Prof Robert Shiller Irrational Exuberanc
Prof Robert Shiller Irrational Exuberanc
Prof Robert Shiller Irrational Exuberanc
Revisited
Robert J. Shiller
Yale University, New Haven, CT USA
Istituto di Studi Economici e per l'Occupazione
Iseo, Italy, June, 2015
Shiller Irrational Exuberance
Three Editions
• First
Edi)on:
2000
at
end
of
what
I
call
the
“Millennium
Boom”
• Second
Edi)on:
2005
near
end
of
what
I
call
“Ownership
Society
Boom,”
2003-‐2007
• Third
Edi)on:
2015
during
the
)me
of
what
I
call
the
“New
Normal
Boom”
2009-‐2015
Real U.S. Stock Prices and
Real Earnings 1871-2015
History of Thought
• Ill-Defined Notion of Efficient Markets Dates Back to
19th Century, but Blossomed in Second Half of 20th
100
• First-order autoregressive (AR-1)
model: xt=100+ρ (xt-1-100)+εt. 95
Mean reverting (to 100), 0< ρ<1.
x
90
• Random walk as approximate
85
implication of unpredictability of
returns 80
1 5 9 13 17 21 25 29 33 37 41 45 49
Time Period
• Similarity of both random walk and
AR-1 to actual stock prices. Random Walk AR-1
Event Studies:
Eugene Fama, Lawrence Fisher,
Michael Jensen, Richard Roll
International Economic Review 1969
Real Stock Prices Compared with Present Value of
Real Dividends, “Do Stock Prices ...”
AER 1981 updated
“Stock Prices and Social Dynamics”
Brookings 1984
• Demand
for
stocks
per
share
by
ordinary
investors
At
is
somewhat
predictable
• Demand
for
stocks
by
smart
money
per
share
is
the
difference
between
ra)onally
expected
return
next
period
and
the
constant
riskless
rate
r
,
divided
by
constant
φ
• It
follows
that:
The Basic Theory of Speculative
Bubbles in Irrational Exuberance, 2000
• Bubbles
are
driven
ini)ally
by
an
unusual
confluence
of
an
array
of
precipita)ng
factors
• Many
of
these
factors
are
stories,
oaen
human
interest
stories
(narra)ve
basis
for
human
thinking)
• Some
of
these
factors
are
naïve
theories
• Bubbles
reach
epidemic
propor)ons
with
amplifica)on
mechanisms
• Price-‐to-‐price
feedback
• Price-‐to-‐GDP-‐to-‐price
feedback
• Price-‐to-‐corporate-‐earnings-‐to-‐price
feedback
• Naturally
Occurring
Ponzi
Scheme
(Pyramid
Scheme,
Money
Circula)on
Scheme,
Pilotenspiel)
Evidence of Feedback Mechanism:
Results of Individual Investor Survey:
Stocks Are the Best Investment
Evidence of Feedback Mechanism:
Results of Individual Investor Surveys:
Buy-on-Dips Confidence Correlates with
Stock Market Level
Individual and Institutional Investor
Survey: Valuation Confidence
Perceptual Biases Relevant to
Financial Markets
• Framing
• Representa)veness
heuris)c
• Afen)on
anomalies
• Regret
theory
and
envy
• Ego
involvement
The Behavioral Finance
Revolution After 1990
• Sociology:
Collec)ve
consciousness
Durkheim
(1893),
collec)ve
memory
Halbwachs
(1925)
• Social
psychology:
Groupthink
,
Janis
(1971)
• Selec)ve
afen)on:
William
James
1890,
(“ra)onal
inafen)on”
Sims
2003)
• News
media,
Internet,
as
amplifier
of
social
epidemics
• Even
popula)on
biology,
epidemiology,
and
neuroeconomics
are
coming
into
play
Precipitating Factors for Millennium
Bubble 1982-2000
Addi)ons:
Dele)ons:
• Ownership
Society
• The
World
Wide
Web
aaer
Theory
Dot-‐Com
burst
• Greenspan
put
• Republican
Congress
(Senate
)ed
in
2000
elec)ons,
both
houses
went
Democra)c
in
2006
elec)on)
• Triumphalism
faded
with
memories
of
Deng
Xaioping
(d.
1997)
and
Boris
Yeltsin
(d.
2007)
Rather Different Precipitating Factors
for the New Normal Boom 2009-15
Addi)ons:
Dele)ons: