ROBERT J. SHILLER has often been described as a visionary. In some of his best-selling books, Macro Markets and The New Financial Order, he has made the case for creating new financial markets in which individuals would be able to diversify away the most important risks affecting them, such as income or house prices. He refers to this as the democratization of finance, or making financial markets work for the benefit of the common person. With two patents for financial innovation to his name, in recent years Shiller has started turning his vision into reality: in 2006, futures on home prices for 10 U.S. metropolitan areas, as well as an average nationwide price, started trading on the Chicago Mercantile Exchange. Shiller’s reputation as a visionary in finance and macroeconomics is probably even better established with the general public for his work on irrational behavior in financial markets—especially for his admirable ability to identify “irrational exuberance ” and speculative bubbles at an early stage, for both the stock market and housing prices. Of course Shiller remains, first and foremost, a highly respected academic (he is the Arthur M. Okun Professor of Economics at Yale University and Professor of Finance at the Yale School of Management). But he is as close to a celebrity as it gets within the field of economics: his books on financial markets and the subprime crisis have made him a household name, and he has appeared in a series of fullpage retirement-planning advertisements in the U.S. popular press. Irrational exuberance First, the facts on Shiller’s ability to identify asset price bubbles. In 1996, he noted that the price/earnings ratio on the stock market was at a historical peak, and argued (admittedly, four years too early) that the stock market was overvalued and likely to crash. He articulated this view in the impeccably timed first edition of Irrational Exuberance, published in March 2000, just as the dot-com bubble burst: in particular, he provided a cogent analysis of the psychological factors underlying the formation of speculative bubbles. In a 2003 Brookings Papers study with Karl Case and in the second edition of Irrational Exuberance (2005), Shiller showed that house prices had begun looking like a “rocket taking off,
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