1 00:00:03,240 --> 00:00:08,559 Speaker 1: This is Masters in Business with Barry Ridholds on Bloomberg Radio. Alright, 2 00:00:08,600 --> 00:00:11,039 Speaker 1: this week we have a very special guest. I'm really 3 00:00:11,080 --> 00:00:14,720 Speaker 1: excited about this, although I'm always really excited about our 4 00:00:15,160 --> 00:00:19,759 Speaker 1: all of our guests. Uh Yale University professor Robert Schiller, 5 00:00:20,280 --> 00:00:25,840 Speaker 1: winner of the Nobel Prize for Economics. He is really 6 00:00:25,880 --> 00:00:30,880 Speaker 1: a fascinating and delightful guy. I'm a huge fan of 7 00:00:30,960 --> 00:00:37,320 Speaker 1: his work. I've been following his writings about markets, about bubbles, 8 00:00:37,360 --> 00:00:41,680 Speaker 1: about investor behavior for really a long time. You know, 9 00:00:42,240 --> 00:00:45,560 Speaker 1: early in my career, I became very interested in investor 10 00:00:45,600 --> 00:00:50,199 Speaker 1: behavior and the cognitive errors that people in general, but 11 00:00:50,360 --> 00:00:55,680 Speaker 1: specifically when we're making risk reward decisions and making bets 12 00:00:55,760 --> 00:00:58,880 Speaker 1: on on markets or bonds or stocks or what have you. 13 00:00:59,480 --> 00:01:04,920 Speaker 1: Those specific errors are quite fascinating. And when I began 14 00:01:05,280 --> 00:01:09,639 Speaker 1: exploring that area, not a lot of people were doing 15 00:01:09,760 --> 00:01:14,080 Speaker 1: serious academic research and writing about it. And and Bob 16 00:01:14,120 --> 00:01:18,400 Speaker 1: Schiller was really one of the first academics to say, hey, 17 00:01:18,440 --> 00:01:23,040 Speaker 1: the math doesn't add up. Markets maybe sort of kinda 18 00:01:23,319 --> 00:01:28,160 Speaker 1: a little efficient, but the numbers aren't there to justify 19 00:01:28,400 --> 00:01:32,120 Speaker 1: this belief that markets are perfectly efficient. In fact, when 20 00:01:32,120 --> 00:01:33,880 Speaker 1: you see the day to day and week to week 21 00:01:33,920 --> 00:01:38,920 Speaker 1: swings looked at against dividends, which are really the ultimate 22 00:01:39,000 --> 00:01:44,640 Speaker 1: payout of of future earnings. The numbers just completely destroy 23 00:01:44,720 --> 00:01:48,760 Speaker 1: the argument that that people are rational, markets are efficient, etcetera. 24 00:01:49,040 --> 00:01:53,600 Speaker 1: So he's really a fascinating guy, not what you would 25 00:01:53,640 --> 00:01:57,800 Speaker 1: expect from an academic. Uh, really down to earth. I've 26 00:01:57,800 --> 00:02:02,160 Speaker 1: been on a number of panels and in media appearances 27 00:02:02,200 --> 00:02:04,080 Speaker 1: with him, and I just always find him to be 28 00:02:04,840 --> 00:02:09,160 Speaker 1: charming and pleasant. I've given him numerous opportunities to throw 29 00:02:09,200 --> 00:02:12,360 Speaker 1: people under the bus, and he refuses to rise to 30 00:02:12,440 --> 00:02:16,120 Speaker 1: the bait each and every time. Uh. If you're familiar 31 00:02:16,160 --> 00:02:18,760 Speaker 1: with his track record, or if you're unfamiliar with his 32 00:02:18,800 --> 00:02:21,639 Speaker 1: track record, he's the guy who published the book A 33 00:02:21,720 --> 00:02:25,920 Speaker 1: Rational Xuberance early in two thousand pretty much marked the 34 00:02:26,040 --> 00:02:30,000 Speaker 1: very top of the market. As if that wasn't enough, 35 00:02:30,680 --> 00:02:34,160 Speaker 1: in two thousand five two thousand six, he warned that 36 00:02:35,440 --> 00:02:40,360 Speaker 1: housing was wildly overvalued and was due for a significant correction. 37 00:02:40,800 --> 00:02:43,600 Speaker 1: Oh and by the way, we should expect that correction 38 00:02:43,680 --> 00:02:48,440 Speaker 1: to have a real negative impact across the economy. He 39 00:02:48,520 --> 00:02:52,560 Speaker 1: was dead right about that, and today he sees markets 40 00:02:52,680 --> 00:02:57,440 Speaker 1: not as quite in bubble territory liked or as as 41 00:02:57,480 --> 00:03:00,680 Speaker 1: bubblicious as we saw housing was in two thousand five, 42 00:03:00,720 --> 00:03:03,840 Speaker 1: two thousand six. But he thinks markets are fairly valued 43 00:03:04,040 --> 00:03:06,200 Speaker 1: and that they could have a couple of years to 44 00:03:06,280 --> 00:03:10,720 Speaker 1: go before we start to run into real, um serious problems. 45 00:03:10,760 --> 00:03:16,440 Speaker 1: So really interesting guy, fascinating curriculum vitae. And still you 46 00:03:16,480 --> 00:03:18,919 Speaker 1: know he really just wants to be a professor. He 47 00:03:18,919 --> 00:03:21,680 Speaker 1: he teaches a class every day. He's been up in 48 00:03:21,680 --> 00:03:25,960 Speaker 1: New Haven at Yale for many years. Really sharp guy, 49 00:03:26,360 --> 00:03:31,720 Speaker 1: very fascinating discussion. Without further ado on my part, here's 50 00:03:31,720 --> 00:03:38,880 Speaker 1: our conversation with Bob Schiller. This is Masters in Business 51 00:03:38,960 --> 00:03:42,520 Speaker 1: with Barry Ridholts on Bloomberg Radio. Today. I have a 52 00:03:42,640 --> 00:03:47,520 Speaker 1: very special guest, our second Nobel Laureate uh Yale, Professor 53 00:03:47,640 --> 00:03:52,080 Speaker 1: Robert Schiller. If you don't know who Professor Schiller is, well, first, 54 00:03:52,360 --> 00:03:55,240 Speaker 1: shame on you. You should. And second, let me give 55 00:03:55,280 --> 00:03:59,200 Speaker 1: you just a brief background on the professor. You've been 56 00:03:59,200 --> 00:04:03,800 Speaker 1: teaching economics at Yale for thirty two quite a while. 57 00:04:04,320 --> 00:04:06,800 Speaker 1: You've written a number of books. One of the most 58 00:04:06,840 --> 00:04:11,280 Speaker 1: famous books was called Irrational Exuberance, which came out in 59 00:04:11,320 --> 00:04:15,160 Speaker 1: the year two thousand, in which you had warned about 60 00:04:15,200 --> 00:04:20,000 Speaker 1: the coming dot com implosion. That wasn't the first time 61 00:04:20,080 --> 00:04:22,440 Speaker 1: you had warned people that things were going to be 62 00:04:22,480 --> 00:04:27,000 Speaker 1: a problem. In two thousand and six, you were describing 63 00:04:27,120 --> 00:04:30,120 Speaker 1: the subprime problem and what it was gonna do for 64 00:04:30,200 --> 00:04:33,840 Speaker 1: housing and said, hey, we're looking at something we haven't 65 00:04:33,880 --> 00:04:38,200 Speaker 1: seen in many, many decades, big drop in housing prices 66 00:04:38,279 --> 00:04:42,000 Speaker 1: and loan behold. I think nationally we saw a thirty 67 00:04:42,000 --> 00:04:45,719 Speaker 1: three percent drop. You're the co creator of the Case 68 00:04:45,760 --> 00:04:51,599 Speaker 1: Schiller Housing Index, with which also measures house prices in 69 00:04:51,680 --> 00:04:56,920 Speaker 1: both cities and metropolitan regions. And and basically you were 70 00:04:56,960 --> 00:05:01,680 Speaker 1: the first to really quantify changes in home prices nationally 71 00:05:02,320 --> 00:05:06,360 Speaker 1: and internationally. And then last year, for all the work 72 00:05:06,400 --> 00:05:10,279 Speaker 1: you've done on behavioral economics and finance, you were the 73 00:05:10,320 --> 00:05:15,880 Speaker 1: recipient of the Nobel Prize, which you actually shared with 74 00:05:15,960 --> 00:05:19,119 Speaker 1: someone else from Yale or am I to know? The 75 00:05:19,160 --> 00:05:23,560 Speaker 1: other two were both from Chicago, Eugene Farmer and Lars 76 00:05:23,600 --> 00:05:27,880 Speaker 1: Peter Hansen. And and we'll save the whole wonky argument 77 00:05:27,920 --> 00:05:32,600 Speaker 1: about Fama versus Schiller in terms of our market sufficient 78 00:05:32,800 --> 00:05:36,160 Speaker 1: or not for a later segment. But Professor Schiller, well, 79 00:05:36,200 --> 00:05:40,560 Speaker 1: welcome to the show. My pleasure. So let's let's get 80 00:05:40,560 --> 00:05:44,560 Speaker 1: into the background of this. You've found your way into 81 00:05:44,640 --> 00:05:49,120 Speaker 1: a field which has become known as behavioral economics or 82 00:05:49,200 --> 00:05:53,320 Speaker 1: behavioral finance, before anyone even knew there was such a thing. 83 00:05:53,800 --> 00:05:56,920 Speaker 1: How did how did that come about? Well? I never know. 84 00:05:57,640 --> 00:06:02,880 Speaker 1: It's uh apparently because actually there are antecedents. I had 85 00:06:02,880 --> 00:06:06,080 Speaker 1: a professor at Michigan, George Katona. He was the guy 86 00:06:06,120 --> 00:06:10,400 Speaker 1: who created the Michigan consumer sentiment indexes, which are still 87 00:06:10,480 --> 00:06:13,080 Speaker 1: widely exited. And when did he create that? That was 88 00:06:13,200 --> 00:06:16,640 Speaker 1: quite a way. Oh yeah, he did his first sentiment 89 00:06:16,680 --> 00:06:20,240 Speaker 1: index in the nineteen fifties, So that was an early 90 00:06:20,279 --> 00:06:24,280 Speaker 1: exposure on your side to consumer sentiment. But nobody had 91 00:06:24,279 --> 00:06:28,040 Speaker 1: ever taken that and really directly applied it to Yeah, 92 00:06:28,040 --> 00:06:31,840 Speaker 1: he was in the psych department and he was all 93 00:06:31,880 --> 00:06:34,280 Speaker 1: by himself. Yeah, I don't know who. It must have 94 00:06:34,320 --> 00:06:37,040 Speaker 1: been someone else, but but no one else was really saying, hey, 95 00:06:37,120 --> 00:06:40,599 Speaker 1: let's look at the psychology of consumers to see how 96 00:06:40,680 --> 00:06:44,560 Speaker 1: what they're feeling and saying effects their behavior in terms 97 00:06:44,600 --> 00:06:48,360 Speaker 1: of spending and retail sales. Well, there weren't academic so 98 00:06:48,480 --> 00:06:52,039 Speaker 1: there weren't scientifically there must have been people talking about 99 00:06:52,040 --> 00:06:56,000 Speaker 1: psychology they've always talked about it. But the idea of 100 00:06:56,160 --> 00:06:59,280 Speaker 1: systematized you know, it was in the early sixties that 101 00:06:59,600 --> 00:07:02,760 Speaker 1: the Chris tape came, so you could use a computer 102 00:07:03,279 --> 00:07:07,360 Speaker 1: and you could process an analysis of stock prices, and 103 00:07:07,440 --> 00:07:12,240 Speaker 1: that kind of dominated thought. From nineteen sixty two almost nine. 104 00:07:13,560 --> 00:07:16,720 Speaker 1: They were finding that markets looked efficient. That was the 105 00:07:16,880 --> 00:07:19,720 Speaker 1: general tenor so. The whole idea that you could beat 106 00:07:19,760 --> 00:07:23,880 Speaker 1: the market, at least among academic types was considered discredited, 107 00:07:23,960 --> 00:07:26,840 Speaker 1: and so they weren't interested in psychology. There was no 108 00:07:27,000 --> 00:07:30,880 Speaker 1: psychology in this frame of thinking in the markets. And 109 00:07:30,960 --> 00:07:35,080 Speaker 1: yet when you look at the behavior of markets in actuality, 110 00:07:35,760 --> 00:07:39,200 Speaker 1: you have giant booms, you have bubbles, you have terrible 111 00:07:39,320 --> 00:07:43,720 Speaker 1: busts and crashes. You know, in seven the Dow lost 112 00:07:44,800 --> 00:07:48,720 Speaker 1: in one day. How efficient is a market? Then on 113 00:07:48,720 --> 00:07:50,480 Speaker 1: one day it's worth a hundred and then the next 114 00:07:50,560 --> 00:07:55,000 Speaker 1: day it's worth seventy seven, and both of those prices 115 00:07:55,040 --> 00:07:59,560 Speaker 1: are actually valid according to that sort of approach. How 116 00:07:59,560 --> 00:08:02,640 Speaker 1: does that make any sense? Well, you're referring to October 117 00:08:02,720 --> 00:08:07,040 Speaker 1: nine seven, when, as you say, the market made a 118 00:08:07,120 --> 00:08:12,960 Speaker 1: historic one day dropped and efficient markets. People would say 119 00:08:13,080 --> 00:08:16,280 Speaker 1: there must have been news that the problem is, no 120 00:08:16,320 --> 00:08:18,880 Speaker 1: one could come up with what the news was, and 121 00:08:18,960 --> 00:08:22,520 Speaker 1: so it started to sound funny. I did a study 122 00:08:22,520 --> 00:08:25,400 Speaker 1: of that event, but my way of studying it was 123 00:08:25,560 --> 00:08:30,120 Speaker 1: totally out of fashion. I did a questionnaire survey. Now 124 00:08:30,640 --> 00:08:35,600 Speaker 1: most no one else did that until later there was 125 00:08:35,640 --> 00:08:39,360 Speaker 1: this Brady Commission that did a survey. But you know, 126 00:08:39,440 --> 00:08:41,680 Speaker 1: the economists have gotten into the frame of mind that 127 00:08:41,960 --> 00:08:44,640 Speaker 1: there's no point in asking people why they bought or 128 00:08:44,679 --> 00:08:49,320 Speaker 1: sold because they lie. They make up stories, nationalized, they 129 00:08:49,360 --> 00:08:52,360 Speaker 1: lie to themselves. They don't know they're lying. This looks 130 00:08:52,400 --> 00:08:56,280 Speaker 1: like psychology, which is just disreputable. In the econ department, 131 00:08:56,920 --> 00:08:59,520 Speaker 1: I found that whenever you talked to people who were 132 00:08:59,559 --> 00:09:05,640 Speaker 1: bullet the question to always ask is, so what's your 133 00:09:05,840 --> 00:09:09,040 Speaker 1: investment posture? Oh, I'm fully invested, I'm long my own 134 00:09:09,080 --> 00:09:11,920 Speaker 1: lots of equities. And whenever you talk to people who 135 00:09:11,920 --> 00:09:16,319 Speaker 1: are bearish, it's always, oh, I'm out of stocks. I 136 00:09:16,400 --> 00:09:19,480 Speaker 1: don't want to have any exposure. It seems that the 137 00:09:19,520 --> 00:09:25,600 Speaker 1: way we define ourselves is rationalizing the prior decision, right. 138 00:09:25,840 --> 00:09:30,679 Speaker 1: That's called cognitive dissonance. That's so so we end up 139 00:09:30,760 --> 00:09:34,400 Speaker 1: with participants in markets who don't really seem to know 140 00:09:35,120 --> 00:09:39,200 Speaker 1: why they're doing what they're doing, but they're constantly rationalizing 141 00:09:40,000 --> 00:09:43,640 Speaker 1: uh that process to themselves. Right. Well, they these are 142 00:09:43,960 --> 00:09:49,240 Speaker 1: ring bells that psychologists have explored. So justification bias, which 143 00:09:49,240 --> 00:09:53,600 Speaker 1: is something that Knomen and others have studied, people uh 144 00:09:53,840 --> 00:09:57,840 Speaker 1: will feel they have to justify things there their self 145 00:09:57,880 --> 00:10:01,880 Speaker 1: respect even when they're justifying to them selves, and so 146 00:10:02,040 --> 00:10:07,920 Speaker 1: they tend to follow naive rules and they tend to 147 00:10:07,920 --> 00:10:09,880 Speaker 1: do the same thing that they've done before. As you 148 00:10:09,920 --> 00:10:13,280 Speaker 1: were saying today, my special guest in the studio is 149 00:10:13,400 --> 00:10:17,400 Speaker 1: Yale Professor of Economics Robert Schiller, winner last year of 150 00:10:17,480 --> 00:10:23,240 Speaker 1: the uh Rivsking Award for Risk Bank Award. It's this 151 00:10:23,400 --> 00:10:26,559 Speaker 1: technically not a Nobel for economics, but it comes from 152 00:10:26,600 --> 00:10:29,679 Speaker 1: the right. They don't make up their mind what to 153 00:10:29,760 --> 00:10:32,360 Speaker 1: call it, so all these different names that they use 154 00:10:32,440 --> 00:10:34,560 Speaker 1: it at the Nobel Foundation, So we could just go 155 00:10:34,720 --> 00:10:37,520 Speaker 1: with the Nobel Prize in Economics and yeah, that's that's 156 00:10:37,520 --> 00:10:41,280 Speaker 1: good enough. Shorthand. So the segment, this segment, what I 157 00:10:41,360 --> 00:10:44,880 Speaker 1: really want to discuss with you are the booms and 158 00:10:45,000 --> 00:10:49,120 Speaker 1: busts that it seems every market has gone through. We 159 00:10:49,160 --> 00:10:51,280 Speaker 1: had the dot com boom and bust, We had the 160 00:10:51,320 --> 00:10:55,040 Speaker 1: housing boom and bust. Lately, gold seems to be in 161 00:10:55,040 --> 00:10:58,280 Speaker 1: the midst of imploding as we're speaking. It's in the 162 00:10:58,280 --> 00:11:01,839 Speaker 1: eleven hundreds. It was nineteen hundred dollars not too long ago. 163 00:11:01,960 --> 00:11:07,080 Speaker 1: It's lost about its value. Is this the fate of humanity? 164 00:11:07,080 --> 00:11:10,160 Speaker 1: That there are always gonna be booms and busts, that 165 00:11:10,240 --> 00:11:15,719 Speaker 1: were always going to have bubbles? Ah, good point, I 166 00:11:16,400 --> 00:11:19,600 Speaker 1: h Let me say in my Nobel lecture which I 167 00:11:19,679 --> 00:11:22,079 Speaker 1: gave on that occasion, I tried to point out that 168 00:11:22,640 --> 00:11:27,120 Speaker 1: efficient markets is actually the theory actually has some value. 169 00:11:27,559 --> 00:11:30,880 Speaker 1: It's a half truth. So let's not go to extreme right, 170 00:11:31,040 --> 00:11:33,360 Speaker 1: Maybe it would be more fun if we went to extremes, 171 00:11:33,400 --> 00:11:38,280 Speaker 1: but price movements and markets often do reflect real news. 172 00:11:38,840 --> 00:11:41,920 Speaker 1: The point is that sometimes they don't, and so it's 173 00:11:41,960 --> 00:11:45,720 Speaker 1: not the pure efficient markets theory is not quite right. 174 00:11:46,040 --> 00:11:49,640 Speaker 1: So when we look back at this past decade, we've had, 175 00:11:50,080 --> 00:11:52,880 Speaker 1: we had a dot, We've had it seems every few 176 00:11:52,960 --> 00:11:57,440 Speaker 1: years we've had a major bubble. Why is it that 177 00:11:57,640 --> 00:12:04,000 Speaker 1: human beings succumbed to this sort of activity in capital markets? Well, 178 00:12:04,040 --> 00:12:07,079 Speaker 1: people succumbed to this sort of thing outside of capital 179 00:12:07,160 --> 00:12:11,800 Speaker 1: markets too. It's called fashions. And fads. Henry Fielding said, 180 00:12:11,960 --> 00:12:15,280 Speaker 1: fashion is the great governor of this world. It's true. 181 00:12:15,280 --> 00:12:17,880 Speaker 1: We're you know, so much like the way we're dressed 182 00:12:17,920 --> 00:12:24,040 Speaker 1: and the laser your suit and tie. Yeah, I look 183 00:12:24,800 --> 00:12:30,400 Speaker 1: very conventional here, right, it's all dictated gray flannel overcoat 184 00:12:31,040 --> 00:12:34,200 Speaker 1: and this is the sort of stuff. So because so 185 00:12:34,200 --> 00:12:37,760 Speaker 1: in other words, it's the crowd. It's because peer pressure. 186 00:12:38,240 --> 00:12:41,400 Speaker 1: Everybody else dresses this way. So is that how the 187 00:12:41,720 --> 00:12:44,560 Speaker 1: investors behave? Yeah, and no, there's no problem in doing 188 00:12:44,600 --> 00:12:48,040 Speaker 1: what everyone else does in dress, doesn't matter. But if 189 00:12:48,080 --> 00:12:50,920 Speaker 1: you do what everyone else does in investing, you'll just 190 00:12:50,960 --> 00:12:54,040 Speaker 1: have the market return if you're lucky. Some of the 191 00:12:54,040 --> 00:12:58,440 Speaker 1: studies we've seen have said that the average investor isn't 192 00:12:58,440 --> 00:13:02,120 Speaker 1: even forget alpha, they're not even generating beta, they're not 193 00:13:02,160 --> 00:13:07,080 Speaker 1: even obtaining market returns. So how how significant is investor 194 00:13:07,160 --> 00:13:11,120 Speaker 1: behavior to those sorts of bad returns. Well, then people 195 00:13:11,120 --> 00:13:16,520 Speaker 1: are vulnerable to sales tactics, and they might buy into 196 00:13:16,600 --> 00:13:20,319 Speaker 1: some investment fund that has a very high management fee, 197 00:13:21,280 --> 00:13:26,000 Speaker 1: uh which they were sold on it, and they fall 198 00:13:26,120 --> 00:13:29,440 Speaker 1: victim to tricks like incubator funds that you know, you 199 00:13:29,559 --> 00:13:32,040 Speaker 1: try to start a number of funds and one of 200 00:13:32,040 --> 00:13:34,400 Speaker 1: them is going to do well by chance, and you 201 00:13:34,440 --> 00:13:37,080 Speaker 1: start promoting that one. There was an old joke many 202 00:13:37,160 --> 00:13:39,959 Speaker 1: years ago that you could send out the back in 203 00:13:40,000 --> 00:13:44,000 Speaker 1: the day when newsletter writers were popular. You send out 204 00:13:44,040 --> 00:13:47,440 Speaker 1: ten thousand pieces of mail, and you pick a stock, 205 00:13:47,520 --> 00:13:50,480 Speaker 1: and one piece of mail says, this stock is the 206 00:13:50,559 --> 00:13:53,880 Speaker 1: greatest things, and slice bread. It's our next pick. You 207 00:13:53,920 --> 00:13:56,520 Speaker 1: have to own it. And the other five thousand pieces 208 00:13:56,520 --> 00:13:59,439 Speaker 1: of mail say this is a terrible stock. You want 209 00:13:59,480 --> 00:14:02,400 Speaker 1: nothing to do with it. And then whichever half is right, 210 00:14:02,559 --> 00:14:05,000 Speaker 1: that's how you market the next the next letter two, 211 00:14:05,320 --> 00:14:07,640 Speaker 1: and people like, well, they were so right the last time, 212 00:14:08,160 --> 00:14:12,400 Speaker 1: So it's very easy for us to be fooled. I'm 213 00:14:12,440 --> 00:14:16,960 Speaker 1: speaking with Yale professor Robert Schiller discussing booms and bus 214 00:14:17,800 --> 00:14:21,520 Speaker 1: Let's talk a little bit about irrational exuberance, a phrase 215 00:14:21,680 --> 00:14:27,120 Speaker 1: that was made famous in by Alan Greenspan, which I 216 00:14:27,160 --> 00:14:30,440 Speaker 1: think many of our listeners will be familiar with. Green 217 00:14:30,520 --> 00:14:34,200 Speaker 1: Spans irrational exuberant speech. What I bet most people don't 218 00:14:34,280 --> 00:14:38,240 Speaker 1: know is that you're the guy who briefed him before 219 00:14:38,280 --> 00:14:42,640 Speaker 1: that speech, and that was essentially your phrase that he 220 00:14:42,680 --> 00:14:45,880 Speaker 1: incorporated into his um his speech. Is that is that 221 00:14:45,960 --> 00:14:48,880 Speaker 1: more or less accurate. Well, I know that. I I've 222 00:14:49,200 --> 00:14:52,320 Speaker 1: met with the whole Federal Reserve Board with my co 223 00:14:52,480 --> 00:14:55,840 Speaker 1: author John Campbell three days before that speech, and we 224 00:14:55,840 --> 00:14:59,360 Speaker 1: were saying the market was the irrational, But I don't 225 00:14:59,440 --> 00:15:02,880 Speaker 1: think I probably used the word irrational exurbance. So that 226 00:15:02,960 --> 00:15:05,680 Speaker 1: was his own phrase. Well, it wasn't exactly his own. 227 00:15:05,760 --> 00:15:08,640 Speaker 1: It was already around but not used. But we know 228 00:15:08,720 --> 00:15:12,120 Speaker 1: what really made it famous was not the fact that 229 00:15:12,160 --> 00:15:14,480 Speaker 1: he used it. It was that markets all over the 230 00:15:14,520 --> 00:15:18,640 Speaker 1: world dropped sharply as soon as he I believe the 231 00:15:18,880 --> 00:15:22,040 Speaker 1: Japanese markets were open when he gave his speech, the 232 00:15:22,120 --> 00:15:25,840 Speaker 1: U S markets were closed. They just dropped immediately, and people, 233 00:15:26,040 --> 00:15:29,360 Speaker 1: what's going on here? Why would the Japanese market Well, 234 00:15:29,400 --> 00:15:31,760 Speaker 1: you know, people in Japan were listening to his speech 235 00:15:32,240 --> 00:15:34,720 Speaker 1: and they must have put it out on the news, 236 00:15:34,800 --> 00:15:38,040 Speaker 1: and that was the basis of the full and the nick. Yeah, 237 00:15:38,520 --> 00:15:41,320 Speaker 1: it was so absurd that he just uttered these words 238 00:15:41,400 --> 00:15:44,800 Speaker 1: irrational and he mentioned Japan in the same sentence. And 239 00:15:45,040 --> 00:15:49,200 Speaker 1: now everybody forgets back in the late nineties, green Span 240 00:15:49,440 --> 00:15:52,800 Speaker 1: was the man. He was moving markets. Since then, we've 241 00:15:52,840 --> 00:15:56,320 Speaker 1: had a little bit of reputational damaged thanks to the 242 00:15:56,360 --> 00:16:00,000 Speaker 1: most recent financial crisis. Today, my guest in the studio 243 00:16:00,000 --> 00:16:03,120 Speaker 1: OH is Professor Robert Schiller of Yale, winner of the 244 00:16:03,160 --> 00:16:08,520 Speaker 1: Nobel Prize in Economics. In and earlier we were discussing housing. 245 00:16:08,600 --> 00:16:13,200 Speaker 1: Let's have a little more detailed conversation about that. So 246 00:16:13,520 --> 00:16:16,960 Speaker 1: you were the co creator of the Case Shiller Housing Index. 247 00:16:17,480 --> 00:16:21,880 Speaker 1: Prior to that, there really wasn't a reliable set of 248 00:16:23,080 --> 00:16:27,600 Speaker 1: national data that compiles all the different metropolitan and regional 249 00:16:28,120 --> 00:16:31,720 Speaker 1: housing markets. Is that? Is that correct? We had? Well, 250 00:16:31,760 --> 00:16:35,720 Speaker 1: it's interesting there were no price indexes at all until 251 00:16:35,760 --> 00:16:39,240 Speaker 1: around the nineteen sixties. Strange because people had the Dow 252 00:16:39,440 --> 00:16:43,400 Speaker 1: and there was none. Then the National Association of Realtory 253 00:16:43,400 --> 00:16:46,080 Speaker 1: I think they had a different name. Then UH created 254 00:16:46,120 --> 00:16:48,520 Speaker 1: the Media and Home Price and they published it. It 255 00:16:48,600 --> 00:16:50,760 Speaker 1: was kind of intermittent. Some months they'd missed and it 256 00:16:50,840 --> 00:16:53,240 Speaker 1: was very jumpy. Then the sense, I don't know if 257 00:16:53,240 --> 00:16:55,360 Speaker 1: you wanted all that. There was a new home price 258 00:16:55,680 --> 00:17:00,360 Speaker 1: index that Census published, but it didn't track existing homes. 259 00:17:00,560 --> 00:17:03,600 Speaker 1: It wasn't you know what what we Case and I developed. 260 00:17:03,960 --> 00:17:09,080 Speaker 1: We wanted to at Wellesley College. We wanted a tradeable index. 261 00:17:09,119 --> 00:17:12,639 Speaker 1: We believed in markets for indexes so we wanted an 262 00:17:12,640 --> 00:17:16,439 Speaker 1: index that represented the investment value of a existence, so 263 00:17:16,560 --> 00:17:19,680 Speaker 1: to repeat sales indere like a stock market index. It 264 00:17:20,200 --> 00:17:23,960 Speaker 1: shows the changes in the index reflect changes in prices 265 00:17:24,000 --> 00:17:27,520 Speaker 1: of homes, not the change in the mix of homes 266 00:17:27,520 --> 00:17:30,359 Speaker 1: that are sold. Right, So every year the NR every 267 00:17:30,400 --> 00:17:33,320 Speaker 1: month the NUR data. That's a different set of houses sold, 268 00:17:33,480 --> 00:17:36,760 Speaker 1: different every month. You guys try to focus on a 269 00:17:36,880 --> 00:17:40,320 Speaker 1: region and make it look more like you're trading a 270 00:17:40,359 --> 00:17:44,919 Speaker 1: given house, given group of houses. So we were the 271 00:17:45,000 --> 00:17:49,960 Speaker 1: first to publish a home price index that is like 272 00:17:50,000 --> 00:17:52,560 Speaker 1: a stock price index. And that's been around for how 273 00:17:52,600 --> 00:17:56,640 Speaker 1: long now, since the late eighties, and it was eventually 274 00:17:56,640 --> 00:18:00,159 Speaker 1: sold to S and P. It's complicated. We so that 275 00:18:00,200 --> 00:18:02,880 Speaker 1: the five service service, so that the core logic core 276 00:18:02,960 --> 00:18:05,800 Speaker 1: Logic has a deal with SMP. It's kind of, you know, 277 00:18:05,880 --> 00:18:09,520 Speaker 1: the way the world works, never never simple. So then 278 00:18:09,720 --> 00:18:13,960 Speaker 1: in two thousand three you had an interesting paper at 279 00:18:14,119 --> 00:18:16,800 Speaker 1: I think it was Brookings. Is that right? Is there 280 00:18:16,840 --> 00:18:19,760 Speaker 1: a bubble brewing in the housing market? So tell us 281 00:18:19,800 --> 00:18:22,560 Speaker 1: a little bit about that. What did you see an 282 00:18:22,560 --> 00:18:27,040 Speaker 1: oh three, long before anybody else was talking about um 283 00:18:27,080 --> 00:18:30,639 Speaker 1: housing bubbles? What caught your eye that made you author 284 00:18:30,680 --> 00:18:34,960 Speaker 1: a paper three years before the market peaked and said, hey, 285 00:18:35,000 --> 00:18:39,479 Speaker 1: this is a potential problem. Well, one thing is, we 286 00:18:39,520 --> 00:18:43,840 Speaker 1: did a questionnaire survey of homebuyers and asked them what 287 00:18:44,000 --> 00:18:46,760 Speaker 1: they thought home prices would do for the next ten years, 288 00:18:47,720 --> 00:18:53,560 Speaker 1: and we got extravagantly high expectations. People thought, uh, something 289 00:18:53,600 --> 00:18:57,639 Speaker 1: like ten percent a year increasing for ten years, so 290 00:18:57,720 --> 00:19:01,520 Speaker 1: the houses will double every seven or so after already 291 00:19:01,560 --> 00:19:06,840 Speaker 1: reaching record high levels. Uh and uh. We we asked 292 00:19:06,840 --> 00:19:10,359 Speaker 1: about you know, general people thought housing was the great investment. 293 00:19:10,800 --> 00:19:13,520 Speaker 1: They were a little annoyed with the stock market in 294 00:19:13,560 --> 00:19:16,159 Speaker 1: two thousand three because they had bottomed out and they 295 00:19:16,240 --> 00:19:19,200 Speaker 1: had a bubble burst, and they would write things on 296 00:19:19,280 --> 00:19:22,680 Speaker 1: the questionnaires they right. I am really angry with my broker. 297 00:19:22,760 --> 00:19:25,320 Speaker 1: He he told me all these finance guys are a 298 00:19:25,359 --> 00:19:27,879 Speaker 1: bunch of crooks. I want to buy a house something 299 00:19:27,880 --> 00:19:30,520 Speaker 1: that I can see and believe. I know it's real. 300 00:19:30,680 --> 00:19:33,320 Speaker 1: I'm sitting in it, I can watch it all the time. 301 00:19:33,920 --> 00:19:36,760 Speaker 1: And that just became an attitude that drove, and then 302 00:19:36,840 --> 00:19:41,840 Speaker 1: home prices got increased that record pace. The price to 303 00:19:41,920 --> 00:19:46,040 Speaker 1: rent ratio went up, the price too, personal income racial 304 00:19:46,080 --> 00:19:50,200 Speaker 1: went up to record levels. Uh. Price to GDP home 305 00:19:50,280 --> 00:19:54,359 Speaker 1: home valuation GDP. All three metrics had just gone three 306 00:19:54,400 --> 00:19:58,840 Speaker 1: standard deviations away from the historically they went completely vertical. 307 00:19:59,359 --> 00:20:01,720 Speaker 1: And one of the studies that you had written, and 308 00:20:01,720 --> 00:20:04,320 Speaker 1: I don't remember if it was the three study, said 309 00:20:04,359 --> 00:20:07,320 Speaker 1: that over a hundred years. Here's something that people are 310 00:20:07,359 --> 00:20:10,960 Speaker 1: always astonished when I tell them this. How much of 311 00:20:11,040 --> 00:20:16,480 Speaker 1: a return has a home generated net of inflation over 312 00:20:16,520 --> 00:20:19,520 Speaker 1: the past century. What are the numbers? Well, this is 313 00:20:19,520 --> 00:20:22,280 Speaker 1: what I published in two thousand five in the second 314 00:20:22,400 --> 00:20:27,359 Speaker 1: edition of Irrational Exuberance. In real terms from eighteen ninety 315 00:20:27,560 --> 00:20:32,440 Speaker 1: to nine, there was almost no change in real home prices. So, 316 00:20:32,480 --> 00:20:35,480 Speaker 1: in other words, after once you back out inflation, home 317 00:20:35,560 --> 00:20:39,480 Speaker 1: prices were flat for a century century for a century. 318 00:20:39,520 --> 00:20:43,000 Speaker 1: Now that does that include the tax real estate taxes 319 00:20:43,040 --> 00:20:46,520 Speaker 1: you pay the maintenance. So effectively, all of us who 320 00:20:46,560 --> 00:20:48,800 Speaker 1: have big houses that we pay a lot of maintenance 321 00:20:48,800 --> 00:20:52,399 Speaker 1: and costs for this is a money loser unless you 322 00:20:52,560 --> 00:20:55,080 Speaker 1: like the house. Yeah, if you got to live somewhere. 323 00:20:55,400 --> 00:20:57,520 Speaker 1: For a lot of people, it's a form of force 324 00:20:57,560 --> 00:21:00,560 Speaker 1: savings because they have to pay their more page down 325 00:21:00,840 --> 00:21:04,520 Speaker 1: each month. And if they are not irrational. When it 326 00:21:04,560 --> 00:21:08,240 Speaker 1: comes to home equity loans, thirty years later, they have 327 00:21:08,320 --> 00:21:10,680 Speaker 1: a house and they have no obligation. That's another thing 328 00:21:10,720 --> 00:21:13,120 Speaker 1: that was happening during the bubble. There were these home 329 00:21:13,160 --> 00:21:17,840 Speaker 1: equity loans were proliferating. People were borrowing against How is 330 00:21:17,880 --> 00:21:20,920 Speaker 1: it they buy a second house, some of them using 331 00:21:21,000 --> 00:21:24,240 Speaker 1: the first houses as collateral. I'm Barry rid Helps. You're 332 00:21:24,240 --> 00:21:27,320 Speaker 1: listening to Masters in Business on Bloomberg Radio. Our guest 333 00:21:27,400 --> 00:21:31,080 Speaker 1: today is the great Robert Chiller of Yale University, winner 334 00:21:31,119 --> 00:21:38,040 Speaker 1: of the Prize in Economics, creator of the Case Schiller Index, 335 00:21:38,200 --> 00:21:41,760 Speaker 1: creator of the Cape measure, which we'll get into, and 336 00:21:42,600 --> 00:21:47,720 Speaker 1: relentless um popper of bubbles. You've been pretty good identifying 337 00:21:48,440 --> 00:21:50,399 Speaker 1: when markets are in a bubble. You did it in 338 00:21:50,440 --> 00:21:53,040 Speaker 1: two thousand with the dot coms, you did it in 339 00:21:53,160 --> 00:21:56,240 Speaker 1: oh six with housing. What do we see as a 340 00:21:56,280 --> 00:21:59,239 Speaker 1: bubble today? What? What's got You have to come up 341 00:21:59,280 --> 00:22:02,119 Speaker 1: with another one? Well, I don't know. The stock market 342 00:22:02,200 --> 00:22:06,080 Speaker 1: looks highly priced, the bond market looks highly priced. The 343 00:22:06,119 --> 00:22:10,040 Speaker 1: housing market is going up. Um, these are good times 344 00:22:10,040 --> 00:22:13,600 Speaker 1: for booms. So this is a boom and the question 345 00:22:13,600 --> 00:22:16,400 Speaker 1: has win will it end? I wish I were better 346 00:22:16,440 --> 00:22:19,439 Speaker 1: at doing that. You know, I don't get the sense 347 00:22:19,520 --> 00:22:22,760 Speaker 1: that you perceive the market now. I think we will 348 00:22:23,119 --> 00:22:27,400 Speaker 1: agree stocks are at least fully valued, if not pricing. 349 00:22:28,040 --> 00:22:31,200 Speaker 1: Bonds are pretty fully valued if not pricing. I don't 350 00:22:31,200 --> 00:22:33,840 Speaker 1: know if houses I would not highly priced, but not 351 00:22:34,040 --> 00:22:36,160 Speaker 1: that's where I was going going They have been going well, 352 00:22:36,240 --> 00:22:38,680 Speaker 1: maybe not in the last few months. But I don't 353 00:22:38,760 --> 00:22:43,760 Speaker 1: sense the same sort of warning from you today in 354 00:22:45,760 --> 00:22:47,879 Speaker 1: that I heard from you in two thousand six about 355 00:22:47,920 --> 00:22:52,840 Speaker 1: housing or two thousand about stocks. This feels like so 356 00:22:52,960 --> 00:22:56,719 Speaker 1: we still have We know that these cycles always end badly. 357 00:22:56,760 --> 00:23:00,360 Speaker 1: We know there's always a bear market down the road, 358 00:23:00,760 --> 00:23:04,840 Speaker 1: but it seems like you're saying this could run a 359 00:23:04,880 --> 00:23:08,160 Speaker 1: few more years. So we're not at the level where, 360 00:23:08,240 --> 00:23:11,560 Speaker 1: oh my god, this is crazy. It's really Hey, things 361 00:23:11,560 --> 00:23:15,200 Speaker 1: are a little a little pricey. That doesn't mean they 362 00:23:15,240 --> 00:23:18,400 Speaker 1: can't get even more pricey. I really wish I could. 363 00:23:18,440 --> 00:23:21,320 Speaker 1: I keep trying to predict turning points, huh, And I've 364 00:23:21,320 --> 00:23:24,040 Speaker 1: been doing questionnaire surveys. You can find them on our website. 365 00:23:24,080 --> 00:23:26,840 Speaker 1: I give these away. The problem is that it just 366 00:23:26,960 --> 00:23:30,840 Speaker 1: can't make any sense out of them. I'm peeping to try. 367 00:23:30,920 --> 00:23:33,760 Speaker 1: Maybe I'll have I'll share when we're done, I'll share 368 00:23:34,000 --> 00:23:36,320 Speaker 1: some sense out of them. We we figured out the secret. 369 00:23:36,320 --> 00:23:39,040 Speaker 1: I'll share with you later. It's a quantitative trick. I 370 00:23:39,040 --> 00:23:41,600 Speaker 1: don't want to say it over the radio, but i'll 371 00:23:41,920 --> 00:23:44,800 Speaker 1: that'll be the next, the next Nobel. It's a simple 372 00:23:44,840 --> 00:23:48,480 Speaker 1: moving average, and that's usually the um. So let's talk 373 00:23:48,480 --> 00:23:50,960 Speaker 1: a little bit about Since we mentioned the Nobel, let's 374 00:23:50,960 --> 00:23:54,440 Speaker 1: talk about you and professor Fama. He's at your Yale, 375 00:23:54,840 --> 00:23:59,480 Speaker 1: he's at Chicago. I always thought that you guys had 376 00:23:59,560 --> 00:24:06,320 Speaker 1: too very different philosophies, and I thought your philosophy complimented his. 377 00:24:06,880 --> 00:24:09,200 Speaker 1: So let me just set this up in a nutshell. 378 00:24:10,200 --> 00:24:14,840 Speaker 1: Eugene Fama essentially says markets are, if not perfectly efficient, 379 00:24:14,920 --> 00:24:17,840 Speaker 1: then very efficient. That price and then what that means 380 00:24:17,840 --> 00:24:22,120 Speaker 1: in English is prices reflect all the available knowledge that's 381 00:24:22,160 --> 00:24:25,760 Speaker 1: out there, and so don't even try to beat the market. 382 00:24:26,840 --> 00:24:30,320 Speaker 1: It's almost impossible. You're better off just buying a passive 383 00:24:30,359 --> 00:24:35,160 Speaker 1: index and and forgetting about it. And Fama famously inspired 384 00:24:35,440 --> 00:24:38,679 Speaker 1: John Bogel, who went on to form Vanguard, which is 385 00:24:38,720 --> 00:24:43,000 Speaker 1: now managing three trillion dollars, of which two trillion is 386 00:24:43,040 --> 00:24:48,400 Speaker 1: in all passive indexes. So as an academic, my experience 387 00:24:48,400 --> 00:24:53,280 Speaker 1: has been most academics don't necessarily disagree with that as 388 00:24:53,280 --> 00:24:59,600 Speaker 1: an investment strategy. Is that a fair statement brought passive intentions? Yeah, 389 00:24:59,600 --> 00:25:02,879 Speaker 1: it's a question of degree. If you're talking to someone 390 00:25:03,000 --> 00:25:07,119 Speaker 1: who is not really likely to be that interested or 391 00:25:07,200 --> 00:25:10,800 Speaker 1: attentive to what he or she is doing, of course 392 00:25:10,840 --> 00:25:12,879 Speaker 1: you don't tell them to try to beat the market. 393 00:25:12,920 --> 00:25:16,720 Speaker 1: It's a it's a game that smart people can beat on, 394 00:25:16,880 --> 00:25:19,000 Speaker 1: and so you're not gonna win. It's like, don't go 395 00:25:19,040 --> 00:25:22,240 Speaker 1: into the gambling casino and play poker with your life 396 00:25:22,280 --> 00:25:26,920 Speaker 1: savings either to lose. So uh. But I think the 397 00:25:27,480 --> 00:25:30,560 Speaker 1: other question is whether some people who try hard and 398 00:25:30,560 --> 00:25:34,359 Speaker 1: who are smart and organized, whether they can beat the market. 399 00:25:34,560 --> 00:25:38,600 Speaker 1: And I think the answer is yes, although maybe not 400 00:25:38,800 --> 00:25:42,400 Speaker 1: as dramatically as you hoped, but yes, they're very rare, 401 00:25:42,520 --> 00:25:46,440 Speaker 1: the warm buffets of the world and the dramatic right, 402 00:25:47,040 --> 00:25:50,760 Speaker 1: the guys who have have put up market beating them. Now, 403 00:25:50,800 --> 00:25:55,040 Speaker 1: some of the efficient market people say, well, that's just random. 404 00:25:55,119 --> 00:25:56,800 Speaker 1: But I don't. I don't get the sense you agree 405 00:25:56,880 --> 00:26:02,720 Speaker 1: with that. No, I think at people who try hard 406 00:26:03,040 --> 00:26:06,840 Speaker 1: have business sense, and you know it's work. I don't. Yes, 407 00:26:07,160 --> 00:26:11,040 Speaker 1: it's not necessarily fun. I think you know lots of Uh, 408 00:26:11,400 --> 00:26:15,200 Speaker 1: it's not intrinsically rewarding unless you have a certain urge 409 00:26:15,240 --> 00:26:17,560 Speaker 1: to do that sort of thing. Some people love it, 410 00:26:17,640 --> 00:26:20,600 Speaker 1: you know, so maybe that's great for them. Most of 411 00:26:20,640 --> 00:26:24,159 Speaker 1: us would rather do something else, right, as opposed to 412 00:26:24,320 --> 00:26:28,760 Speaker 1: being handcuffed to a terminal and watching the market take 413 00:26:28,800 --> 00:26:31,439 Speaker 1: by tick day by day. There are people who have 414 00:26:31,520 --> 00:26:35,080 Speaker 1: demonstrated the ability to outpulform the market doing that, but 415 00:26:35,200 --> 00:26:37,520 Speaker 1: you're right, it's a lot of work. It's it's and 416 00:26:37,520 --> 00:26:39,960 Speaker 1: then and then they can the last twenty years of 417 00:26:40,000 --> 00:26:43,439 Speaker 1: their life might be a failure, even though because you know, 418 00:26:43,520 --> 00:26:46,200 Speaker 1: it's not just people, that's their theories and their ideas, 419 00:26:46,560 --> 00:26:49,560 Speaker 1: and the market can just work against some theory that 420 00:26:49,720 --> 00:26:52,800 Speaker 1: was right. We'll be right again, but maybe not for 421 00:26:52,840 --> 00:26:55,560 Speaker 1: the rest of your life. So these things come into 422 00:26:55,640 --> 00:26:59,400 Speaker 1: and out of fashion. As as you said earlier, that's 423 00:26:59,440 --> 00:27:02,760 Speaker 1: the problem. So you know, I'm I'm a professor, not 424 00:27:02,920 --> 00:27:07,560 Speaker 1: a professional investor. Somehow going into that field seem a 425 00:27:07,600 --> 00:27:10,520 Speaker 1: little bit It would give me ulcers if I went 426 00:27:10,560 --> 00:27:13,239 Speaker 1: into that as my full time job. Well, you have 427 00:27:13,280 --> 00:27:15,880 Speaker 1: to you have to learn to accept that you can't 428 00:27:15,880 --> 00:27:18,040 Speaker 1: control what the market is going to do and as 429 00:27:18,040 --> 00:27:19,960 Speaker 1: soon as you accept the market goes up and down 430 00:27:19,960 --> 00:27:22,720 Speaker 1: and I can't control it. The ulcers go away. Some 431 00:27:22,760 --> 00:27:26,280 Speaker 1: people never get to that phase of hey, listen, sometimes 432 00:27:26,280 --> 00:27:28,119 Speaker 1: it rains. I just have to remember to bring an 433 00:27:28,160 --> 00:27:33,199 Speaker 1: umbrella and not blame yourself. That that's exactly that's exactly right. 434 00:27:33,240 --> 00:27:36,640 Speaker 1: I'm speaking with Robert Schiller of Yale University. So let's 435 00:27:36,680 --> 00:27:39,960 Speaker 1: get back to the efficient market hypothesis. So on the 436 00:27:40,000 --> 00:27:43,399 Speaker 1: one hand, Fama is this efficient market guy. On the 437 00:27:43,440 --> 00:27:47,359 Speaker 1: other hand, he's at the what's now known as the 438 00:27:47,400 --> 00:27:52,080 Speaker 1: Booth School, and at the time there is an anomaly 439 00:27:52,320 --> 00:27:56,280 Speaker 1: that these small cap stocks and these value stocks seem 440 00:27:56,400 --> 00:27:59,040 Speaker 1: to do better than the rest of the market, which 441 00:27:59,119 --> 00:28:02,119 Speaker 1: is a little funny because no one's supposed to be 442 00:28:02,160 --> 00:28:06,000 Speaker 1: able to outperform the market. But yet he becomes an 443 00:28:06,000 --> 00:28:09,600 Speaker 1: advisor to a company that tries to beat the market 444 00:28:09,600 --> 00:28:12,280 Speaker 1: on a regular basis. They don't use the word beat 445 00:28:12,359 --> 00:28:15,280 Speaker 1: the market, So what phrase do they use? I have 446 00:28:15,320 --> 00:28:19,119 Speaker 1: it exactly, But it's something about identifying risk factors. So 447 00:28:19,200 --> 00:28:21,920 Speaker 1: there's a value risk factor. So in other words, you're 448 00:28:21,920 --> 00:28:25,560 Speaker 1: getting a greater reward for the capital you put at risk. 449 00:28:25,640 --> 00:28:28,680 Speaker 1: Is that right? And that there might be a rational 450 00:28:28,760 --> 00:28:32,880 Speaker 1: reason why one would need to be compensated. It might 451 00:28:32,920 --> 00:28:39,000 Speaker 1: correlate with something you're doing, or some tale risk that 452 00:28:39,080 --> 00:28:42,280 Speaker 1: you have in mind that you don't see in the data. 453 00:28:42,440 --> 00:28:46,720 Speaker 1: But it's important. These are kind of hypotheticals and he 454 00:28:47,080 --> 00:28:50,640 Speaker 1: so he wants to uh, he has faith in the 455 00:28:50,720 --> 00:28:54,480 Speaker 1: rationality of the market that he wants to say that 456 00:28:55,000 --> 00:28:58,960 Speaker 1: you can't prove why these fluctuate why value stocks. I 457 00:28:58,960 --> 00:29:01,600 Speaker 1: shouldn't say that I can exactly what he would say, 458 00:29:01,640 --> 00:29:04,400 Speaker 1: but it has that quality too, And and your approach 459 00:29:04,440 --> 00:29:09,120 Speaker 1: is different. Your approaches. Hey, humans aren't especially rational, and 460 00:29:09,200 --> 00:29:14,520 Speaker 1: in a crowd, they are occasionally very irrational. And hence 461 00:29:14,920 --> 00:29:18,440 Speaker 1: these humans and by crowd, it could be a stock market, 462 00:29:18,520 --> 00:29:22,040 Speaker 1: it could be any sort of market for goods and services, 463 00:29:22,080 --> 00:29:27,440 Speaker 1: and that's how prices go so wildly out of whack. Yeah. Now, 464 00:29:27,440 --> 00:29:31,600 Speaker 1: I think Farma is a brilliant man. Actually I admire him. 465 00:29:32,480 --> 00:29:36,280 Speaker 1: But you know, a brilliance comes with slants or views 466 00:29:36,360 --> 00:29:38,760 Speaker 1: as well. And that's that's all it was, you know, 467 00:29:38,760 --> 00:29:41,000 Speaker 1: when it comes down to I talked to him about fact. 468 00:29:41,400 --> 00:29:44,840 Speaker 1: We kind of agree on the fact on the objective 469 00:29:44,880 --> 00:29:49,640 Speaker 1: statistics of the market. So um, so you've viewed forecast 470 00:29:49,680 --> 00:29:52,560 Speaker 1: a ball. You know, as Farmer would say, the fact 471 00:29:52,640 --> 00:29:56,240 Speaker 1: that it's somewhat forecasting ball doesn't mean it's inefficient. His 472 00:29:56,520 --> 00:30:01,760 Speaker 1: Nobel lecture was called two Pillars of financial modeling. The 473 00:30:01,840 --> 00:30:06,160 Speaker 1: one pillar is market efficiency, the basic notion. But the 474 00:30:06,160 --> 00:30:09,240 Speaker 1: other pillar is you have to say, well, what should 475 00:30:09,240 --> 00:30:12,480 Speaker 1: an efficient market look like? And it could be a 476 00:30:12,560 --> 00:30:17,080 Speaker 1: little bit forecast herble. So so the two of you 477 00:30:17,200 --> 00:30:20,640 Speaker 1: share a Nobel prize with the third person who's a 478 00:30:20,680 --> 00:30:27,320 Speaker 1: statistician at Chicago and doesn't philosophically. He's really more about 479 00:30:27,440 --> 00:30:32,719 Speaker 1: the mechanics of of crunching numbers, whereas you and Fama 480 00:30:32,760 --> 00:30:37,840 Speaker 1: are philosophically very much I don't want to say polar opposites, 481 00:30:38,240 --> 00:30:42,560 Speaker 1: but you look at the market very very differently. Well, 482 00:30:42,720 --> 00:30:49,760 Speaker 1: I believe in broader social science. I believe in psychology, sociology, 483 00:30:50,120 --> 00:30:53,880 Speaker 1: political science. They all matter. When you wonder why is 484 00:30:53,880 --> 00:30:55,800 Speaker 1: the market growing up and down? You have to think 485 00:30:56,000 --> 00:30:59,880 Speaker 1: in terms of those broader disciplines. That there's a ten 486 00:31:00,320 --> 00:31:03,240 Speaker 1: for economists to dismiss these people, and I think that's 487 00:31:03,280 --> 00:31:07,760 Speaker 1: a big mistake. So early in your career you had 488 00:31:07,800 --> 00:31:12,000 Speaker 1: a paper you published, do stock prices move too much 489 00:31:12,120 --> 00:31:17,920 Speaker 1: to justify subsequent changes in dividends. So explain how you 490 00:31:18,160 --> 00:31:22,120 Speaker 1: looked at dividends as a way to decide that, hey, 491 00:31:22,160 --> 00:31:25,680 Speaker 1: this market isn't really all that efficient after all. Well, 492 00:31:25,680 --> 00:31:29,760 Speaker 1: people often forget that ultimately the value in stocks comes 493 00:31:29,760 --> 00:31:32,400 Speaker 1: from the dividends they pay. If there were ever a 494 00:31:32,400 --> 00:31:35,520 Speaker 1: company that the government said we're putting a special tax 495 00:31:35,560 --> 00:31:40,360 Speaker 1: on you. We're gonna tax your dividends forever the company, 496 00:31:40,400 --> 00:31:44,080 Speaker 1: the stock would be worthless because it's only value comes 497 00:31:44,120 --> 00:31:47,640 Speaker 1: from the dividends. What about companies like Amazon that have 498 00:31:47,840 --> 00:31:51,600 Speaker 1: no dividend but in the future. So that's the expectation. 499 00:31:51,720 --> 00:31:54,560 Speaker 1: Is you're buying a pricing stock now that one day 500 00:31:54,600 --> 00:31:56,719 Speaker 1: is going to have a big dividend. That's right. So 501 00:31:56,840 --> 00:32:00,880 Speaker 1: that's the lure. This is the podcast portion of our interview. 502 00:32:01,080 --> 00:32:04,960 Speaker 1: By now you've heard the first hour of the radio interview, 503 00:32:04,960 --> 00:32:07,520 Speaker 1: which goes by. I told you it goes by like that, right, 504 00:32:07,600 --> 00:32:11,600 Speaker 1: It's it's so quick. Um, So I have you in 505 00:32:11,600 --> 00:32:13,680 Speaker 1: the studio for a little while longer before we have 506 00:32:13,720 --> 00:32:16,960 Speaker 1: to take you to your next um presentation. I know 507 00:32:17,040 --> 00:32:21,800 Speaker 1: you're honoring a colleague from Columbia, and there's a handful 508 00:32:21,800 --> 00:32:24,440 Speaker 1: of things we didn't get to. I definitely wanted to 509 00:32:24,960 --> 00:32:28,640 Speaker 1: talk about first before I forget. You now have an 510 00:32:28,720 --> 00:32:34,480 Speaker 1: online economics course? What what is that called? Financial markets? Yeah? 511 00:32:34,640 --> 00:32:37,960 Speaker 1: And and how can somebody access this? Well, first of all, 512 00:32:38,080 --> 00:32:40,680 Speaker 1: it's free unless you want a certificate. You can pay 513 00:32:40,720 --> 00:32:44,600 Speaker 1: for the certificate, but it's a free course on Coursera. 514 00:32:46,000 --> 00:32:49,080 Speaker 1: Started a couple of weeks ago and it's running until December. 515 00:32:50,360 --> 00:32:53,560 Speaker 1: You can sign up any time for free and you 516 00:32:53,600 --> 00:32:58,200 Speaker 1: can participate. And then we have now Coursera is a 517 00:32:58,240 --> 00:33:01,960 Speaker 1: group joint venture of a couple of different schools or 518 00:33:01,960 --> 00:33:06,600 Speaker 1: it's of course Sarah is a company uh that involves 519 00:33:06,680 --> 00:33:11,040 Speaker 1: a number of universities offering some l M I T Stanford, Harvard, 520 00:33:11,080 --> 00:33:15,440 Speaker 1: There's a whole list of really highly regarded schools. Yeah, 521 00:33:15,440 --> 00:33:17,880 Speaker 1: there's a lot of courses that you can take for free, 522 00:33:18,080 --> 00:33:20,880 Speaker 1: for free. It's it's it's a very so it's like 523 00:33:20,920 --> 00:33:23,720 Speaker 1: going to Yale taking a course with Bob Schiller, but 524 00:33:23,800 --> 00:33:27,640 Speaker 1: without paying fifty your tuition. Yes. And the other thing 525 00:33:27,680 --> 00:33:31,760 Speaker 1: is you don't really uh see me directly. You see 526 00:33:31,800 --> 00:33:34,000 Speaker 1: me on the TV. There's there's I think close to 527 00:33:34,080 --> 00:33:37,360 Speaker 1: forty students in my class right who signed up and 528 00:33:37,400 --> 00:33:39,640 Speaker 1: maybe they're not showing up. And we know that the 529 00:33:39,680 --> 00:33:42,600 Speaker 1: online courses there's a big drop off when when over 530 00:33:42,640 --> 00:33:45,480 Speaker 1: the course of time. But you know, so they don't 531 00:33:45,480 --> 00:33:47,280 Speaker 1: get to go to the front of the class and 532 00:33:47,320 --> 00:33:50,400 Speaker 1: ask you questions when the lectures over. But this is 533 00:33:50,440 --> 00:33:52,960 Speaker 1: the same sort of lecture you give. Yeah, it's the same. 534 00:33:53,400 --> 00:33:58,120 Speaker 1: Last time I did this, I had We graduated eight 535 00:33:58,120 --> 00:34:01,520 Speaker 1: thousand with a final exam. We gave a certificate and 536 00:34:01,560 --> 00:34:05,040 Speaker 1: we failed three fifty. I'm sorry, I feel bad about that. 537 00:34:05,320 --> 00:34:07,760 Speaker 1: But you have to take a final exam. It's it's 538 00:34:08,000 --> 00:34:11,520 Speaker 1: essay or multiple choice. It's multiple choice. Okay, well it's 539 00:34:11,560 --> 00:34:15,480 Speaker 1: computer graded. I'm not grading, you know, so you're not 540 00:34:15,520 --> 00:34:18,759 Speaker 1: gonna do eight thousand essays for free. And then at 541 00:34:18,760 --> 00:34:22,600 Speaker 1: the office hours. Uh, students can send in questions. We 542 00:34:22,680 --> 00:34:25,800 Speaker 1: just had one the other day. Uh. And how similar 543 00:34:25,920 --> 00:34:28,960 Speaker 1: is this course to you know, a Yale Economics one 544 00:34:29,000 --> 00:34:31,799 Speaker 1: on one course. Well, it's a little bit shorter. We 545 00:34:31,840 --> 00:34:34,600 Speaker 1: trimmed it down, but it's it's based it's based on 546 00:34:34,760 --> 00:34:37,799 Speaker 1: actual lectures I gave to my class. So this is 547 00:34:37,840 --> 00:34:41,560 Speaker 1: if someone were to say, Gee, I didn't get into Yale, 548 00:34:41,600 --> 00:34:44,640 Speaker 1: but I'd like to take Bob Show's economics course. This 549 00:34:44,719 --> 00:34:47,880 Speaker 1: is actually something they could do and it's no charge. 