WEBVTT - Masters in Business: Yale Professor Robert Shiller (Audio) 0:00:03.240 --> 0:00:08.559 This is Masters in Business with Barry Ridholds on Bloomberg Radio. Alright, 0:00:08.600 --> 0:00:11.039 this week we have a very special guest. I'm really 0:00:11.080 --> 0:00:14.720 excited about this, although I'm always really excited about our 0:00:15.160 --> 0:00:19.759 all of our guests. Uh Yale University professor Robert Schiller, 0:00:20.280 --> 0:00:25.840 winner of the Nobel Prize for Economics. He is really 0:00:25.880 --> 0:00:30.880 a fascinating and delightful guy. I'm a huge fan of 0:00:30.960 --> 0:00:37.320 his work. I've been following his writings about markets, about bubbles, 0:00:37.360 --> 0:00:41.680 about investor behavior for really a long time. You know, 0:00:42.240 --> 0:00:45.560 early in my career, I became very interested in investor 0:00:45.600 --> 0:00:50.199 behavior and the cognitive errors that people in general, but 0:00:50.360 --> 0:00:55.680 specifically when we're making risk reward decisions and making bets 0:00:55.760 --> 0:00:58.880 on on markets or bonds or stocks or what have you. 0:00:59.480 --> 0:01:04.920 Those specific errors are quite fascinating. And when I began 0:01:05.280 --> 0:01:09.639 exploring that area, not a lot of people were doing 0:01:09.760 --> 0:01:14.080 serious academic research and writing about it. And and Bob 0:01:14.120 --> 0:01:18.400 Schiller was really one of the first academics to say, hey, 0:01:18.440 --> 0:01:23.040 the math doesn't add up. Markets maybe sort of kinda 0:01:23.319 --> 0:01:28.160 a little efficient, but the numbers aren't there to justify 0:01:28.400 --> 0:01:32.120 this belief that markets are perfectly efficient. In fact, when 0:01:32.120 --> 0:01:33.880 you see the day to day and week to week 0:01:33.920 --> 0:01:38.920 swings looked at against dividends, which are really the ultimate 0:01:39.000 --> 0:01:44.640 payout of of future earnings. The numbers just completely destroy 0:01:44.720 --> 0:01:48.760 the argument that that people are rational, markets are efficient, etcetera. 0:01:49.040 --> 0:01:53.600 So he's really a fascinating guy, not what you would 0:01:53.640 --> 0:01:57.800 expect from an academic. Uh, really down to earth. I've 0:01:57.800 --> 0:02:02.160 been on a number of panels and in media appearances 0:02:02.200 --> 0:02:04.080 with him, and I just always find him to be 0:02:04.840 --> 0:02:09.160 charming and pleasant. I've given him numerous opportunities to throw 0:02:09.200 --> 0:02:12.360 people under the bus, and he refuses to rise to 0:02:12.440 --> 0:02:16.120 the bait each and every time. Uh. If you're familiar 0:02:16.160 --> 0:02:18.760 with his track record, or if you're unfamiliar with his 0:02:18.800 --> 0:02:21.639 track record, he's the guy who published the book A 0:02:21.720 --> 0:02:25.920 Rational Xuberance early in two thousand pretty much marked the 0:02:26.040 --> 0:02:30.000 very top of the market. As if that wasn't enough, 0:02:30.680 --> 0:02:34.160 in two thousand five two thousand six, he warned that 0:02:35.440 --> 0:02:40.360 housing was wildly overvalued and was due for a significant correction. 0:02:40.800 --> 0:02:43.600 Oh and by the way, we should expect that correction 0:02:43.680 --> 0:02:48.440 to have a real negative impact across the economy. He 0:02:48.520 --> 0:02:52.560 was dead right about that, and today he sees markets 0:02:52.680 --> 0:02:57.440 not as quite in bubble territory liked or as as 0:02:57.480 --> 0:03:00.680 bubblicious as we saw housing was in two thousand five, 0:03:00.720 --> 0:03:03.840 two thousand six. But he thinks markets are fairly valued 0:03:04.040 --> 0:03:06.200 and that they could have a couple of years to 0:03:06.280 --> 0:03:10.720 go before we start to run into real, um serious problems. 