Speculative Asset Prices (Nobel Prize Lecture)

I will start this lecture with some general thoughts on the determinants of long-term asset prices such as stock prices or home prices: what, ultimately, drives these prices to change as they do from time to time and how can we interpret these changes? I will consider the discourse in the profession about the role of rationality in the formation of these prices and the growing trend towards behavioral finance and, more broadly, behavioral economics, the growing acceptance of the importance of alternative psychological, sociological, and epidemiological factors as affecting prices. I will focus on the statistical met hods that allow us to learn about the sources of price volatility in the stock market and the housing market, and evidence that has led to the behavioral finance revolution in financial thought in recent decades.

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The Rationality Debate, Simmering in Stockholm

Are people really rational in their economic decision making? That question divides the economics profession today, and the divisions were evident at the Nobel Week events in Stockholm last month.

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The Financial Fire Next Time

If we have learned anything since the global financial crisis peaked in 2008, it is that preventing another one is a tougher job than most people anticipated. Not only does effective crisis prevention require overhauling our financial institutions through creative application of the principles of good finance; it also requires that politicians and their constituents have a shared understanding of these principles.

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Why Is Housing Finance Still Stuck in Such a Primitive Stage?

The institutions for financing owner-occupied housing have not progressed as they should, and the financial innovation that has followed the financial crisis of 2007-9 has not been focused on improving the risk management of individual homeowners. This paper lists a number of barriers to housing finance innovation, and in light of these barriers, the problems of some major innovations of the past and future: self-amortizing mortgages, price-level adjusted mortgages (PLAMs), shared appreciation mortgages (SAMs), housing partnerships, and continuous workout mortgages (CWMs)

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Is Economics a Science?

I am one of the winners of this year’s Nobel Memorial Prize in Economic Sciences, which makes me acutely aware of criticism of the prize by those who claim that economics – unlike chemistry, physics, or medicine, for which Nobel Prizes are also awarded – is not a science. Are they right?

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Robert Shiller: A Skeptic and a Nobel Winner

Robert J. Shiller, a professor at Yale, learned on Monday that he had won the Nobel Memorial Prize in Economic Science, along with Lars Peter Hansen and Eugene F. Fama of the University of Chicago. The Nobel committee described Professor Shiller as a founder of the field of behavioral finance, an innovator in incorporating psychology into economics and a pioneering analyst of speculative bubbles in the stock and real estate markets.

He is also one of a group of eminent economists who write the Economic View column for Sunday Business, and has contributed 60 of those columns since August 2007. As the editor of that column, I have talked to him often about his work, and on Wednesday, he called me from the airport en route to a lecture at the Dutch central bank in Amsterdam. Here is an edited, condensed version of that conversation.

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Housing Market Is Heating Up, if Not Yet Bubbling

HOME prices have been rising rapidly, so much so that there is talk that we are entering another national bubble.

In fact, according to the S.& P./Case-Shiller Composite-10 Home Price Index, which Karl Case of Wellesley College and I developed, home prices in the United States were up 18.4 percent in real, inflation-corrected terms in the 16 months that ended in July. During the housing bubble that preceded the 2008 financial crisis, the largest 16-month increase wasn’t much bigger: 22.7 percent, for the period ended in July 2004. 

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