the tax code, it has been doing
that. The tax code
has become more complicated because it is possible to do the
calculations now.
Shiller: Well, obviously, for good risk management purposes,
complexity may
be necessary. But, anyway, as far as the Yale tradition . . .
going back to Irving
Fisher, a lot of people admire him. He was an innovator. He
tried to get indexed
bonds started. He had a kind of practical approach to
economics. And he even did
survey work.
Campbell: Really? I didn’t know that.
Shiller: In his book Money Illusion, he reported an informal
survey of shopkeepers
in Germany during the hyperinflation, and asked them why they
raised their
prices, and concluded that they didn’t really understand the
role of inflation in their
decision. So, there is a sort of tradition at Yale for
down-to-earth policy-focused
research.
Incidentally, there is another article in Macroeconomic
Dynamics about the Yale
Tradition. David Colander interviewed Jim Tobin and me about
the Yale Tradition
in economics.41
Campbell: I have a last question. Looking forward, are there
any research topics
that are going to be especially productive for you or for the
profession in the next
10 years? If a graduate student comes to you and says I am
looking for a field to
work in or an idea to work on, what would you say?
Shiller: Well, it is hard to predict very far out what we will
be doing. I have
never known very far out what my own research will be. I think
that there are a
number of things to say.
One of the things I would say that perhaps most economists
would not say in
answer to such a question is that the information revolution
is lowering the costs of
doing things, and we have to think about what we as economists
can do with that
new opportunity. And so, economic researchers should be
thinking more about
what they can do constructively to develop more complex
economic institutions.
It is starting to happen. We have a lot more research on
financial engineering
and mechanism design. It is an emerging thing.
I think that there is a lot of fundamental work to do on the
integration of the
theory of risk management into broader economic theory. It is
very important to
try to advance this fundamental theory. Unfortunately, the
day-to-day life in the
profession has a tendency to distract one from such basic
research with a million
little diversions. I have to thank my administrative assistant
for many years, Carol
Copeland, for helping me to manage my time and to steer clear
of distractions.
People need to listen both to others’ advice as well as to
their own conscience to
keep their research from becoming diluted.
A lot of what economists do is, though, very abstract. I would
also encourage
more economists to do practical things, like write patents,
rather than just NSF
proposals. There is a lot to be gained from the application of
our theory.
I imagine myself in the coming decade celebrating and
supporting others’ efforts
to do such things. It is hard to be an innovator because it is
not a traditional course
in the profession. It tends to look nutty.Well, the Wright
brothers were thought of
as nutty by many when they tried to develop the airplane.
Today, new designers of
airplanes are fully respected. But, today, inmechanism design
or other constructive
aspects of economics, we are in the Wright Flyer stage.
So, one of my missions in the years ahead is to help support
innovation in
finance. I get a lot of proposals now that cross my desk or my
e-mail. The typical
story is that “I have this idea that nobody will listen to.”
Sometimes the idea is
nutty, but often not. Sometimes it just seems to be an idea
that there is no current
momentum for. I believe that eventually many of these ideas
will be heard. There
will be a lot of fundamental financial and social insurance
innovations in coming
years, coming from people all over the world who are inspired
by financial theory
and the rapid advance of information technology.
NOTES
1. Lucas (1975).
2. Sutch (1968).
3. Shiller (1972).
4. Modigliani and Shiller (1973).
5. Fair and Shiller (1990).
6. Shiller (1973).
7. Leamer (1978).
8. Fisher (1966).
9. Belsley et al. (1980).
10. Anderson and Jordan (1968).
11. Friedman (1977).
12. Dickey (1975), Fuller (1976).
13. Shiller (1979).
14. Shiller and Perron (1985).
15. Perron and Phillips (1988).
16. Fama (1970).
17. Kahneman and Tversky (1979).
18. See Thaler and Rosen (1976).
19. Grossman and Shiller (1981).
20. Shiller (1982).
21. Hansen and Jagannathan (1991).
22. Shiller (1984).
INTERVIEW WITH ROBERT J. SHILLER 677
23. Friedman (1953).
24. Shiller (1989).
25. Case and Shiller (1988).
26. Case (1986).
27. Baily et al. (1963).
28. Case and Shiller (1989).
29. Shiller (2000).
30. Campbell and Shiller (1988).
31. Campbell and Shiller (1998).
32. Siegel (2000).
33. Siegel (2002).
34. Shiller (2003).
35. Newcomb (1879).
36. Fisher (1928).
37. Fisher (1913).
38. Shiller (1993).
39. Athanasoulis and Shiller (2001).
40. Brainard and Dolbear (1971).
41. Colander (1999).
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Macro Markets: Creating Institutions for Managing Society’s
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2000
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1978
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1979
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INTERVIEW WITH ROBERT J. SHILLER 683
1999
Evaluating real estate valuation systems, with A.N. Weiss.
Journal of Real Estate Finance and Economics
18, 147–161.
Home equity insurance, with A.N. Weiss. Journal of Real Estate
Finance and Economics 19, 21–47.
Human behavior and the efficiency of the financial system. In
J. Taylor & M. Woodford (eds.),
Handbook of Macroeconomics, vol. 1, pp. 1305–1340. New York:
North-Holland.
Macro markets and financial security,with S.
Athanasoulis&E. vanWincoop. Economic Policy
Review
5(1), 21–39.
Social security and intergenerational, intragenerational and
international risk sharing. Carnegie-
Rochester Series in Public Policy 50, 165–204.
2000
Measuring bubble expectations and investor confidence. Journal
of Psychology and Financial Markets
1(1), 49–60.
The significance of the market portfolio, with S.
Athanasoulis. Review of Financial Studies 13, 301–
329.
2001
World income components: Measuring and exploiting risk sharing
opportunities, with S. Athanasoulis.
American Economic Review 91, 1031–1054.
2002
Bubbles, human judgment and expert opinion. Financial Analysts
Journal 58(3), 18–26.
Indexed units of account: Theory and analysis of historical
experience. In F. Lefort & K. Schmidt-
Hebbel (eds.), Indexation, Inflation, and Monetary Policy.
Santiago: Central Bank of Chile.
2003
Is there a bubble in the housing market? with K.E. Case.
Brookings Papers on Economic Activity 2,
299–362.
Social security and individual accounts as elements of overall
risk sharing. American Economic Review
93, 343–347.
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