0:03:10.760 --> 0:03:16.440 So really interesting guy, fascinating curriculum vitae. And still you 0:03:16.480 --> 0:03:18.919 know he really just wants to be a professor. He 0:03:18.919 --> 0:03:21.680 he teaches a class every day. He's been up in 0:03:21.680 --> 0:03:25.960 New Haven at Yale for many years. Really sharp guy, 0:03:26.360 --> 0:03:31.720 very fascinating discussion. Without further ado on my part, here's 0:03:31.720 --> 0:03:38.880 our conversation with Bob Schiller. This is Masters in Business 0:03:38.960 --> 0:03:42.520 with Barry Ridholts on Bloomberg Radio. Today. I have a 0:03:42.640 --> 0:03:47.520 very special guest, our second Nobel Laureate uh Yale, Professor 0:03:47.640 --> 0:03:52.080 Robert Schiller. If you don't know who Professor Schiller is, well, first, 0:03:52.360 --> 0:03:55.240 shame on you. You should. And second, let me give 0:03:55.280 --> 0:03:59.200 you just a brief background on the professor. You've been 0:03:59.200 --> 0:04:03.800 teaching economics at Yale for thirty two quite a while. 0:04:04.320 --> 0:04:06.800 You've written a number of books. One of the most 0:04:06.840 --> 0:04:11.280 famous books was called Irrational Exuberance, which came out in 0:04:11.320 --> 0:04:15.160 the year two thousand, in which you had warned about 0:04:15.200 --> 0:04:20.000 the coming dot com implosion. That wasn't the first time 0:04:20.080 --> 0:04:22.440 you had warned people that things were going to be 0:04:22.480 --> 0:04:27.000 a problem. In two thousand and six, you were describing 0:04:27.120 --> 0:04:30.120 the subprime problem and what it was gonna do for 0:04:30.200 --> 0:04:33.840 housing and said, hey, we're looking at something we haven't 0:04:33.880 --> 0:04:38.200 seen in many, many decades, big drop in housing prices 0:04:38.279 --> 0:04:42.000 and loan behold. I think nationally we saw a thirty 0:04:42.000 --> 0:04:45.719 three percent drop. You're the co creator of the Case 0:04:45.760 --> 0:04:51.599 Schiller Housing Index, with which also measures house prices in 0:04:51.680 --> 0:04:56.920 both cities and metropolitan regions. And and basically you were 0:04:56.960 --> 0:05:01.680 the first to really quantify changes in home prices nationally 0:05:02.320 --> 0:05:06.360 and internationally. And then last year, for all the work 0:05:06.400 --> 0:05:10.279 you've done on behavioral economics and finance, you were the 0:05:10.320 --> 0:05:15.880 recipient of the Nobel Prize, which you actually shared with 0:05:15.960 --> 0:05:19.119 someone else from Yale or am I to know? The 0:05:19.160 --> 0:05:23.560 other two were both from Chicago, Eugene Farmer and Lars 0:05:23.600 --> 0:05:27.880 Peter Hansen. And and we'll save the whole wonky argument 0:05:27.920 --> 0:05:32.600 about Fama versus Schiller in terms of our market sufficient 0:05:32.800 --> 0:05:36.160 or not for a later segment. But Professor Schiller, well, 0:05:36.200 --> 0:05:40.560 welcome to the show. My pleasure. So let's let's get 0:05:40.560 --> 0:05:44.560 into the background of this. You've found your way into 0:05:44.640 --> 0:05:49.120 a field which has become known as behavioral economics or 0:05:49.200 --> 0:05:53.320 behavioral finance, before anyone even knew there was such a thing. 0:05:53.800 --> 0:05:56.920 How did how did that come about? Well? I never know. 0:05:57.640 --> 0:06:02.880 It's uh apparently because actually there are antecedents. I had 0:06:02.880 --> 0:06:06.080 a professor at Michigan, George Katona. He was the guy 0:06:06.120 --> 0:06:10.400 who created the Michigan consumer sentiment indexes, which are still 0:06:10.480 --> 0:06:13.080 widely exited. And when did he create that? That was 0:06:13.200 --> 0:06:16.640 quite a way. Oh yeah, he did his first sentiment 0:06:16.680 --> 0:06:20.240 index in the nineteen fifties, So that was an early 0:06:20.279 --> 0:06:24.280 exposure on your side to consumer sentiment. But nobody had 0:06:24.279 --> 0:06:28.040 ever taken that and really directly applied it to Yeah, 0:06:28.040 --> 0:06:31.840 he was in the psych department and he was all 0:06:31.880 --> 0:06:34.280 by himself. Yeah, I don't know who. It must have 0:06:34.320 --> 0:06:37.040 been someone else, but but no one else was really saying, hey, 0:06:37.120 --> 0:06:40.599 let's look at the psychology of consumers to see how 0:06:40.680 --> 0:06:44.560 what they're feeling and saying effects their behavior in terms 0:06:44.600 --> 0:06:48.360 of spending and retail sales. Well, there weren't academic so 0:06:48.480 --> 0:06:52.039 