Interview with Robert Shiller – “Markets Will Never Completely Understand Their Own Psychology”
Postat den 6th November, 2013, 09:41 av Hubert Fromlet, reprinted interview with Robert Shiller from 2004.
Quite a number of big financial bubbles have burst in modern financial history, lately four years ago in the IT sector. Do you think that people have become more aware of psychology on financial markets or what research calls behavioral finance?
– We have seen many financial bubbles in the past. There is definitely an increasing awareness of behavioral finance. That’s new. A movement for behavioral finance has been created. But markets will never have a complete understanding of this phenomenon. I doubt that people will completely learn their lesson at any time. Part of the problem lies in the fact that it is hard to know when there really is a financial bubble.
What you have to do is to analyze carefully and judge what impact other persons’ language has on attitudes and markets. It is so difficult to have an idea about the long-term value of an asset, if markets are behaving in a herdlike way, and prices are too high. Mistakes will be made again and again.
The other thing is, of course, that lots of people disregard these facts and believe that a new era with new rules is about to start. Interpretation of behavioral finance is also a question of experience.
Right now, people say Alan Greenspan did not object to the bubble and so it can’t be a bubble. I have great respect for the man, but he could caught up in a bubble, too. This is something you realize after the fact.
Probably you are mainly referring to the booming housing sector in the U.S. Is there any way of measuring such a potential threat?
– I have given some ideas about that in several discussion papers, based on questions and surveys. It strikes me as odd that there is not more research on how people think.
This is, however, contrary to what Milton Friedman said in his Essays in Positive Economics, 1953 – that people should not be asked what they are thinking because they never can be truthful and never can explain. That thinking has dominated the economic profession for decades, looking only at actions when building the models. As a result of this, economists don’t look into minds of individuals.
A method of studying real estate bubbles is to listen to people. One thing I learned from these surveys is that many people were buying houses because of the bursting of the stock market bubble. This seems paradoxical. You might have expected that people after a stock market downturn would sell their homes to get money or that they would be depressed, and not willing to bid hard for new homes.
What happened was that people got fed up with the stock market and instead moved to real estate. People like houses because houses are visible and regarded as quite a safe investment.
However, the question remains: Do people tend to forget interest rate sensitivity when rates are very low? Why do people not consider that U.S. rates will go up in the foreseeable future?
– This is the big issue and partly a generational thing. Interest rates have been going down since the early 80’s. Younger people are just complacent about this, believing that interest rates always go down. Apart from that, there is a feeling of desperation in some areas. Los Angeles is an interesting example of this. People there seem to think that the real estate bubble will never end – or if it ends it will be at a much higher level than now.
These people worry that they can miss the chance of buying a house. They want to lock it in. They want to get the house and feel a sense of urgency. Many are borrowing very large amounts on flexible-rate mortgages because payments are affordable when interests rates are very low. They are not concerned about rising interest rates because they assume their incomes will be going up.
However, a lot can happen which people tend to forget. By the way, real interest rates are not really low in a historical perspective.
Buying a home is a very emotional decision, especially buying a home for the first time. Right now, the decision is what kind of house to buy. You could buy a depressing and affordable house, or a nicer one that will not be affordable when rates rise.
The importance of behavioral finance for financial markets is now widely accepted. However, a number of economists argue that behavioral finance now needs more support from psychological research.
What should be done?
– Much more can be done. I think we are just at the beginning. It is still at the frontier. The combination of economics and psychology is probably the most exciting area in the profession today. Mathematical economics has been dominating for some decades and has had an impressive development. But it has cut economics off from other sciences.
Meanwhile psychology, sociology. anthropology, political science and ecology are gaining momentum as factors driving economic behavior. These disciplines have to be combined with economics which is not easy to do. Academia needs more professional interaction. Especially professors have to promote this.
Det här inlägget postades den November 6th, 2013, 09:41 och fylls under Emerging markets, generally