Seven Fascinating Insights From A Nobel Prize Winning Economist

Ser Jing - Why Investors Shouldn't Trust Predictions (pic) A few weeks ago, Robert Shiller, along with Eugene Fama and Lars Peter Hansen, won this year’s Nobel Prize in economic sciences.

Shiller’s a Yale University economist who correctly predicted both the dot-com and housing bubbles and is well known among investors for coming up with the valuation measure for stocks known as the Cyclically Adjusted Price Earnings (CAPE) ratio.

But that’s not all. He also taught us to think about human emotions, not just numbers, and how to view markets through the long lens of history rather than the short-term news filter.

The Motley Fool’s Morgan Housel had the privilege to interview Shiller two years ago, and here are some incredible insights Housel gleaned from one of the most prominent economists of our times.

1) On thinking differently

The Straits Times Index (SGX: ^STI) presented itself as a great bargain back in March 2009 during the nadir of the Great Financial Crisis when it was selling for around six times earnings. But, it became such a bargain only because everyone else was discarding stocks out of fear of financial armageddon.

It takes a different type of thinker to spot a bargain like that, with the thought that perhaps things aren’t as bad as most fear. Here’s what Shiller has to say on thinking differently.

“In the early to mid-2000s, I created a home price index back to 1890, and I just plotted that and looked at it, and I thought, wow, this is unusual, really unusual. This looks like a first-time bubble, the biggest bubble we have ever had.

“The strange thing is, nobody else had ever made a plot like that. I can tell you, no one had ever seen that picture. It strikes me as odd; why me, why now? People plot all kinds of data. Why wouldn’t someone have done that? I still haven’t figured it out. We have to always reflect, and maybe this is a Motley Fool-type theme; we have always to reflect that if you swim with the current, you will be thinking the same things as everyone else. You have to recognize that your own thoughts are not your own thoughts. They kind of filtered and percolated in from other people. It all seems like my own common sense, but it’s just what everybody is saying now.”

2) On homeownership

This insight is poignant for us Singaporeans, given the focus that our nation has on housing prices.

“Basically, if I were in the market right now because I wanted a house, I would buy a house. I think most people have a sense of what kind of life they want to live and where they want their family and where they want their kids to go to school, and they value neighbors, maybe. It depends on your position in life and what you are thinking, but quite likely you are living in a neighborhood with a street, with sidewalks, with a playground nearby, a school that’s convenient, and you end up buying a house because you want those things. I wouldn’t let speculative concerns dominate that decision.”

3) On the psychology of recessions

“The causes of the decline are very complex. This is history; this is not something that a simple economic metric model will describe. I think of society as a constant feedback loop. Certain ideas rise, and they become viral and they spread, and they become reinforced for a while and they get, they overshoot. So the idea that we have escaped from the risk of a depression, that we live in a wonderful prosperous time, gradually it sank in over the 1990s, just as it did over the 1920s, the roaring twenties. It’s the same phenomenon. Then afterwards, we go through a long period of reassessment. So it’s not simple to explain, and I wouldn’t pin it to any one factor. In my book, Irrational Exuberance, I gave a dozen precipitating factors for the boom. I don’t need precipitating factors for the decline from the boom because it’s just correcting back down to a more normal state.”

4) On why so many experts missed the 2008 financial crisis

“Experts have always missed big events like this. If you look at the record of statistical forecasting models, they tend to get to the recession when it’s starting to come. A casual observer might start to worry about it. Forecasting it years out, they don’t get; in particular, if you look at the Great Depression of the 1930s, nobody forecasted that. Zero. Nobody. Now there were, of course, some guys who were saying the stock market is overpriced and it would come down, but if you look at what they said, did that mean a depression is coming? A decade-long depression? That was never said.”

5) On short-term thinking

“I think that there’s too much faith in analysis of short-term data. You see some pattern, and you can do a statistical test and prove that will prove that it is significant or passes the smell test to a statistician. But the problem is, the world is always changing. It’s not a stable thing. The underlying human parameters may be stable, but you can see that there is institutional and cultural evolution, and it’s not something that you can quantify.”

6) On humans being rational

“I actually wrote my dissertation on rational expectations. But I have to say, right from the beginning, I didn’t exactly believe in my own theory. It didn’t sound right. It didn’t have the ring of truth to it to me, and the whole efficient markets hypothesis. So for me, I spent decades in my life wrestling with these issues, because there was the general impression that there was a vast literature supporting sufficient markets. But as years go by, I have learned not to trust vast literatures and science. They can be wrong. I don’t know that I appreciated fully the bandwagon effect when I was a young researcher, and I felt kind of intimidated by the great authorities who were saying that science has shown that markets are efficient. I was a little bit too slow to come to a negative opinion on that idea.”

7) On advice to students

This is another great insight for us to think about. Are Singaporean students able and willing to take up potentially life-changing opportunities when they present themselves?

“My standard advice, is be respectful of history. Every time creates its own opportunity, and a time of great economic turmoil is a time of opportunity. You have to think creatively about that. I tell my students, my standard advice, is not to make the mistake of thinking too much in the framework of my life cycle — I am at this age, it’s time for me to take my exams and graduate, then I have to find a spouse, then I have to do such and such. Consider that opportunities come once in a lifetime. Zuckerberg dropped out and found Facebook. That is a good metaphor. I am not advising dropping out, but I am saying life is like that. You have to be alert to opportunities, and the opportunities often take the form of developing your human capital. Okay, I am getting expansive and excited about this advice. I really believe it, and I think that young people don’t seem to know this.”

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Morgan Housel, and first published on It has been edited for