there weren't scientifically there must have been people talking about 0:06:52.040 --> 0:06:56.000 psychology they've always talked about it. But the idea of 0:06:56.160 --> 0:06:59.280 systematized you know, it was in the early sixties that 0:06:59.600 --> 0:07:02.760 the Chris tape came, so you could use a computer 0:07:03.279 --> 0:07:07.360 and you could process an analysis of stock prices, and 0:07:07.440 --> 0:07:12.240 that kind of dominated thought. From nineteen sixty two almost nine. 0:07:13.560 --> 0:07:16.720 They were finding that markets looked efficient. That was the 0:07:16.880 --> 0:07:19.720 general tenor so. The whole idea that you could beat 0:07:19.760 --> 0:07:23.880 the market, at least among academic types was considered discredited, 0:07:23.960 --> 0:07:26.840 and so they weren't interested in psychology. There was no 0:07:27.000 --> 0:07:30.880 psychology in this frame of thinking in the markets. And 0:07:30.960 --> 0:07:35.080 yet when you look at the behavior of markets in actuality, 0:07:35.760 --> 0:07:39.200 you have giant booms, you have bubbles, you have terrible 0:07:39.320 --> 0:07:43.720 busts and crashes. You know, in seven the Dow lost 0:07:44.800 --> 0:07:48.720 in one day. How efficient is a market? Then on 0:07:48.720 --> 0:07:50.480 one day it's worth a hundred and then the next 0:07:50.560 --> 0:07:55.000 day it's worth seventy seven, and both of those prices 0:07:55.040 --> 0:07:59.560 are actually valid according to that sort of approach. How 0:07:59.560 --> 0:08:02.640 does that make any sense? Well, you're referring to October 0:08:02.720 --> 0:08:07.040 nine seven, when, as you say, the market made a 0:08:07.120 --> 0:08:12.960 historic one day dropped and efficient markets. People would say 0:08:13.080 --> 0:08:16.280 there must have been news that the problem is, no 0:08:16.320 --> 0:08:18.880 one could come up with what the news was, and 0:08:18.960 --> 0:08:22.520 so it started to sound funny. I did a study 0:08:22.520 --> 0:08:25.400 of that event, but my way of studying it was 0:08:25.560 --> 0:08:30.120 totally out of fashion. I did a questionnaire survey. Now 0:08:30.640 --> 0:08:35.600 most no one else did that until later there was 0:08:35.640 --> 0:08:39.360 this Brady Commission that did a survey. But you know, 0:08:39.440 --> 0:08:41.680 the economists have gotten into the frame of mind that 0:08:41.960 --> 0:08:44.640 there's no point in asking people why they bought or 0:08:44.679 --> 0:08:49.320 sold because they lie. They make up stories, nationalized, they 0:08:49.360 --> 0:08:52.360 lie to themselves. They don't know they're lying. This looks 0:08:52.400 --> 0:08:56.280 like psychology, which is just disreputable. In the econ department, 0:08:56.920 --> 0:08:59.520 I found that whenever you talked to people who were 0:08:59.559 --> 0:09:05.640 bullet the question to always ask is, so what's your 0:09:05.840 --> 0:09:09.040 investment posture? Oh, I'm fully invested, I'm long my own 0:09:09.080 --> 0:09:11.920 lots of equities. And whenever you talk to people who 0:09:11.920 --> 0:09:16.319 are bearish, it's always, oh, I'm out of stocks. I 0:09:16.400 --> 0:09:19.480 don't want to have any exposure. It seems that the 0:09:19.520 --> 0:09:25.600 way we define ourselves is rationalizing the prior decision, right. 0:09:25.840 --> 0:09:30.679 That's called cognitive dissonance. That's so so we end up 0:09:30.760 --> 0:09:34.400 with participants in markets who don't really seem to know 0:09:35.120 --> 0:09:39.200 why they're doing what they're doing, but they're constantly rationalizing 0:09:40.000 --> 0:09:43.640 uh that process to themselves. Right. Well, they these are 0:09:43.960 --> 0:09:49.240 ring bells that psychologists have explored. So justification bias, which 0:09:49.240 --> 0:09:53.600 is something that Knomen and others have studied, people uh 0:09:53.840 --> 0:09:57.840 will feel they have to justify things there their self 0:09:57.880 --> 0:10:01.880 respect even when they're justifying to them selves, and so 0:10:02.040 --> 0:10:07.920 they tend to follow naive rules and they tend to 0:10:07.920 --> 0:10:09.880 do the same thing that they've done