Robert Shiller
Economist, Nobel laureate and author of Irrational Exuberance
Born 1946
Documented that share and house prices can move far from fundamentals, and developed a cyclically adjusted valuation measure.
Biography
Robert Shiller, born in Detroit in 1946, is an American economist and Sterling Professor of Economics at Yale University. He studied at the University of Michigan and took a doctorate at the Massachusetts Institute of Technology in 1972 under Franco Modigliani, taught at the University of Minnesota and at Wharton, and joined the Yale faculty in 1982.
The research that made his name arrived in 1981 and asked a deceptively simple question: do share prices move too much to be justified by the dividends that later arrive? He compared the observed swings in prices with the far smoother stream of dividends those prices were supposed to represent, and found the prices moving several times more than the fundamentals beneath them. The finding, usually called excess volatility, became one of the foundations of behavioural finance.
With John Campbell he developed the cyclically adjusted price-to-earnings ratio, which compares a market price with average inflation-adjusted earnings over ten years rather than with a single year. Smoothing across a full cycle stops a temporary collapse or spike in profits from making a market look cheap or expensive when it is neither. With Karl Case he built a repeat-sales index of house prices that made residential property measurable in the way share prices already were.
Irrational Exuberance appeared in 2000, close to the peak of the technology boom, and its second edition in 2005 extended the same argument to housing. He shared the 2013 Nobel Memorial Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen for empirical work on asset prices, an award notable for pairing him with a researcher whose reading of the evidence is close to the opposite of his. Narrative Economics, published in 2019, argues that popular stories spread like infections and move the economy while they spread.
Career timeline
- 1946Born in Detroit, Michigan.
- 1967Graduates from the University of Michigan.
- 1972Completes a doctorate in economics at the Massachusetts Institute of Technology.
- 1981Publishes the excess volatility research showing prices moving far more than dividends.
- 1982Joins the faculty at Yale University.
- 1988With John Campbell, develops the cyclically adjusted price-to-earnings measure.
- 1991Helps commercialise the repeat-sales house price index built with Karl Case.
- 2000Publishes Irrational Exuberance, extended to housing in the 2005 edition.
- 2013Shares the Nobel Memorial Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen.
- 2019Publishes Narrative Economics.
How he reads markets
He starts from measurement rather than from a theory of how investors ought to behave. The question he keeps returning to is whether the prices we observe are consistent with the fundamentals we can also observe, and the answer he keeps finding is that they are not. That is an empirical claim about data rather than a claim about anyone being foolish, which is why his work is hard to dismiss even by people who dislike its implications.
A large part of what moves prices is social rather than informational. Stories spread between people, belief moves prices, and the price movement then supplies fresh evidence for the story, which spreads it further. Treating a bubble as an epidemic rather than as a collection of individual mistakes explains why they take years to build and why participants can be individually reasonable while the aggregate is not.
He treats his own measures as descriptions rather than as signals. A high cyclically adjusted ratio says that long-run expected returns from this starting point have historically been lower than usual; it does not say a decline is imminent, and he has been consistent that the measure carries no short-horizon precision at all. That restraint is also the source of most of the frustration with it.
Key ideas
Tap any idea to expand a plain-English explanation, why it matters, and where to learn more.
Excess volatility
The finding that share prices swing far more than the stream of dividends and earnings those prices are meant to represent.
If prices only reflected information about future cash flows, they should be smoother than they are. The gap is evidence that something else is moving them.
A company's dividends might drift up gently for a decade while its share price doubles, halves and doubles again over the same period.
The cyclically adjusted price-to-earnings ratio
A valuation measure comparing price with average inflation-adjusted earnings over ten years instead of a single year.
One year of earnings is noisy. A recession makes a market look expensive on a normal ratio at exactly the point it is cheapest, and a boom does the reverse.
During a severe downturn, reported earnings can collapse so far that the ordinary ratio spikes even as prices fall, which is the problem the ten-year average is there to solve.