550 00:34:48,960 --> 00:34:51,319 Speaker 1: I think this is a revolution for the future. I 551 00:34:51,320 --> 00:34:54,879 Speaker 1: don't know where colleges are going as this becomes more 552 00:34:55,040 --> 00:34:58,520 Speaker 1: and more con academy and they even meet each other 553 00:34:58,920 --> 00:35:02,960 Speaker 1: our students, Uh, they meet ups, they can blog each other, 554 00:35:03,000 --> 00:35:07,600 Speaker 1: they have meetups. So kin Academy is something that started 555 00:35:07,600 --> 00:35:11,400 Speaker 1: doing this to teach math, and now they've added dozens 556 00:35:11,480 --> 00:35:14,640 Speaker 1: of subjects. You think that this is something that is 557 00:35:14,680 --> 00:35:18,120 Speaker 1: a a change in society. This is a tech. That's 558 00:35:18,120 --> 00:35:20,760 Speaker 1: a question that that we we have to wait and see. 559 00:35:20,600 --> 00:35:24,840 Speaker 1: I actually like to have real people in the classroom. 560 00:35:25,480 --> 00:35:28,360 Speaker 1: I think people want to get to know their professor, 561 00:35:28,440 --> 00:35:32,560 Speaker 1: which you really can't do or I can't get to 562 00:35:32,600 --> 00:35:35,080 Speaker 1: know them when there's so many of them, for sure, 563 00:35:35,600 --> 00:35:38,960 Speaker 1: not not when there's eight thousand sign ups. Um, that's 564 00:35:38,960 --> 00:35:43,239 Speaker 1: an interesting technology. What what other technologies I'm a gadget head. 565 00:35:43,280 --> 00:35:47,480 Speaker 1: I know you have a smartphone. What other technologies impress 566 00:35:47,560 --> 00:35:50,200 Speaker 1: you or interest you or do you think might be 567 00:35:50,320 --> 00:35:58,320 Speaker 1: leading to societal changes? Oh, well, there are big changes coming. Uh. 568 00:35:58,400 --> 00:36:01,279 Speaker 1: We were talking about the diet pill earlier. The problem is, 569 00:36:01,400 --> 00:36:04,520 Speaker 1: are we and lots of people have written about this. 570 00:36:05,200 --> 00:36:09,600 Speaker 1: Uh uh are are we arriving at a new society 571 00:36:09,600 --> 00:36:13,200 Speaker 1: where there aren't jobs for most people? You know, it 572 00:36:13,280 --> 00:36:15,040 Speaker 1: used to be you could get a PhD. And if 573 00:36:15,040 --> 00:36:17,000 Speaker 1: you couldn't get a job, you could drive a taxi. 574 00:36:17,640 --> 00:36:20,799 Speaker 1: But it's coming. We're gonna have driverless taxis before long, 575 00:36:20,920 --> 00:36:23,200 Speaker 1: not not too far. Used to be a taxi driver, 576 00:36:23,400 --> 00:36:25,400 Speaker 1: you used to have to know something, You have to 577 00:36:25,400 --> 00:36:28,240 Speaker 1: know your way around the city. Now they just plug 578 00:36:28,280 --> 00:36:32,440 Speaker 1: in GPS, and so we're gonna eliminate the driver completely. 579 00:36:32,960 --> 00:36:35,280 Speaker 1: And the question is where is this going? Young people 580 00:36:35,280 --> 00:36:41,320 Speaker 1: today have say fifty or more years ahead of earning years. 581 00:36:42,120 --> 00:36:43,680 Speaker 1: What are they going to look like? What are their 582 00:36:43,760 --> 00:36:48,399 Speaker 1: jobs gonna look like in fifty years? It's frightening. So 583 00:36:48,680 --> 00:36:51,920 Speaker 1: what about something that's less frightening. Earlier we were talking 584 00:36:51,960 --> 00:36:56,720 Speaker 1: about a diet pill that you go to the Midwestern America. 585 00:36:56,880 --> 00:36:59,319 Speaker 1: Even you go to Europe now, which used to make 586 00:36:59,360 --> 00:37:03,800 Speaker 1: fun of us fat Americans. Europeans are now giant and bloated. 587 00:37:04,360 --> 00:37:06,880 Speaker 1: What what did you mention you thought was happening on 588 00:37:07,000 --> 00:37:10,239 Speaker 1: that side? I was thinking that I don't know. I'm 589 00:37:10,239 --> 00:37:12,400 Speaker 1: not a drug expert, but I think I wouldn't be 590 00:37:12,440 --> 00:37:15,360 Speaker 1: at all surprised if in ten years they'll have a 591 00:37:15,400 --> 00:37:19,120 Speaker 1: diet pill that not only works, but they'll tell you 592 00:37:19,800 --> 00:37:23,479 Speaker 1: it will improve your longevity if you take it. They'll 593 00:37:23,480 --> 00:37:26,160 Speaker 1: say it's good for you, you better take it, and 594 00:37:26,200 --> 00:37:29,600 Speaker 1: there won't be fat people anymore. So you think technologies 595 00:37:29,760 --> 00:37:35,520 Speaker 1: and and biotechnologies eventually going to eradicate controlling appetite. There 596 00:37:35,600 --> 00:37:38,960 Speaker 1: is this lepton hormone they discovered and they thought that 597 00:37:39,040 --> 00:37:41,200 Speaker 1: was it, but it turned out not to work. But 598 00:37:41,280 --> 00:37:44,319 Speaker 1: we'll find that's the famine mode. We were talking about 599 00:37:44,360 --> 00:37:47,560 Speaker 1: that earlier, that you could suppress that, but then your 600 00:37:47,560 --> 00:37:50,520 Speaker 1: body starts to think you're in there's no food, you're 601 00:37:50,560 --> 00:37:53,880 Speaker 1: in famine mode, and it tries to hoard calories and 602 00:37:53,920 --> 00:37:57,760 Speaker 1: not lose them. So it's a matter of eventually figuring 603 00:37:57,760 --> 00:38:00,640 Speaker 1: out the biochemistry. It's just this will be a bigger 604 00:38:00,680 --> 00:38:04,080 Speaker 1: revolution than the birth control to really so now it 605 00:38:04,200 --> 00:38:06,160 Speaker 1: was the only thing there They tell women take it 606 00:38:06,200 --> 00:38:10,319 Speaker 1: because it will make it actually reduces your risks. That's 607 00:38:10,320 --> 00:38:14,480 Speaker 1: really interesting. So the technology, so here's what we're gonna have. 608 00:38:14,480 --> 00:38:19,120 Speaker 1: We're gonna have people living longer but making less money. 609 00:38:19,200 --> 00:38:23,680 Speaker 1: Who's gonna who's gonna pay for this. You you got me, 610 00:38:26,800 --> 00:38:28,680 Speaker 1: And so we have no answer to Well, the only 611 00:38:28,719 --> 00:38:31,480 Speaker 1: answer that I've been giving in my books is that 612 00:38:31,600 --> 00:38:36,200 Speaker 1: we should think about the computer generated inequality that might 613 00:38:36,239 --> 00:38:39,520 Speaker 1: come in the future, and let's make plans now how 614 00:38:39,560 --> 00:38:42,680 Speaker 1: we're going to deal with it, don't wait until it happens. 615 00:38:43,320 --> 00:38:46,200 Speaker 1: And so the plans could take various forms. One of 616 00:38:46,200 --> 00:38:49,000 Speaker 1: them is risk management. We could put people in risk 617 00:38:49,040 --> 00:38:52,600 Speaker 1: management contract. It would be an insurance variety. Another one 618 00:38:52,680 --> 00:38:55,840 Speaker 1: is a plan to raise taxes on the rich. I 619 00:38:55,880 --> 00:38:58,520 Speaker 1: mean not to I'm not saying to make everyone equal, 620 00:38:58,920 --> 00:39:04,200 Speaker 1: just to respond to exceptionally increase inequality if it happens. 621 00:39:04,360 --> 00:39:07,759 Speaker 1: If it happens now, by a lot of measures, inequality 622 00:39:07,760 --> 00:39:11,680 Speaker 1: in America today is at the widest levels since the 623 00:39:11,800 --> 00:39:16,560 Speaker 1: nineteen twenties. Um, do you think that if we continue 624 00:39:16,560 --> 00:39:19,319 Speaker 1: to see things move along the path that they they are, 625 00:39:19,960 --> 00:39:24,800 Speaker 1: and if technology continues and globalization and other factors continue 626 00:39:24,840 --> 00:39:27,960 Speaker 1: to make getting a job more challenging, is that going 627 00:39:28,000 --> 00:39:31,560 Speaker 1: to get better or is that going to get worse? Well, 628 00:39:31,640 --> 00:39:35,120 Speaker 1: nobody knows it could get better. It could be that 629 00:39:35,200 --> 00:39:41,000 Speaker 1: it generates jobs. Uh so Uh. For example, the people 630 00:39:41,040 --> 00:39:46,560 Speaker 1: talk about musicians They say the invention of communications technology 631 00:39:46,600 --> 00:39:51,160 Speaker 1: created a winner take all effect that only the only 632 00:39:51,200 --> 00:39:55,239 Speaker 1: the very best singers would who could make records or 633 00:39:55,680 --> 00:39:58,680 Speaker 1: c d s would would survive. But it seems to 634 00:39:58,880 --> 00:40:01,439 Speaker 1: be going in another direct and that now the the 635 00:40:01,480 --> 00:40:05,920 Speaker 1: communications technology allows so many different types of music to 636 00:40:06,000 --> 00:40:10,080 Speaker 1: flourish that it's kind of creating more jobs for and 637 00:40:10,080 --> 00:40:12,319 Speaker 1: then people will hear some of them and then they 638 00:40:12,360 --> 00:40:14,840 Speaker 1: want to hire the person for their wedding or something 639 00:40:14,880 --> 00:40:18,640 Speaker 1: like that. It used to be that musicians would tour 640 00:40:19,360 --> 00:40:22,680 Speaker 1: in order to promote the sale of their album. Now, 641 00:40:22,800 --> 00:40:26,719 Speaker 1: the way the cost structures have changed, they release an 642 00:40:26,760 --> 00:40:29,560 Speaker 1: album in order to go out to promote the tour. 643 00:40:29,680 --> 00:40:34,440 Speaker 1: The way the record companies set up their contracts, these guys, 644 00:40:34,600 --> 00:40:37,319 Speaker 1: unless they're selling a million copies, they're not making a 645 00:40:37,320 --> 00:40:40,080 Speaker 1: lot of money. But when they go on tour, if 646 00:40:40,120 --> 00:40:43,040 Speaker 1: they run it lean and smart, that's where they're making 647 00:40:43,040 --> 00:40:47,399 Speaker 1: money today. So you're saying, we don't and everything else 648 00:40:47,440 --> 00:40:51,719 Speaker 1: is changing, that we really don't know the future. That's 649 00:40:51,760 --> 00:40:55,120 Speaker 1: the scary thing. And and since we don't this, you know, 650 00:40:55,160 --> 00:40:59,440 Speaker 1: we're talking finance here. Finance and insurance are really about 651 00:40:59,480 --> 00:41:03,600 Speaker 1: an un certain future. It's about managing it, sharing your risks, 652 00:41:03,960 --> 00:41:07,880 Speaker 1: hedging your risks. People forget that that that's a core element. 653 00:41:08,040 --> 00:41:12,080 Speaker 1: It's not about beating the market necessarily. It's about managing 654 00:41:12,160 --> 00:41:14,400 Speaker 1: risks in such a way that you can be a 655 00:41:14,440 --> 00:41:18,279 Speaker 1: productive society and we can achieve our yours. Now that 656 00:41:18,360 --> 00:41:22,520 Speaker 1: sounds eminently reasonable, and yet we seem to overlook it. 657 00:41:22,600 --> 00:41:25,200 Speaker 1: So I'm going to repeat what you just said. The 658 00:41:25,239 --> 00:41:30,200 Speaker 1: future is unknowable. There are risks inherent to that. It's 659 00:41:30,239 --> 00:41:34,440 Speaker 1: our responsibility to manage those risks, and how successfull we 660 00:41:34,480 --> 00:41:38,280 Speaker 1: manage those risks will determine how successful we are. Financial 661 00:41:38,480 --> 00:41:41,759 Speaker 1: is Is that a fair restatement? This is what This 662 00:41:41,840 --> 00:41:44,480 Speaker 1: is one of the messages that my financial markets course. 663 00:41:45,080 --> 00:41:50,200 Speaker 1: There's an important technology that finance represents, and it's a 664 00:41:50,280 --> 00:41:55,719 Speaker 1: technology of financing activities and doing it in such a 665 00:41:55,760 --> 00:41:59,000 Speaker 1: way that people can undertake activities that would have been 666 00:41:59,040 --> 00:42:03,000 Speaker 1: too risky for um. They can they can take you 667 00:42:03,040 --> 00:42:06,640 Speaker 1: know you you venture capitalists will support a young firm 668 00:42:06,920 --> 00:42:13,360 Speaker 1: whose probability of succeeding might be uh, but it's not 669 00:42:13,400 --> 00:42:16,120 Speaker 1: going to be devastating because they'll spread that risk guard 670 00:42:16,239 --> 00:42:19,920 Speaker 1: over many investors. So you make thirty or forty investments 671 00:42:19,960 --> 00:42:24,960 Speaker 1: into the winners. The big winners pay for all those losers. 