before. As you 0:10:09.920 --> 0:10:13.280 were saying today, my special guest in the studio is 0:10:13.400 --> 0:10:17.400 Yale Professor of Economics Robert Schiller, winner last year of 0:10:17.480 --> 0:10:23.240 the uh Rivsking Award for Risk Bank Award. It's this 0:10:23.400 --> 0:10:26.559 technically not a Nobel for economics, but it comes from 0:10:26.600 --> 0:10:29.679 the right. They don't make up their mind what to 0:10:29.760 --> 0:10:32.360 call it, so all these different names that they use 0:10:32.440 --> 0:10:34.560 it at the Nobel Foundation, So we could just go 0:10:34.720 --> 0:10:37.520 with the Nobel Prize in Economics and yeah, that's that's 0:10:37.520 --> 0:10:41.280 good enough. Shorthand. So the segment, this segment, what I 0:10:41.360 --> 0:10:44.880 really want to discuss with you are the booms and 0:10:45.000 --> 0:10:49.120 busts that it seems every market has gone through. We 0:10:49.160 --> 0:10:51.280 had the dot com boom and bust, We had the 0:10:51.320 --> 0:10:55.040 housing boom and bust. Lately, gold seems to be in 0:10:55.040 --> 0:10:58.280 the midst of imploding as we're speaking. It's in the 0:10:58.280 --> 0:11:01.839 eleven hundreds. It was nineteen hundred dollars not too long ago. 0:11:01.960 --> 0:11:07.080 It's lost about its value. Is this the fate of humanity? 0:11:07.080 --> 0:11:10.160 That there are always gonna be booms and busts, that 0:11:10.240 --> 0:11:15.719 were always going to have bubbles? Ah, good point, I 0:11:16.400 --> 0:11:19.600 h Let me say in my Nobel lecture which I 0:11:19.679 --> 0:11:22.079 gave on that occasion, I tried to point out that 0:11:22.640 --> 0:11:27.120 efficient markets is actually the theory actually has some value. 0:11:27.559 --> 0:11:30.880 It's a half truth. So let's not go to extreme right, 0:11:31.040 --> 0:11:33.360 Maybe it would be more fun if we went to extremes, 0:11:33.400 --> 0:11:38.280 but price movements and markets often do reflect real news. 0:11:38.840 --> 0:11:41.920 The point is that sometimes they don't, and so it's 0:11:41.960 --> 0:11:45.720 not the pure efficient markets theory is not quite right. 0:11:46.040 --> 0:11:49.640 So when we look back at this past decade, we've had, 0:11:50.080 --> 0:11:52.880 we had a dot, We've had it seems every few 0:11:52.960 --> 0:11:57.440 years we've had a major bubble. Why is it that 0:11:57.640 --> 0:12:04.000 human beings succumbed to this sort of activity in capital markets? Well, 0:12:04.040 --> 0:12:07.079 people succumbed to this sort of thing outside of capital 0:12:07.160 --> 0:12:11.800 markets too. It's called fashions. And fads. Henry Fielding said, 0:12:11.960 --> 0:12:15.280 fashion is the great governor of this world. It's true. 0:12:15.280 --> 0:12:17.880 We're you know, so much like the way we're dressed 0:12:17.920 --> 0:12:24.040 and the laser your suit and tie. Yeah, I look 0:12:24.800 --> 0:12:30.400 very conventional here, right, it's all dictated gray flannel overcoat 0:12:31.040 --> 0:12:34.200 and this is the sort of stuff. So because so 0:12:34.200 --> 0:12:37.760 in other words, it's the crowd. It's because peer pressure. 0:12:38.240 --> 0:12:41.400 Everybody else dresses this way. So is that how the 0:12:41.720 --> 0:12:44.560 investors behave? Yeah, and no, there's no problem in doing 0:12:44.600 --> 0:12:48.040 what everyone else does in dress, doesn't matter. But if 0:12:48.080 --> 0:12:50.920 you do what everyone else does in investing, you'll just 0:12:50.960 --> 0:12:54.040 have the market return if you're lucky. Some of the 0:12:54.040 --> 0:12:58.440 studies we've seen have said that the average investor isn't 0:12:58.440 --> 0:13:02.120 even forget alpha, they're not even generating beta, they're not 0:13:02.160 --> 0:13:07.080 even obtaining market returns. So how how significant is investor 0:13:07.160 --> 0:13:11.120 behavior to those sorts of bad returns. Well, then people 0:13:11.120 --> 0:13:16.520 are vulnerable to sales tactics, and they might buy into 0:13:16.600 --> 0:13:20.319 some investment fund that has a very high management fee, 0:13:21.280 --> 0:13:26.000 uh which they were sold on it, and they fall 0:13:26.120 --> 