Nobel economist Robert Shiller on how the stock market reflects psychology

Yale University professor Robert Shiller was one of three Americans honored with the Nobel Prize for Economics for research on how financial markets work and how assets, like stocks, are priced. Economics correspondent Paul Solman sits down with Shiller to discuss the award, irrational exuberance and the global housing market.


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GWEN IFILL: Finally tonight, a conversation with one of the winners of this year's Nobel Prize for Economics.

The prizes were handed out yesterday in Stockholm. Yale University Professor Robert Shiller was one of three Americans honored for research on how financial markets work and how assets, like stocks, are priced.

Our economics correspondent, Paul Solman, recently talked with Professor Shiller about the award.

It's part of Paul's ongoing reporting Making Sense of financial news.

PAUL SOLMAN: How surprised were you at getting the Nobel Prize?

(LAUGHTER)

ROBERT SHILLER, Yale University: Well, there were people telling me I would get it.

PAUL SOLMAN: Really?

ROBERT SHILLER: But they're my friends, right?

In fact, I asked other professors, do you have friends telling you that you're going get the Nobel Prize? And they said, yes.

So I thought every professor has friends telling them that.

(LAUGHTER)

PAUL SOLMAN: Can you say in a sentence or two what you got the Nobel Prize for?

(LAUGHTER)

ROBERT SHILLER: I don't know.

There is a long scientific background paper on the Nobel Web site and it talks about the three of us, Gene Fama, Lars Hansen, and me, as contributors to the same body of literature, which seems a little hard, because Gene Fama especially. It takes a different summary view of it all.

PAUL SOLMAN: Exactly the opposite in some sense, right?

ROBERT SHILLER: Right.

PAUL SOLMAN: He says the market at any given time reveals what the underlying stocks are really worth.

ROBERT SHILLER: The whole idea that the stock market reflects fundamentals, I think, is wrong. It really reflects psychology. The aggregate stock market, it reflects psychology more than fundamentals.

PAUL SOLMAN: Are we experiencing, to use your phrase from 1996, I think, irrational exuberance in the stock market again?

ROBERT SHILLER: Well, some people are.

It has bubble elements to it, because people see the market going up, and they're regretting the fact that they didn't buy in several years ago. And they're tempted back into it. But it isn't the really strong bubble that we saw before, because there are so many clouds and there are so many issues on people's minds that it doesn't look like the chance of a lifetime now.

PAUL SOLMAN: I know you don't like to make predictions and think they're foolish in some sense.

ROBERT SHILLER: Yes.

PAUL SOLMAN: But I'm not doing my job if I don't ask the Shiller of Case-Shiller...

ROBERT SHILLER: Yes. Yes.

PAUL SOLMAN: ... what about the housing market at the moment?

ROBERT SHILLER: It's a very interesting phenomenon, to me, that there are bubbles in so many different countries around the world, like Brazil.

I was just down there a few months ago. And they're going through a huge boom in housing. They have adopted kind of the mentality that we had eight years ago. It's uncanny. When I was in Brazil and talking to people, I felt like I was in the United States of 2005.

PAUL SOLMAN: Well, did you start to warn them, the way you warned us then?

ROBERT SHILLER: Well, I did, although the Brazilian home price boom is interpreted by most Brazilians as a sign of the country emerging.

Brazil is joining the advanced countries of the world. And, of course, if you want to buy a condo in Sao Paulo, you have to expect to pay New York prices. That's where it's going, right? And if I say no, then it just feels bad to say that.

And I can do it because I'm leaving Brazil. In an hour, in a couple of hours, so I am out of here.

PAUL SOLMAN: But, I mean, you're a Nobel laureate who won the prize based in large measure on your skepticism about irrational markets, right?

ROBERT SHILLER: Yes.

PAUL SOLMAN: I mean, so you would think the Brazilians would go, oh, my goodness, Bob Shiller is calling a housing bubble?

ROBERT SHILLER: Yes, some of them -- some of them did. But I'm sure it stays as a fringe opinion. It's just the forces to -- the patriotic forces. It just doesn't feel good, this alternative view.

And, by the way, we have professional economists who could defend any viewpoint with statistics. And they -- they do that.

PAUL SOLMAN: Everywhere in the world.

ROBERT SHILLER: Everywhere in the world.

Economics is not an exact science. I wanted to be a scientist when I was a child.

And I am lamenting ever since that I go into a field where I just can't be exact. And I don't think anybody can. What is the economy going to do next? We just went through the biggest housing bubble in U.S. history. It's off the charts. And now it is starting to go up again. What to make of that? Are we going back into another bubble economy? I don't know. And I don't see how anybody knows that.