672 00:42:25,040 --> 00:42:29,239 Speaker 1: And that's a form of risk management, and that's what 673 00:42:29,320 --> 00:42:33,960 Speaker 1: our civilization is built on. We're doing amazing things. Uh 674 00:42:34,000 --> 00:42:38,120 Speaker 1: so we have cures for diseases. Pharmaceuticals. People who try 675 00:42:38,160 --> 00:42:42,319 Speaker 1: to develop new drugs have a notorious failure record, but 676 00:42:42,400 --> 00:42:46,080 Speaker 1: a few of them end up being, you know, worth billions. 677 00:42:46,160 --> 00:42:48,800 Speaker 1: The lipatours and viagraas of the day, those are billion 678 00:42:48,840 --> 00:42:52,280 Speaker 1: dollar pills. And in other words, to get to those, 679 00:42:52,719 --> 00:42:54,960 Speaker 1: they had to be willing to go through dozens and 680 00:42:55,040 --> 00:42:58,480 Speaker 1: dozens of failures trying to solve a particular problem. They 681 00:42:58,480 --> 00:43:02,640 Speaker 1: couldn't in order to get those Southbuster advanced financially advanced 682 00:43:02,680 --> 00:43:07,520 Speaker 1: countries are producing these drugs that save millions of lives. 683 00:43:07,680 --> 00:43:11,080 Speaker 1: They're not coming from backward, I should say, backward emerging 684 00:43:11,160 --> 00:43:16,760 Speaker 1: countries that don't have a sophisticated way of promoting enterprise. 685 00:43:16,880 --> 00:43:21,080 Speaker 1: Now the count the argument people would say is, Professor Schiller, 686 00:43:21,280 --> 00:43:25,520 Speaker 1: these emerging markets, they don't have the wealth that Europe 687 00:43:25,560 --> 00:43:27,640 Speaker 1: with the United States has, How can they be expected 688 00:43:27,640 --> 00:43:30,120 Speaker 1: to develop these sort of things. Fortunately, you're saying it's 689 00:43:30,160 --> 00:43:32,839 Speaker 1: not a function of wealth, it's a for for it's 690 00:43:32,840 --> 00:43:38,600 Speaker 1: a function of intelligent risk management. Unfortunately, these emerging countries 691 00:43:38,880 --> 00:43:41,600 Speaker 1: are moving along. That is the story of our age. 692 00:43:41,760 --> 00:43:45,480 Speaker 1: They're coming up. So it's China, it's India, it's the 693 00:43:45,520 --> 00:43:49,280 Speaker 1: whole Pacific Rim, It's places in South America and Turkey. 694 00:43:49,719 --> 00:43:53,680 Speaker 1: And yet you know the news lately, when you avoid 695 00:43:53,719 --> 00:43:57,839 Speaker 1: the horrible headlines about Ebola and isis whenever I read 696 00:43:57,840 --> 00:44:01,920 Speaker 1: about India, which you know, you look at China as 697 00:44:02,000 --> 00:44:06,040 Speaker 1: a huge success story, although there are stories now about 698 00:44:06,840 --> 00:44:11,520 Speaker 1: it's also become an economic bubble, but India hasn't had 699 00:44:11,600 --> 00:44:14,200 Speaker 1: that problem. India seems to be having a hard time. 700 00:44:14,680 --> 00:44:17,240 Speaker 1: Forget the twenty first century. They have a hard time 701 00:44:17,800 --> 00:44:22,040 Speaker 1: with parts of the twentieth century. Half the country does 702 00:44:22,080 --> 00:44:25,160 Speaker 1: not have indoor plumbing. I think that's the actual number 703 00:44:25,360 --> 00:44:30,840 Speaker 1: of households don't have toilets and indoor plumbing. Their health 704 00:44:30,920 --> 00:44:34,600 Speaker 1: care system is or i should say their public health 705 00:44:34,640 --> 00:44:40,640 Speaker 1: system is. There. People dump garbage and effluence in the 706 00:44:40,719 --> 00:44:44,759 Speaker 1: river and in places where people bathe. And Washington, how 707 00:44:44,800 --> 00:44:49,239 Speaker 1: can in a modern and yet technologically there are very 708 00:44:49,320 --> 00:44:53,279 Speaker 1: advanced country with lots and lots of software companies and 709 00:44:53,320 --> 00:44:56,759 Speaker 1: lots and lots of technology companies outsourced. How do we 710 00:44:56,800 --> 00:45:00,680 Speaker 1: have such a bifurcated society in an immerge gene market 711 00:45:01,080 --> 00:45:04,680 Speaker 1: that should really be doing so well? Well, they do 712 00:45:04,840 --> 00:45:08,440 Speaker 1: have a couple of hundred million people living like an 713 00:45:08,440 --> 00:45:15,919 Speaker 1: advanced country, quality of life, and it's well, this might 714 00:45:15,960 --> 00:45:19,560 Speaker 1: be the story of our times. The world is developing 715 00:45:19,560 --> 00:45:25,920 Speaker 1: into two divisions. The cosmopolitans. The people who are running 716 00:45:26,440 --> 00:45:30,680 Speaker 1: high tech companies in India are very cosmopolitan people. You'll 717 00:45:30,719 --> 00:45:33,480 Speaker 1: see them here in New York. They travel around, they 718 00:45:33,520 --> 00:45:37,040 Speaker 1: know the world. It's the locals who I worry about, 719 00:45:37,080 --> 00:45:40,800 Speaker 1: people who don't develop this kind of sense of the world, 720 00:45:40,880 --> 00:45:44,920 Speaker 1: and um, they may stay behind for a long time. 721 00:45:45,280 --> 00:45:48,880 Speaker 1: I'm hoping now that this will develop better so that 722 00:45:49,000 --> 00:45:54,960 Speaker 1: India will will These things will be the modern technology, 723 00:45:55,040 --> 00:45:59,400 Speaker 1: financial technology will be shared more broadly, find its way 724 00:45:59,440 --> 00:46:01,880 Speaker 1: from the half to the have nots in in countries 725 00:46:01,920 --> 00:46:05,760 Speaker 1: like that. You know, we see nations like Vietnam, and 726 00:46:06,520 --> 00:46:11,600 Speaker 1: forget South Korea. South Korea is now a booming First 727 00:46:11,600 --> 00:46:20,400 Speaker 1: World nation comparable to Japan or developed Western Europe. What 728 00:46:20,560 --> 00:46:23,400 Speaker 1: about some of the other Pacific rim countries we we 729 00:46:23,760 --> 00:46:26,480 Speaker 1: we he see. Vietnam was at one point in time 730 00:46:27,160 --> 00:46:33,000 Speaker 1: a fairly agricultural, fairly aggregarian society. They seem to be 731 00:46:33,080 --> 00:46:36,120 Speaker 1: coming along with a lot of other countries along that 732 00:46:36,200 --> 00:46:43,680 Speaker 1: Pacific rim um. Technological powerhouses, manufacturing powerhouses. Is that the 733 00:46:43,800 --> 00:46:48,160 Speaker 1: path out of of poverty for these nations or is 734 00:46:48,200 --> 00:46:52,200 Speaker 1: that just over oversimplifying it. Well, I don't think all 735 00:46:52,239 --> 00:46:55,279 Speaker 1: of them can do the same thing, and we may 736 00:46:55,320 --> 00:46:59,600 Speaker 1: be saturating the world with some kinds of product. Uh. 737 00:46:59,600 --> 00:47:03,879 Speaker 1: It's this. There's a whole field called development economics that 738 00:47:04,480 --> 00:47:09,680 Speaker 1: studies UH. I'm thinking of. There's a wonderful book by 739 00:47:09,760 --> 00:47:16,719 Speaker 1: Danny Roderick called UH One Many Recipes One Economics. It's 740 00:47:16,719 --> 00:47:20,239 Speaker 1: a book about development economics I recommend, and what he 741 00:47:20,280 --> 00:47:23,320 Speaker 1: says that every country is different and they all faced 742 00:47:23,440 --> 00:47:28,040 Speaker 1: different problems. So you need a development economist to go 743 00:47:28,160 --> 00:47:31,200 Speaker 1: in like a doctor and to try to diagnose the problems. 744 00:47:31,560 --> 00:47:35,719 Speaker 1: It's not a simple thing to know. Often these problems 745 00:47:35,719 --> 00:47:40,120 Speaker 1: are uh created by a culture that is resistant to 746 00:47:40,280 --> 00:47:44,680 Speaker 1: modern ideas, and it can be very hard to dislodge that. 747 00:47:45,200 --> 00:47:48,480 Speaker 1: So this is as much sociological and psychological as it 748 00:47:48,560 --> 00:47:54,479 Speaker 1: is economics. Yeah, I wish these different departments would cooperate more. So, 749 00:47:54,600 --> 00:47:57,000 Speaker 1: let's let's bring this back to the US, and let's 750 00:47:57,040 --> 00:48:00,160 Speaker 1: talk a little bit about UM stocks and valuation. Is 751 00:48:00,200 --> 00:48:04,960 Speaker 1: the one thing we haven't talked about was a measure 752 00:48:05,000 --> 00:48:11,280 Speaker 1: you created called the CAPE, the cyclically adjusted pere ratio. 753 00:48:11,880 --> 00:48:16,080 Speaker 1: Described for listeners exactly what that is. I developed this 754 00:48:16,160 --> 00:48:21,080 Speaker 1: in the eighties with my former student John Campbell. The 755 00:48:21,160 --> 00:48:24,440 Speaker 1: idea is very simple. That price earnings ratio has been 756 00:48:24,560 --> 00:48:29,799 Speaker 1: used for a hundred years or more to judge the 757 00:48:29,920 --> 00:48:33,080 Speaker 1: valuation of a company. Earnings is what it makes you 758 00:48:33,120 --> 00:48:35,719 Speaker 1: want to know how many years earnings do I have 759 00:48:35,800 --> 00:48:39,399 Speaker 1: to pay to buy share of this? Uh? But we 760 00:48:39,400 --> 00:48:42,879 Speaker 1: we thought that the price earnings ratio is as it's 761 00:48:42,920 --> 00:48:47,080 Speaker 1: commonly calculated is is a little bit inaccurate because earnings 762 00:48:47,120 --> 00:48:50,160 Speaker 1: are so volatile from year to year. So we thought, 763 00:48:50,200 --> 00:48:54,120 Speaker 1: let's just average the earnings over more years, so you're 764 00:48:54,160 --> 00:48:56,680 Speaker 1: taking ten years instead of a single quarter or a 765 00:48:56,760 --> 00:48:59,400 Speaker 1: single year. Turns out we weren't the first people to 766 00:48:59,480 --> 00:49:01,840 Speaker 1: think of that, do we We show that that helps 767 00:49:01,880 --> 00:49:06,000 Speaker 1: predict read subsequent returns quite a bit. So in other words, 768 00:49:06,040 --> 00:49:10,080 Speaker 1: when you're looking out at future tenure returns, when the 769 00:49:10,160 --> 00:49:13,480 Speaker 1: CAPE ratio is high, you get worse returns. Right, ratio 770 00:49:13,600 --> 00:49:19,120 Speaker 1: is low. So, in other words, trailing tenuere returns when 771 00:49:19,160 --> 00:49:22,319 Speaker 1: they're low, when you're coming off of a period of 772 00:49:22,920 --> 00:49:25,560 Speaker 1: either earnings are high relative to price or price or 773 00:49:25,640 --> 00:49:29,719 Speaker 1: low relative to earnings looking for so essentially you're saying 774 00:49:29,800 --> 00:49:32,879 Speaker 1: valuation matters. Is that that's the takeaway of the cape 775 00:49:32,960 --> 00:49:37,240 Speaker 1: ratio right now? We use this on index or sector 776 00:49:37,280 --> 00:49:40,840 Speaker 1: indexes or not. So far we haven't used it on 777 00:49:40,880 --> 00:49:46,120 Speaker 1: individual stocks because I think they ten years might for 778 00:49:46,160 --> 00:49:48,040 Speaker 1: a lot of stocks it might not even be ten 779 00:49:48,120 --> 00:49:52,040 Speaker 1: years of runnings history. So but for indexes, uh, you know, 780 00:49:52,080 --> 00:49:56,080 Speaker 1: like looking at the United States, who can forecast earnings 781 00:49:56,120 --> 00:49:59,719 Speaker 1: anyway beyond saying well, they'll be similar to what they 782 00:49:59,719 --> 00:50:01,880 Speaker 1: are in So if the price is high relative to 783 00:50:02,480 --> 00:50:04,640 Speaker 1: what it's been doing for the last ten years, and 784 00:50:04,760 --> 00:50:06,520 Speaker 1: maybe it's not such a great time to be in 785 00:50:06,560 --> 00:50:09,680 Speaker 1: the market. You know. McKenzie did a fascinating study on 786 00:50:09,880 --> 00:50:13,200 Speaker 1: analysts forecasts of earnings and it turns out that over 787 00:50:13,239 --> 00:50:17,920 Speaker 1: the past twenty five years, the consensus estimates of forward 788 00:50:17,920 --> 00:50:22,880 Speaker 1: earnings by the analyst community has consistently been about twelve 789 00:50:22,960 --> 00:50:26,680 Speaker 1: percent a year, but earnings growth has consistently been about 790 00:50:26,719 --> 00:50:30,080 Speaker 1: six percent a year. So they've been twice as optimistic 791 00:50:30,160 --> 00:50:33,279 Speaker 1: as they should be, the only exceptions being in the 792 00:50:33,320 --> 00:50:37,000 Speaker 1: midst of bear markets, they've been twice as barish as 793 00:50:37,040 --> 00:50:39,560 Speaker 1: they should have been. They've been much more negative. So 794 00:50:39,640 --> 00:50:44,200 Speaker 1: forecasting earnings doesn't seem to be what Wall Street does. Especially, 795 00:50:44,280 --> 00:50:46,879 Speaker 1: I'm hoping they're getting better. By the way, from all 796 00:50:46,920 --> 00:50:50,759 Speaker 1: these experiences, you would have thought that two thousand would 797 00:50:50,800 --> 00:50:54,000 Speaker 1: have taught them a certain lesson. And to be fair, 798 00:50:54,320 --> 00:50:57,960 Speaker 1: when we look at the NASDACK today, the NASDACK is 799 00:50:58,000 --> 00:51:02,160 Speaker 1: over four thousand. The P ratio is so much lower 800 00:51:02,160 --> 00:51:06,360 Speaker 1: than it was back in two thousand when when markets 801 00:51:06,360 --> 00:51:11,480 Speaker 1: had gone crazy. From from October to March two thousand, 802 00:51:11,560 --> 00:51:15,440 Speaker 1: that six month period um, the NASDAC doubled. It went 803 00:51:15,480 --> 00:51:18,799 Speaker 1: from twenty hundred to five thousand, and then proceeded to 804 00:51:18,840 --> 00:51:23,239 Speaker 1: collapse down to eleven hundred, and the p ratio was 805 00:51:23,320 --> 00:51:25,560 Speaker 1: over a hundred. It was something crazy, and I believe 806 00:51:25,680 --> 00:51:29,200 Speaker 1: the SMP five hundred peaked. I'm doing this from memory 807 00:51:29,719 --> 00:51:35,000 Speaker 1: somewhere in the mid thirties forties. The cape ratio was 808 00:51:35,040 --> 00:51:38,080 Speaker 1: in the forties in two thousand on the SMP five hundred, 809 00:51:38,600 --> 00:51:42,080 Speaker 1: and let me remind people the SMP five hundred hit 810 00:51:42,200 --> 00:51:46,759 Speaker 1: fifteen hundred right around the peak, and did not get 811 00:51:46,840 --> 00:51:51,680 Speaker 1: over fifteen hundred until thirteen years later. So the forward 812 00:51:51,719 --> 00:51:55,960 Speaker 1: forecast of the CAPE was low and the net returns 813 00:51:55,960 --> 00:51:59,680 Speaker 1: were zero percent a year for thirteen years. So is 814 00:51:59,680 --> 00:52:04,080 Speaker 1: that how investors? Because here's the argument that's been circulating 815 00:52:04,080 --> 00:52:06,879 Speaker 1: on Wall Street about CAPE. You know, the CAPE has 816 00:52:06,960 --> 00:52:10,759 Speaker 1: been saying markets have been overvalued of the time for 817 00:52:10,800 --> 00:52:14,319 Speaker 1: the past twenty years, but that's not really how you 818 00:52:14,480 --> 00:52:18,400 Speaker 1: envisioned using the CAPE hasn't done that well overall for 819 00:52:18,440 --> 00:52:22,120 Speaker 1: the last fifteen years anyway. Well, but the markets themselves 820 00:52:22,200 --> 00:52:24,360 Speaker 1: haven't done all that well over the last you know, 821 00:52:24,600 --> 00:52:28,680 Speaker 1: from the peak in two thousand to last year, effectively 822 00:52:28,760 --> 00:52:31,680 Speaker 1: flat with lots of booms and busts in the middle. 823 00:52:32,080 --> 00:52:35,840 Speaker 1: So really the way investors should use CAPE is a 824 00:52:35,880 --> 00:52:39,040 Speaker 1: forward expectations. Here's what you should expect your returns to 825 00:52:39,040 --> 00:52:42,040 Speaker 1: be for the next ten years, either above average or 826 00:52:42,040 --> 00:52:47,239 Speaker 1: below average, based on whether the CAPE is elevated or not. 827 00:52:47,600 --> 00:52:51,719 Speaker 1: So how price he is CAPE today around range, So 828 00:52:51,800 --> 00:52:56,120 Speaker 1: that's pretty that's not extreme, but it's still significantly It 829 00:52:56,160 --> 00:52:59,000 Speaker 1: should be in the fifteen sixteen range. Is that about right? 830 00:52:59,520 --> 00:53:04,359 Speaker 1: Even at the If you look at what it suggests 831 00:53:04,400 --> 00:53:07,960 Speaker 1: for returns, returns are still in real terms three or 832 00:53:08,000 --> 00:53:11,400 Speaker 1: four percent predicted for the next ten years after inflation 833 00:53:11,960 --> 00:53:14,799 Speaker 1: based on historically It's not a really solid prediction. You 834 00:53:14,840 --> 00:53:18,080 Speaker 1: never know. But uh, if you compare that with the 835 00:53:18,120 --> 00:53:21,640 Speaker 1: re turns you see on bonds, that's real, so it 836 00:53:22,000 --> 00:53:24,640 Speaker 1: looks a lot better. Of course, it's risk here, but 837 00:53:24,760 --> 00:53:27,040 Speaker 1: I think that at this point of time it is 838 00:53:27,080 --> 00:53:31,320 Speaker 1: reasonable to have a substantial fraction of your portfolio in stocks, 839 00:53:31,800 --> 00:53:35,440 Speaker 1: even though they look pricey. What bond market is pricey too, 840 00:53:35,640 --> 00:53:40,600 Speaker 1: So six stock bond portfolio that gets rebalanced on a 841 00:53:40,600 --> 00:53:44,960 Speaker 1: regular basis is something that you wouldn't object to. Yeah, 842 00:53:44,960 --> 00:53:47,920 Speaker 1: I don't want to be responsible if it crashes. Well, 843 00:53:47,920 --> 00:53:51,760 Speaker 1: but we know what happens if stocks crash, everybody rotates 844 00:53:51,760 --> 00:53:56,160 Speaker 1: into treasuries, so bonds do better. That's the whole ideas expensive. 845 00:53:56,480 --> 00:53:58,920 Speaker 1: You know, people forget and and this is right up 846 00:53:58,960 --> 00:54:02,640 Speaker 1: your ally in terms of crowd behavior. In the midst 847 00:54:02,719 --> 00:54:06,800 Speaker 1: of the crisis in O eight oh nine, so many 848 00:54:06,840 --> 00:54:10,799 Speaker 1: funds had poured into US treasuries that the yield had 849 00:54:10,840 --> 00:54:14,000 Speaker 1: gone negative. It was below zero. Here, I'm giving you 850 00:54:14,040 --> 00:54:17,759 Speaker 1: a hundred dollars promised to pay me back in a 851 00:54:17,800 --> 00:54:21,520 Speaker 1: few years. That sounds crazy, doesn't so much for for 852 00:54:21,920 --> 00:54:25,200 Speaker 1: a rational xuberance on the fixed income side. Hey, I 853 00:54:25,200 --> 00:54:27,759 Speaker 1: don't want to own stocks at any price. I'm want 854 00:54:27,800 --> 00:54:30,600 Speaker 1: to buy bonds and only lose a little instead of 855 00:54:30,600 --> 00:54:35,359 Speaker 1: taking a risk in stocks. So a portfolio that that 856 00:54:35,520 --> 00:54:39,560 Speaker 1: is pick a number seventy That seems to make sense 857 00:54:39,960 --> 00:54:44,200 Speaker 1: over the long haul, even with elevated cape ratios where 858 00:54:44,200 --> 00:54:48,080 Speaker 1: where they are and and too depends on your situation though, 859 00:54:48,280 --> 00:54:51,480 Speaker 1: how much risk you can take. And people who are 860 00:54:51,520 --> 00:54:56,719 Speaker 1: living in retirement, maybe that's too much stocks. So yeah, 861 00:54:56,840 --> 00:55:00,239 Speaker 1: you have to talk to your adviser. I can't. There 862 00:55:00,360 --> 00:55:04,120 Speaker 1: is no perfect portfolio for every let's so let's caveat this. 863 00:55:04,120 --> 00:55:07,920 Speaker 1: This we're talking very generally. We're not talking obviously. Someone 864 00:55:07,960 --> 00:55:10,480 Speaker 1: who's eighty years old and living on a fixed income 865 00:55:11,040 --> 00:55:13,880 Speaker 1: is going to have a very different portfolio than someone 866 00:55:13,920 --> 00:55:17,840 Speaker 1: who's twenty and as a fifty year window till they retire, 867 00:55:18,360 --> 00:55:22,680 Speaker 1: or someone who's especially risk averse or especially risk embracing. 868 00:55:22,760 --> 00:55:26,200 Speaker 1: Those are two. All that stuff has to be personalized. 869 00:55:26,200 --> 00:55:30,160 Speaker 1: There is no magic formula for for everybody. So I 870 00:55:30,200 --> 00:55:32,000 Speaker 1: want to go back to what you said earlier that 871 00:55:33,360 --> 00:55:36,560 Speaker 1: you know stocks are fully priced, but we're not in 872 00:55:37,000 --> 00:55:40,960 Speaker 1: two thousand territory. You said this feels sort of like 873 00:55:42,160 --> 00:55:45,799 Speaker 1: six or so. Is that's just a guess, right? I mean, 874 00:55:45,840 --> 00:55:48,400 Speaker 1: I'm not We're not quoting you as saying Bob Shiller 875 00:55:48,440 --> 00:55:50,919 Speaker 1: says the market has four more years to run. You're 876 00:55:50,960 --> 00:55:55,799 Speaker 1: saying we still haven't hit that crazy bubble level. See, 877 00:55:55,840 --> 00:55:59,560 Speaker 1: and I think of political and sociological factors, Marc for 878 00:55:59,680 --> 00:56:04,920 Speaker 1: exact ample, we just elected a Republican Congress. Now, we 879 00:56:05,040 --> 00:56:10,719 Speaker 1: could have reacted to the current situation by electing Democrats 880 00:56:10,760 --> 00:56:14,360 Speaker 1: who might raise taxes on the rich. Maybe they were 881 00:56:14,520 --> 00:56:18,480 Speaker 1: more stimulus, more infrastructure. I think that you wouldn't you think? 882 00:56:18,560 --> 00:56:21,880 Speaker 1: Perhaps it's so hard to predict how people with Americans 883 00:56:21,880 --> 00:56:24,240 Speaker 1: are returning to their roots, which is a free market 884 00:56:24,680 --> 00:56:28,400 Speaker 1: belief in capitalism. So we put in these Republicans and 885 00:56:28,480 --> 00:56:31,479 Speaker 1: that sounds good for the stock market. Maybe that's what 886 00:56:31,520 --> 00:56:34,839 Speaker 1: was part of what was driving the market recently. Well, 887 00:56:34,840 --> 00:56:38,680 Speaker 1: but you've had a market that's going up since March 888 00:56:38,760 --> 00:56:43,799 Speaker 1: o nine and Obama has been president. So we went, sorry, 889 00:56:44,000 --> 00:56:46,799 Speaker 1: it tripled, it tripled, but it's up to right, So 890 00:56:46,840 --> 00:56:49,440 Speaker 1: we The low in March O nine was six six 891 00:56:49,520 --> 00:56:53,399 Speaker 1: six on the SNP five hundred. We're just about two 892 00:56:53,480 --> 00:56:58,839 Speaker 1: thousand from spinning distance. That worries me, by the way. 893 00:56:58,880 --> 00:57:02,680 Speaker 1: That worries me. Uh, it looks like it's something that 894 00:57:02,680 --> 00:57:05,480 Speaker 1: there could be attorney, but I just don't know. But 895 00:57:05,560 --> 00:57:08,120 Speaker 1: here's the thing that everybody forgets. It's easy to start 896 00:57:08,160 --> 00:57:12,200 Speaker 1: at the very low. In two thousand, the SMP was 897 00:57:12,200 --> 00:57:16,320 Speaker 1: at fift hundred. So here we are, thirteen fourteen years later, 898 00:57:16,880 --> 00:57:20,760 Speaker 1: we're barely thirty three percent higher than when we were 899 00:57:20,760 --> 00:57:23,320 Speaker 1: where we were in two thousands. Oh and by the way, 900 00:57:23,360 --> 00:57:26,000 Speaker 1: if you correct for inflation, that's I mean, we're right 901 00:57:26,360 --> 00:57:30,000 Speaker 1: back where we were, So no net net So there's 902 00:57:30,040 --> 00:57:33,200 Speaker 1: like sixty six to eighty two. It looked like you 903 00:57:33,240 --> 00:57:36,000 Speaker 1: were flat, but really you lost sixty or seventy of 904 00:57:36,000 --> 00:57:40,200 Speaker 1: your portfolio because of because of inflation. So I'm gonna 905 00:57:40,280 --> 00:57:43,840 Speaker 1: change um subjects on you again. And one of the 906 00:57:43,880 --> 00:57:47,480 Speaker 1: things that I bet people don't know about you is 907 00:57:47,520 --> 00:57:54,960 Speaker 1: that your good friends UM with a professor who teaches 908 00:57:55,000 --> 00:58:00,240 Speaker 1: at Pennsylvania who goes Jeremy Jeremy Segal. Right, So did 909 00:58:00,280 --> 00:58:02,520 Speaker 1: you two guys come to and by the way you 910 00:58:02,680 --> 00:58:06,040 Speaker 1: two couldn't be I've done shows with Jeremy years ago. 911 00:58:06,720 --> 00:58:12,080 Speaker 1: Um YouTube personality wise couldn't be more different. How did 912 00:58:12,120 --> 00:58:15,840 Speaker 1: you two guys ever become well? Uh, we went to 913 00:58:15,880 --> 00:58:20,640 Speaker 1: graduate school at m I T together together and m 914 00:58:20,720 --> 00:58:24,080 Speaker 1: I T. Being very orderly because you know their engineers. 915 00:58:24,400 --> 00:58:28,160 Speaker 1: They had us show up for chest X rays diagnostic 916 00:58:28,760 --> 00:58:34,000 Speaker 1: in alphabetical X so we were waiting in line. We 917 00:58:34,040 --> 00:58:36,800 Speaker 1: had a long conversation. So he and I are actually 918 00:58:36,880 --> 00:58:40,120 Speaker 1: very similar in some ways. I learned a lot from him, 919 00:58:40,160 --> 00:58:46,240 Speaker 1: but we're interested in the real world. Now, economics programs 920 00:58:46,240 --> 00:58:49,920 Speaker 1: are often populated by people who are interested in mathematics. 921 00:58:50,200 --> 00:58:53,880 Speaker 1: But we were both also, but I think we uh 922 00:58:54,680 --> 00:58:58,240 Speaker 1: we we had similar fascination with both. That that's what 923 00:58:58,400 --> 00:59:02,680 Speaker 1: makes very good. His famous book Stocks for the long 924 00:59:02,760 --> 00:59:06,120 Speaker 1: run essentially edition of his and now you have a 925 00:59:06,160 --> 00:59:09,480 Speaker 1: third edition coming out of a Rational coming out in February. 926 00:59:09,520 --> 00:59:12,760 Speaker 1: So he's two editions ahead of you. That's not although 927 00:59:13,080 --> 00:59:16,320 Speaker 1: I'll do it, it'll take me twenty years now, but 928 00:59:16,440 --> 00:59:18,360 Speaker 1: you've had a lot more You've published a lot more 929 00:59:18,360 --> 00:59:21,200 Speaker 1: books than he has. So when when you guys are 930 00:59:21,320 --> 00:59:23,280 Speaker 1: on the bookshelves, and he says I'm up to my 931 00:59:23,320 --> 00:59:25,680 Speaker 1: fifth edition. You get to say, but look how many 932 00:59:25,720 --> 00:59:29,000 Speaker 1: books I've and I understand you. Your families are close. 933 00:59:29,080 --> 00:59:33,600 Speaker 1: You guys vacation together. Really that's that's quite that's quite fascinating. 