0:13:29.440 victim to tricks like incubator funds that you know, you 0:13:29.559 --> 0:13:32.040 try to start a number of funds and one of 0:13:32.040 --> 0:13:34.400 them is going to do well by chance, and you 0:13:34.440 --> 0:13:37.080 start promoting that one. There was an old joke many 0:13:37.160 --> 0:13:39.959 years ago that you could send out the back in 0:13:40.000 --> 0:13:44.000 the day when newsletter writers were popular. You send out 0:13:44.040 --> 0:13:47.440 ten thousand pieces of mail, and you pick a stock, 0:13:47.520 --> 0:13:50.480 and one piece of mail says, this stock is the 0:13:50.559 --> 0:13:53.880 greatest things, and slice bread. It's our next pick. You 0:13:53.920 --> 0:13:56.520 have to own it. And the other five thousand pieces 0:13:56.520 --> 0:13:59.439 of mail say this is a terrible stock. You want 0:13:59.480 --> 0:14:02.400 nothing to do with it. And then whichever half is right, 0:14:02.559 --> 0:14:05.000 that's how you market the next the next letter two, 0:14:05.320 --> 0:14:07.640 and people like, well, they were so right the last time, 0:14:08.160 --> 0:14:12.400 So it's very easy for us to be fooled. I'm 0:14:12.440 --> 0:14:16.960 speaking with Yale professor Robert Schiller discussing booms and bus 0:14:17.800 --> 0:14:21.520 Let's talk a little bit about irrational exuberance, a phrase 0:14:21.680 --> 0:14:27.120 that was made famous in by Alan Greenspan, which I 0:14:27.160 --> 0:14:30.440 think many of our listeners will be familiar with. Green 0:14:30.520 --> 0:14:34.200 Spans irrational exuberant speech. What I bet most people don't 0:14:34.280 --> 0:14:38.240 know is that you're the guy who briefed him before 0:14:38.280 --> 0:14:42.640 that speech, and that was essentially your phrase that he 0:14:42.680 --> 0:14:45.880 incorporated into his um his speech. Is that is that 0:14:45.960 --> 0:14:48.880 more or less accurate. Well, I know that. I I've 0:14:49.200 --> 0:14:52.320 met with the whole Federal Reserve Board with my co 0:14:52.480 --> 0:14:55.840 author John Campbell three days before that speech, and we 0:14:55.840 --> 0:14:59.360 were saying the market was the irrational, But I don't 0:14:59.440 --> 0:15:02.880 think I probably used the word irrational exurbance. So that 0:15:02.960 --> 0:15:05.680 was his own phrase. Well, it wasn't exactly his own. 0:15:05.760 --> 0:15:08.640 It was already around but not used. But we know 0:15:08.720 --> 0:15:12.120 what really made it famous was not the fact that 0:15:12.160 --> 0:15:14.480 he used it. It was that markets all over the 0:15:14.520 --> 0:15:18.640 world dropped sharply as soon as he I believe the 0:15:18.880 --> 0:15:22.040 Japanese markets were open when he gave his speech, the 0:15:22.120 --> 0:15:25.840 U S markets were closed. They just dropped immediately, and people, 0:15:26.040 --> 0:15:29.360 what's going on here? Why would the Japanese market Well, 0:15:29.400 --> 0:15:31.760 you know, people in Japan were listening to his speech 0:15:32.240 --> 0:15:34.720 and they must have put it out on the news, 0:15:34.800 --> 0:15:38.040 and that was the basis of the full and the nick. Yeah, 0:15:38.520 --> 0:15:41.320 it was so absurd that he just uttered these words 0:15:41.400 --> 0:15:44.800 irrational and he mentioned Japan in the same sentence. And 0:15:45.040 --> 0:15:49.200 now everybody forgets back in the late nineties, green Span 0:15:49.440 --> 0:15:52.800 was the man. He was moving markets. Since then, we've 0:15:52.840 --> 0:15:56.320 had a little bit of reputational damaged thanks to the 0:15:56.360 --> 0:16:00.000 most recent financial crisis. Today, my guest in the studio 0:16:00.000 --> 0:16:03.120 OH is Professor Robert Schiller of Yale, winner of the 0:16:03.160 --> 0:16:08.520 Nobel Prize in Economics. In and earlier we were discussing housing. 0:16:08.600 --> 0:16:13.200 Let's have a little more detailed conversation about that. So 0:16:13.520 --> 0:16:16.960 you were the co creator of the Case Shiller Housing Index. 