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Robert Shiller: Accurate Predictions Of A Genius Economist

Robert Shiller won the coveted 2013 Nobel Prize for Economics along with two other economists, Eugene Fama and Lars Peter Hansen. The three won the award for developing new methods to analyze asset market (stocks, bonds, housing) trends. Predicting whether stock or bond prices will shoot up or sink in the short-term is extremely hard. But their methods have made it possible to estimate the asset market movements over the next three years or more. While Fama and Hansen teach at the University of Chicago, Mr. Shiller is a professor at Yale University.

Robert Shiller: Accurate Predictions Of A Genius Economist

Let’s learn a little more about Robert Shiller, who is among 100 of the world’s most influential economists. Shiller is known for accurately predicting two of the biggest bubbles in modern history: the dot-com bubble and the housing bubble. He has also authored a number of books, including the New York Times bestseller Irrational ExuberanceFew people know that he is also the co-founder of the investment firm MacroMarkets LLC.

Robert Shiller: The beginning

Mr. Shiller was born in Detroit, Michigan on March 29, 1946. He pursued a B.A. from the University of Michigan and an M.S. from the Massachusetts Institute of Technology. Robert Shiller received his Ph.D. from MIT in 1972, and began teaching at the Wharton School of Business and the University of Minnesota.  Mr. Shiller moved to Yale as a faculty member in 1982. Since 1980, he has been a research associate of NBER (National Bureau of Economic Research).

Economic genius of Robert Shiller

Shiller has studied a wide variety of topics ranging from asset valuations to real estate, and behavioral finance to risk management. In 1981, Robert Shiller challenged the dominant economic view of “efficient market hypothesis.” He argued that the human psychology could drive consistent and large mis-pricings in the market. We later witnessed that in late 1990s when unimaginable optimism pushed the stock markets into bubble territory. Shiller said that in a rational market, investors base the stock prices on expected dividends, discounting the present value. But when he analyzed the U.S. stock market since 1920s, he found that the expected future dividends and discount rates didn’t justify the excessive fluctuations in the stock market.

He later conducted a survey, asking traders and investors what motivates them to trade or invest in a particular stock. He found that their decisions were mostly based on emotions rather than on rational calculations.

Creation of Case-Shiller Index

In 1991, he joined hands with economist Karl Case to create a repeat-sales index called the “Case-Shiller Index. Back then, Shiller was working on the behavioral aspects of economic bubbles. In the New York Times bestseller Irrational Exuberance (2000), he warned that the U.S. stock  market had reached bubble territory. Later in 2005, he argued that the increase in house prices could never beat inflation over the long-term. His logic was that house prices move towards building costs added with normal economic profit. That received opposition from several economists. But in the 2nd edition of his book Irrational Exuberance (2005), Mr. Shiller predicted the exact timing of the next market bubble. He said housing prices will soar far beyond the traditional valuations. And that will be followed by a period of low returns.

Again in September 2007, he predicted the ultimate collapse of the U.S. housing market, and the financial panic that would follow. We saw it in late 2008 with the collapse of Lehman Brothers. In 2009, Shiller won the Deutsche Bank Prize in Financial Economics.