934 00:59:34,040 --> 00:59:37,120 Speaker 1: And that goes back to grad school at UM at 935 00:59:37,280 --> 00:59:41,000 Speaker 1: M I t that's ah, that's amazing. So we've been 936 00:59:41,040 --> 00:59:48,640 Speaker 1: talking about everything from valuations and bubbles to a rational 937 00:59:49,600 --> 00:59:53,040 Speaker 1: um behavior. What sort of changes would you like to 938 00:59:53,080 --> 00:59:58,680 Speaker 1: see an investor behavior? If you can educate the investing public, 939 00:59:58,920 --> 01:00:01,560 Speaker 1: what would you like to see the do differently than 940 01:00:01,600 --> 01:00:07,200 Speaker 1: they're doing today? Well, that's an interesting question. First of all, 941 01:00:07,280 --> 01:00:11,600 Speaker 1: I've said before they should get an advisor. Uh. Secondly, 942 01:00:12,080 --> 01:00:15,080 Speaker 1: I think that we need better investor education because people 943 01:00:15,520 --> 01:00:19,720 Speaker 1: could know a lot more about Thirdly, if we had 944 01:00:19,840 --> 01:00:25,200 Speaker 1: better appreciation of finance, I think people could participate in 945 01:00:25,600 --> 01:00:29,680 Speaker 1: products that would help them manage risks to their lives, 946 01:00:29,720 --> 01:00:33,520 Speaker 1: like home equity insurance insurance against losses in the value 947 01:00:33,520 --> 01:00:37,520 Speaker 1: of your home, or mortgages that protect you against home 948 01:00:37,560 --> 01:00:40,720 Speaker 1: price declines. And someday I think there will even be 949 01:00:40,880 --> 01:00:44,120 Speaker 1: livelihood insurance that protect you against they drop in your 950 01:00:44,520 --> 01:00:48,040 Speaker 1: ability to earn an income. Uh. These are things I 951 01:00:48,040 --> 01:00:52,320 Speaker 1: talked about in my books. They're kind of futuristic finance. 952 01:00:52,560 --> 01:00:57,200 Speaker 1: Have you been tracking the or following the new set 953 01:00:57,400 --> 01:01:02,200 Speaker 1: of markets the allow you to invest in the future 954 01:01:02,320 --> 01:01:05,000 Speaker 1: income of athletes. Have you been saying I talked about 955 01:01:05,000 --> 01:01:09,040 Speaker 1: that in my book Interrational Zuberans in my book New 956 01:01:09,080 --> 01:01:13,200 Speaker 1: Financial Order. Yeah, the so called Bowie bonds where you 957 01:01:13,200 --> 01:01:17,840 Speaker 1: could invest in David Bowie his future income. That worked 958 01:01:17,840 --> 01:01:19,480 Speaker 1: out to be really good for Bowie. I don't know 959 01:01:19,480 --> 01:01:21,040 Speaker 1: how well that worked out for I don't know what 960 01:01:21,080 --> 01:01:24,000 Speaker 1: happened to David. Well, it wasn't just that. It was 961 01:01:24,040 --> 01:01:28,280 Speaker 1: that record sales eventually fell off a cliff and he 962 01:01:28,680 --> 01:01:31,240 Speaker 1: sold his catalog, so he took the cash up front 963 01:01:31,280 --> 01:01:34,439 Speaker 1: instead of that's good for David Bowie. Yes, it turns 964 01:01:34,480 --> 01:01:37,360 Speaker 1: out he's a savage. You shouldn't hold Bowie bonds as 965 01:01:37,400 --> 01:01:39,600 Speaker 1: the only thing in your portfolio. So if you held 966 01:01:39,640 --> 01:01:43,080 Speaker 1: a diversified portfolio, a little a little Leonard Skinner, it, 967 01:01:43,120 --> 01:01:45,920 Speaker 1: a little led Zeppelin it, it'll works go beyond just 968 01:01:46,440 --> 01:01:49,560 Speaker 1: that sort of thing. So, so these ath there's a 969 01:01:49,600 --> 01:01:53,800 Speaker 1: company out I think in California that's essentially doing the 970 01:01:53,920 --> 01:01:57,680 Speaker 1: equivalent of I P O S where they take an 971 01:01:57,720 --> 01:02:00,800 Speaker 1: athlete and they allow you to buy a percentage of 972 01:02:00,840 --> 01:02:03,560 Speaker 1: his income and you don't know if he's going to 973 01:02:03,600 --> 01:02:07,440 Speaker 1: get injured next year. What what sort of endorsements? That 974 01:02:07,600 --> 01:02:12,640 Speaker 1: seems like a kind of interesting form of speculation. Um, 975 01:02:13,640 --> 01:02:15,760 Speaker 1: what sort of stuff along those lines? By the way, 976 01:02:15,840 --> 01:02:20,840 Speaker 1: with Milton Friedman advocated something like this in the nineties 977 01:02:20,880 --> 01:02:25,440 Speaker 1: sixties in his book Capitalism and Freedom for Everyone. We 978 01:02:25,440 --> 01:02:27,680 Speaker 1: should all be able to sell shares in our income. 979 01:02:27,680 --> 01:02:30,680 Speaker 1: Although then he kind of took it back. Milton Friedman 980 01:02:30,800 --> 01:02:33,720 Speaker 1: had some sense of reality and he said, this is 981 01:02:33,760 --> 01:02:36,960 Speaker 1: not for now in America, So we we all can't 982 01:02:36,960 --> 01:02:41,120 Speaker 1: have individual I p o s. That's not gonna well someday. 983 01:02:41,160 --> 01:02:43,960 Speaker 1: But see he was commenting in his book that they're 984 01:02:44,000 --> 01:02:48,200 Speaker 1: kind of hard to enforce, right, um enforce what trading 985 01:02:48,320 --> 01:02:51,480 Speaker 1: people could? We could jump, they move away and then 986 01:02:51,520 --> 01:02:53,400 Speaker 1: you can't find them anymore. So how are you going 987 01:02:53,440 --> 01:02:55,680 Speaker 1: to capture a stream of That's what he said. Yeah, 988 01:02:55,840 --> 01:02:58,439 Speaker 1: but if you're an athlete playing for a professional team, 989 01:02:58,520 --> 01:03:00,960 Speaker 1: you can find them. So I always thought that was 990 01:03:01,080 --> 01:03:04,200 Speaker 1: kind of a risky thing. You know, you an injury, 991 01:03:04,440 --> 01:03:07,880 Speaker 1: you're done, you say something and forget the craziness that 992 01:03:07,920 --> 01:03:11,240 Speaker 1: happened with the NFL earlier this year. It's two. It 993 01:03:11,280 --> 01:03:16,120 Speaker 1: seems very easy for an athlete to put his you know, 994 01:03:16,200 --> 01:03:19,960 Speaker 1: not everybody's Lebron James. Not everybody is a Michael Jordan 995 01:03:20,040 --> 01:03:25,200 Speaker 1: who's going to have a thirty year stream of UM 996 01:03:25,320 --> 01:03:29,600 Speaker 1: endorsement revenue. Or look, you know, there are millions of golfers. 997 01:03:30,160 --> 01:03:32,919 Speaker 1: There's only a handful of guys like Arnie Palmer and 998 01:03:33,440 --> 01:03:36,600 Speaker 1: Jack Nicholas who when their golf career was over they 999 01:03:36,640 --> 01:03:41,000 Speaker 1: went on to build businesses, building golf courses. That that 1000 01:03:41,080 --> 01:03:43,920 Speaker 1: just seems like a challenging sort of ip O. So 1001 01:03:44,040 --> 01:03:48,080 Speaker 1: to bring that back to individuals, what else do you 1002 01:03:48,080 --> 01:03:51,880 Speaker 1: think they should do to too rain in the worst 1003 01:03:51,920 --> 01:03:57,000 Speaker 1: aspects of their behavior? How should people control their psychological 1004 01:03:57,200 --> 01:04:02,360 Speaker 1: im You need a therapist, Maybe you need some antidepressant. 1005 01:04:02,600 --> 01:04:06,880 Speaker 1: You know, we're medicating people and more and more people 1006 01:04:07,040 --> 01:04:14,479 Speaker 1: or probably I uh so, So aside from anidepressants, most 1007 01:04:14,520 --> 01:04:18,400 Speaker 1: of our listeners are investors. What could they do to 1008 01:04:18,600 --> 01:04:23,960 Speaker 1: avoid the worst aspects of their own cognitive errors and 1009 01:04:24,080 --> 01:04:27,520 Speaker 1: behavioral foibles? Well, I think you have to be introspective 1010 01:04:27,560 --> 01:04:31,439 Speaker 1: and you have to understand psychology, and there are some 1011 01:04:31,840 --> 01:04:35,959 Speaker 1: important books that I recommend. For example, Daniel Kaneman wrote 1012 01:04:35,960 --> 01:04:39,360 Speaker 1: a book called Thinking Fast and Slow, which is a 1013 01:04:39,400 --> 01:04:43,640 Speaker 1: summary of a lot of important UM research in in 1014 01:04:43,760 --> 01:04:47,439 Speaker 1: psycho especially as relates to investing. It's a fascinating book. 1015 01:04:47,480 --> 01:04:51,200 Speaker 1: It's it's a little thick, but it's definitely readable. He 1016 01:04:51,240 --> 01:04:55,200 Speaker 1: writes a very accessible style. What what else? Um? What 1017 01:04:55,360 --> 01:04:59,000 Speaker 1: sort of other books have caught your eye when you 1018 01:04:59,040 --> 01:05:04,640 Speaker 1: talk about emotion? Antonio Dimasio wrote a book called Descartes Error, 1019 01:05:05,920 --> 01:05:10,400 Speaker 1: referring to Renee Descartes. Uh was a philosopher hundreds of 1020 01:05:10,480 --> 01:05:17,720 Speaker 1: years ago who advocated emphasizing your rational self. There, Yeah, 1021 01:05:17,760 --> 01:05:20,400 Speaker 1: he was. He thought that you had two sides to 1022 01:05:20,440 --> 01:05:23,720 Speaker 1: your mind, your rational and your emotional, and that the 1023 01:05:23,760 --> 01:05:27,160 Speaker 1: important thing philosophically is to just clear out all of 1024 01:05:27,200 --> 01:05:32,720 Speaker 1: the emotion. But Demacio said, you can't do that your brain. 1025 01:05:33,120 --> 01:05:35,760 Speaker 1: There is no clear division in your brain that you 1026 01:05:35,960 --> 01:05:40,520 Speaker 1: the emotions are built in. Uh. So that's another interesting book. 1027 01:05:40,640 --> 01:05:43,400 Speaker 1: So so when you say no yourself, be aware of 1028 01:05:43,400 --> 01:05:46,480 Speaker 1: your own you really is really a way of saying, hey, 1029 01:05:46,520 --> 01:05:49,760 Speaker 1: be aware of your own propensity to allow your emotions 1030 01:05:49,800 --> 01:05:53,439 Speaker 1: to to get the best of you. So let's talk 1031 01:05:53,480 --> 01:05:58,880 Speaker 1: for a second about your own portfolio. Um. We we 1032 01:05:59,040 --> 01:06:04,720 Speaker 1: both had discussed passive investments and long term indexes. Is 1033 01:06:04,720 --> 01:06:08,960 Speaker 1: there anything else you do besides that? Or do do 1034 01:06:09,040 --> 01:06:16,240 Speaker 1: you walk the walk as well as uh? Uh? As well? Well, 1035 01:06:16,320 --> 01:06:19,760 Speaker 1: I am not. Uh My I have. I'm working with 1036 01:06:19,800 --> 01:06:23,360 Speaker 1: Barclays Bank on some investment products, but I leave a 1037 01:06:23,360 --> 01:06:26,680 Speaker 1: lot of the management of that to them because I 1038 01:06:27,280 --> 01:06:31,960 Speaker 1: can't do everything, and I'm not. I'm not watching individual 1039 01:06:32,080 --> 01:06:34,680 Speaker 1: stocks on a daily basis. So you're an index investor. 1040 01:06:34,800 --> 01:06:38,680 Speaker 1: Is that a kind of statement? Not? Well, I do 1041 01:06:38,760 --> 01:06:44,320 Speaker 1: sector indexes. Yeah, I do some individual stocks, but I don't. Uh. 1042 01:06:44,480 --> 01:06:47,600 Speaker 1: I have a very busy life. I just don't have 1043 01:06:47,800 --> 01:06:51,880 Speaker 1: time to do um. I write newspaper columns, I write books. 1044 01:06:52,360 --> 01:06:54,560 Speaker 1: That's right. I left out your your columnist for the 1045 01:06:54,560 --> 01:06:57,680 Speaker 1: Sunday Business section in the New York Times. You're you're 1046 01:06:57,800 --> 01:07:00,400 Speaker 1: part of a group with let's see who else is 1047 01:07:00,400 --> 01:07:04,520 Speaker 1: in that Tyler Collen, Greg manque Um, Richard Thaller. I'm 1048 01:07:04,520 --> 01:07:08,160 Speaker 1: trying to remember who else is in that room, that's right. 1049 01:07:08,920 --> 01:07:11,880 Speaker 1: And that's a murderous row of of writers there, to 1050 01:07:11,920 --> 01:07:15,480 Speaker 1: say the least. So it's fair to say you're not 1051 01:07:15,640 --> 01:07:20,080 Speaker 1: actively on a terminal trading every day. You're really a 1052 01:07:20,120 --> 01:07:24,760 Speaker 1: longer term. Uh well, I don't actually need money either. 1053 01:07:25,120 --> 01:07:28,280 Speaker 1: I think I'm all set for You're okay, and you're 1054 01:07:28,280 --> 01:07:31,200 Speaker 1: still working any plans all the time. No, I have 1055 01:07:31,240 --> 01:07:34,720 Speaker 1: no plans to retire full time faculty member. And that's 1056 01:07:34,840 --> 01:07:37,080 Speaker 1: for as far for the next fifty. To spend time 1057 01:07:37,120 --> 01:07:39,400 Speaker 1: with my students too, I try to. I I have 1058 01:07:39,480 --> 01:07:42,080 Speaker 1: too many of them to do as good as I should. 1059 01:07:42,720 --> 01:07:45,240 Speaker 1: So I could keep you here for another hour, but 1060 01:07:45,320 --> 01:07:48,760 Speaker 1: I know you have an appointment. UM up after this 1061 01:07:49,400 --> 01:07:53,919 Speaker 1: honoring a a colleague of yours from Columbia University at 1062 01:07:53,920 --> 01:07:56,520 Speaker 1: the New York Times. So I want to thank you 1063 01:07:56,560 --> 01:07:58,360 Speaker 1: for how much time you spent with us. I really 1064 01:07:58,400 --> 01:08:02,560 Speaker 1: appreciate it. We've been speak taking with Yale professor Robert Schiller. 1065 01:08:03,200 --> 01:08:07,800 Speaker 1: UM be sure and check out our previous podcasts that 1066 01:08:08,000 --> 01:08:11,800 Speaker 1: are on iTunes and Bloomberg dot Com. You're listening to 1067 01:08:11,960 --> 01:08:15,720 Speaker 1: Masters in Business with Barry Ridholts on Bloomberg Radio