0:16:17.480 --> 0:16:21.880 Prior to that, there really wasn't a reliable set of 0:16:23.080 --> 0:16:27.600 national data that compiles all the different metropolitan and regional 0:16:28.120 --> 0:16:31.720 housing markets. Is that? Is that correct? We had? Well, 0:16:31.760 --> 0:16:35.720 it's interesting there were no price indexes at all until 0:16:35.760 --> 0:16:39.240 around the nineteen sixties. Strange because people had the Dow 0:16:39.440 --> 0:16:43.400 and there was none. Then the National Association of Realtory 0:16:43.400 --> 0:16:46.080 I think they had a different name. Then UH created 0:16:46.120 --> 0:16:48.520 the Media and Home Price and they published it. It 0:16:48.600 --> 0:16:50.760 was kind of intermittent. Some months they'd missed and it 0:16:50.840 --> 0:16:53.240 was very jumpy. Then the sense, I don't know if 0:16:53.240 --> 0:16:55.360 you wanted all that. There was a new home price 0:16:55.680 --> 0:17:00.360 index that Census published, but it didn't track existing homes. 0:17:00.560 --> 0:17:03.600 It wasn't you know what what we Case and I developed. 0:17:03.960 --> 0:17:09.080 We wanted to at Wellesley College. We wanted a tradeable index. 0:17:09.119 --> 0:17:12.639 We believed in markets for indexes so we wanted an 0:17:12.640 --> 0:17:16.439 index that represented the investment value of a existence, so 0:17:16.560 --> 0:17:19.680 to repeat sales indere like a stock market index. It 0:17:20.200 --> 0:17:23.960 shows the changes in the index reflect changes in prices 0:17:24.000 --> 0:17:27.520 of homes, not the change in the mix of homes 0:17:27.520 --> 0:17:30.359 that are sold. Right, So every year the NR every 0:17:30.400 --> 0:17:33.320 month the NUR data. That's a different set of houses sold, 0:17:33.480 --> 0:17:36.760 different every month. You guys try to focus on a 0:17:36.880 --> 0:17:40.320 region and make it look more like you're trading a 0:17:40.359 --> 0:17:44.919 given house, given group of houses. So we were the 0:17:45.000 --> 0:17:49.960 first to publish a home price index that is like 0:17:50.000 --> 0:17:52.560 a stock price index. And that's been around for how 0:17:52.600 --> 0:17:56.640 long now, since the late eighties, and it was eventually 0:17:56.640 --> 0:18:00.159 sold to S and P. It's complicated. We so that 0:18:00.200 --> 0:18:02.880 the five service service, so that the core logic core 0:18:02.960 --> 0:18:05.800 Logic has a deal with SMP. It's kind of, you know, 0:18:05.880 --> 0:18:09.520 the way the world works, never never simple. So then 0:18:09.720 --> 0:18:13.960 in two thousand three you had an interesting paper at 0:18:14.119 --> 0:18:16.800 I think it was Brookings. Is that right? Is there 0:18:16.840 --> 0:18:19.760 a bubble brewing in the housing market? So tell us 0:18:19.800 --> 0:18:22.560 a little bit about that. What did you see an 0:18:22.560 --> 0:18:27.040 oh three, long before anybody else was talking about um 0:18:27.080 --> 0:18:30.639 housing bubbles? What caught your eye that made you author 0:18:30.680 --> 0:18:34.960 a paper three years before the market peaked and said, hey, 0:18:35.000 --> 0:18:39.479 this is a potential problem. Well, one thing is, we 0:18:39.520 --> 0:18:43.840 did a questionnaire survey of homebuyers and asked them what 0:18:44.000 --> 0:18:46.760 they thought home prices would do for the next ten years, 0:18:47.720 --> 0:18:53.560 and we got extravagantly high expectations. People thought, uh, something 0:18:53.600 --> 0:18:57.639 like ten percent a year increasing for ten years, so 0:18:57.720 --> 0:19:01.520 the houses will double every seven or so after already 0:19:01.560 --> 0:19:06.840 reaching record high levels. Uh and uh. We we asked 0:19:06.840 --> 0:19:10.359 about you know, general people thought housing was the great investment. 0:19:10.800 --> 0:19:13.520 They were a little annoyed with the stock market in 0:19:13.560 --> 0:19:16.159 two thousand three because they had bottomed out and they 0:19:16.240 --> 0:19:19.200 had a bubble burst, and they would write things on 0:19:19.280 --> 0:19:22.680 the questionnaires they right. I am really angry with my broker. 0:19:22.760 --> 0:19:25.320 He he told me all these finance guys are a 0:19:25.359 --> 0:19:27.879 bunch of crooks. I want to buy a house something 0:19:27.880 --> 0:19:30.520 that I can see and believe. I know it's real. 0:19:30.680 --> 0:19:33.320 I'm sitting in it, I can watch it all the time. 0:19:33.920 --> 0:19:36.760 And that just became an attitude that drove, and then 0:19:36.840 --> 0:19:41.840 home prices got increased that record pace. The price to 0:19:41.920 --> 0:19:46.040 rent ratio went up, the price too, personal income racial 0:19:46.080 --> 0:19:50.200 went up to record levels. Uh. Price to GDP home 0:19:50.280 --> 0:19:54.359 home valuation GDP. All three metrics had just gone three 0:19:54.400 --> 0:19:58.840 standard deviations away from the historically they went completely vertical. 0:19:59.359 --> 0:20:01.720 And one of the studies that you had written, and 0:20:01.720 --> 0:20:04.320 I don't remember if it was the three study, said 0:20:04.359 --> 0:20:07.320 that over a hundred years. Here's something that people are 0:20:07.359 --> 0:20:10.960 always astonished when I tell them this. How much of 0:20:11.040 --> 0:20:16.480 a return has a home generated net of inflation over 0:20:16.520 --> 0:20:19.520 the past century. What are the numbers? Well, this is 0:20:19.520 --> 0:20:22.280 what I published in two thousand five in the second 0:20:22.400 --> 0:20:27.359 edition of Irrational Exuberance. In real terms from eighteen ninety 0:20:27.560 --> 0:20:32.440 to nine, there was almost no change in real home prices. So, 0:20:32.480 --> 0:20:35.480 in other words, after once you back out inflation, home 0:20:35.560 --> 0:20:39.480 prices were flat for a century century for a century. 0:20:39.520 --> 0:20:43.000 Now that does that include the tax real estate taxes 0:20:43.040 --> 0:20:46.520 you pay the maintenance. So effectively, all of us who 0:20:46.560 --> 0:20:48.800 have big houses that we pay a lot of maintenance 0:20:48.800 --> 0:20:52.399 and costs for this is a money loser unless you 0:20:52.560 --> 0:20:55.080 like the house. Yeah, if you got to live somewhere. 0:20:55.400 --> 0:20:57.520 For a lot of people, it's a form of force 0:20:57.560 --> 0:21:00.560 savings because they have to pay their more page down 0:21:00.840 --> 0:21:04.520 each month. And if they are not irrational. When it 0:21:04.560 --> 0:21:08.240 comes to home equity loans, thirty years later, they have 0:21:08.320 --> 0:21:10.680 a house and they have no obligation. That's another thing 0:21:10.720 --> 0:21:13.120 that was happening during the bubble. There were these home 0:21:13.160 --> 0:21:17.840 equity loans were proliferating. People were borrowing against How is 0:21:17.880 --> 0:21:20.920 it they buy a second house, some of them using 0:21:21.000 --> 0:21:24.240 the first houses as collateral. I'm Barry rid Helps. You're 0:21:24.240 --> 0:21:27.320 listening to Masters in Business on Bloomberg Radio. Our guest 0:21:27.400 --> 0:21:31.080 today is the great Robert Chiller of Yale University, winner 0:21:31.119 --> 0:21:38.040 of the Prize in Economics, creator of the Case Schiller Index, 0:21:38.200 --> 0:21:41.760 creator of the Cape measure, which we'll get into, and 0:21:42.600 --> 0:21:47.720 relentless um popper of bubbles. You've been pretty good identifying 0:21:48.440 --> 0:21:50.399 when markets are in a bubble. You did it in 0:21:50.440 --> 0:21:53.040 two thousand with the dot coms, you did it in 0:21:53.160 --> 0:21:56.240 oh six with housing. What do we see as a 0:21:56.280 --> 0:21:59.239 bubble today? What? What's got You have to come up 0:21:59.280 --> 0:22:02.119 with another one? Well, I don't know. The stock market 0:22:02.200 --> 0:22:06.080 looks highly priced, the bond market looks highly priced. The 0:22:06.119 --> 0:22:10.040 housing market is going up. Um, these are good times 0:22:10.040 --> 0:22:13.600 for booms. So this is a boom and the question 0:22:13.600 --> 0:22:16.400 has win will it end? I wish I were better 0:22:16.440 --> 0:22:19.439 at doing that. You know, I don't get the sense 0:22:19.520 --> 0:22:22.760 that you perceive the market now. I think we will 0:22:23.119 --> 0:22:27.400 agree stocks are at least fully valued, if not pricing. 0:22:28.040 --> 0:22:31.200 Bonds are pretty fully valued if not pricing. I don't 0:22:31.200 --> 0:22:33.840 know if houses I would not highly priced, but not 0:22:34.040 --> 0:22:36.160 that's where I was going going They have been going well, 0:22:36.240 --> 0:22:38.680 maybe not in the last few months. But I don't 0:22:38.760 --> 0:22:43.760 sense the same sort of warning from you today in 0:22:45.760 --> 0:22:47.879 that I heard from you in two thousand six about 0:22:47.920 --> 0:22:52.840 housing or two thousand about stocks. This feels like so 0:22:52.960 --> 0:22:56.719 we still have We know that these cycles always end badly. 0:22:56.760 --> 0:23:00.360 We know there's always a bear market down the road, 0:23:00.760 --> 0:23:04.840 but it seems like you're saying this could run a 0:23:04.880 --> 0:23:08.160 few more years. So we're not at the level where, 0:23:08.240 --> 0:23:11.560 oh my god, this is crazy. It's really Hey, things 0:23:11.560 --> 0:23:15.200 are a little a little pricey. That doesn't mean they 0:23:15.240 --> 0:23:18.400 can't get even more pricey. I really wish I could. 0:23:18.440 --> 0:23:21.320 I keep trying to predict turning points, huh, And I've 0:23:21.320 --> 0:23:24.040 been doing questionnaire surveys. You can find them on our website. 0:23:24.080 --> 0:23:26.840 I give these away. The problem is that it just 0:23:26.960 --> 0:23:30.840 can't make any sense out of them. I'm peeping to try. 0:23:30.920 --> 0:23:33.760 Maybe I'll have I'll share when we're done, I'll share 0:23:34.000 --> 0:23:36.320 some sense out of them. We we figured out the secret. 0:23:36.320 --> 0:23:39.040 I'll share with you later. It's a quantitative trick. I 0:23:39.040 --> 0:23:41.600 don't want to say it over the radio, but i'll 0:23:41.920 --> 0:23:44.800 that'll be the next, the next Nobel. It's a simple 0:23:44.840 --> 0:23:48.480 moving average, and that's usually the um. So let's talk 0:23:48.480 --> 0:23:50.960 a little bit about Since we mentioned the Nobel, let's 0:23:50.960 --> 0:23:54.440 talk about you and professor Fama. He's at your Yale, 0:23:54.840 --> 0:23:59.480 he's at Chicago. I always thought that you guys had 0:23:59.560 --> 0:24:06.320 too very different philosophies, and I thought your philosophy complimented his. 0:24:06.880 --> 0:24:09.200 So let me just set this up in a nutshell. 0:24:10.200 --> 0:24:14.840 Eugene Fama essentially says markets are, if not perfectly efficient, 0:24:14.920 --> 0:24:17.840 then very efficient. That price and then what that means 0:24:17.840 --> 0:24:22.120 in English is prices reflect all the available knowledge that's 0:24:22.160 --> 0:24:25.760 out there, and so don't even try to beat the market. 0:24:26.840 --> 0:24:30.320 It's almost impossible. You're better off just buying a passive 0:24:30.359 --> 0:24:35.160 index and and forgetting about it. And Fama famously inspired 0:24:35.440 --> 0:24:38.679 John Bogel, who went on to form Vanguard, which is 0:24:38.720 --> 0:24:43.000 now managing three trillion dollars, of which two trillion is 0:24:43.040 --> 0:24:48.400 in all passive indexes. So as an academic, my experience 0:24:48.400 --> 0:24:53.280 has been most academics don't necessarily disagree with that as 0:24:53.280 --> 0:24:59.600 an investment strategy. Is that a fair statement brought passive intentions? Yeah, 0:24:59.600 --> 0:25:02.879 it's a question of degree. If you're talking to someone 0:25:03.000 --> 0:25:07.119 who is not really likely to be that interested or 0:25:07.200 --> 0:25:10.800 attentive to what he or she is doing, of course 0:25:10.840 --> 0:25:12.879 you don't tell them to try to beat the market. 0:25:12.920 --> 0:25:16.720 It's a it's a game that smart people can beat on, 0:25:16.880 --> 0:25:19.000 and so you're not gonna win. It's like, don't go 0:25:19.040 --> 0:25:22.240 into the gambling casino and play poker with your life 0:25:22.280 --> 0:25:26.920 savings either to lose. So uh. But I think the 0:25:27.480 --> 0:25:30.560 other question is whether some people who try hard and 0:25:30.560 --> 0:25:34.359 who are smart and organized, whether they can beat the market. 0:25:34.560 --> 0:25:38.600 And I think the answer is yes, although maybe not 0:25:38.800 --> 0:25:42.400 as dramatically as you hoped, but yes, they're very rare, 0:25:42.520 --> 0:25:46.440