Bubbles spread like epidemics
The idea that a speculative episode is a social contagion, transmitted by rising prices and the stories people tell about them.
It explains the timing. Contagion builds slowly, accelerates, and then reverses, which fits the observed shape of manias better than a sudden collective error does.
Each new participant is drawn in by the price rise itself, and their arrival pushes the price further, which recruits the next group.
Measuring house prices properly
The repeat-sales method, which tracks the change in price of the same properties over time rather than comparing whatever happened to sell each month.
A simple average of sale prices mostly measures which kinds of houses sold, not what houses are worth. Repeat sales separate the two.
If expensive homes dominate one month's sales, an average price jumps without any individual house becoming more valuable.
Narrative economics
The argument that popular stories about the economy are themselves an economic force, spreading between people and changing behaviour as they go.
It treats the story as data rather than as noise around the data, which changes what an economist should be trying to measure.
A widely shared belief that property prices only rise can change how much people borrow, which then changes what property prices do.
Major contributions
- Showed empirically that share prices move far more than the dividends they represent, opening the excess volatility literature and much of behavioural finance with it.
- Built, with John Campbell, a valuation measure that smooths earnings across a full cycle and is now a standard long-horizon reference point.
- Co-created the repeat-sales house price index that made residential property prices measurable on the same footing as financial assets.
- Wrote Irrational Exuberance, which brought bubble analysis to a general readership twice, first for shares and then for housing.
- Argued that popular narratives are an economic force in their own right and proposed studying how they actually spread.
Major successes
- Shared the Nobel Memorial Prize in Economic Sciences in 2013 for empirical work on how asset prices behave.
- Published Irrational Exuberance in 2000, close to the peak of the technology boom, and extended its argument to housing in the 2005 edition.
- Co-created a house price index that became a standard measure of residential property in the United States.
- Has taught economics at Yale University since 1982 and holds a Sterling Professorship there.
- Produced a long historical earnings and price series that other researchers, including his critics, now build on.
Important books
- Market Volatility1989
The academic collection where the excess volatility work and its statistical defence are laid out. Technical, and the source most of the later argument refers back to.
- Irrational Exuberance2000
His book for general readers on speculative episodes, published near the peak of the technology boom. The second edition extended the argument to housing.
- The New Financial Order2003
On using financial instruments to spread ordinary household risks such as income and home value, rather than only investment risks.
- Animal Spirits2009
Written with George Akerlof, on the role of confidence, fairness and stories in macroeconomics rather than in markets alone.
- Narrative Economics2019
His case that popular stories spread like contagions and move the economy, and that economists should measure them.
Influence on investors
The cyclically adjusted ratio is now a standard reference in long-horizon asset allocation. Retirement planning tools, endowment policy discussions and expected-return models routinely start from where that measure sits, which means a great deal of practical advice is shaped by a number he and John Campbell defined.
His excess volatility work also gave behavioural finance an empirical foundation rather than a collection of anecdotes about bias. Once prices were shown to move more than fundamentals, the question stopped being whether investor psychology matters to prices and became how much, which is the question the field has been working on since.
Criticisms and debates
A balanced view includes the main criticisms and open debates, presented neutrally.
- The cyclically adjusted ratio has read as expensive for long stretches during which markets kept rising, so anyone treating it as a timing signal spent years positioned badly. He argues it was never meant as one, and critics reply that this limits how much use it actually is.
- Jeremy Siegel argued in 2016 that changes in how reported earnings are calculated, particularly the treatment of write-downs, depress the earnings side of the ratio and make recent readings look higher than a consistent series would show.
- The excess volatility result was challenged on statistical grounds soon after publication, on the argument that the tests assume more about how dividends behave over time than the data can support.
- Sharing a Nobel Prize with Eugene Fama, who reads much of the same evidence in close to the opposite way, is itself a fair illustration of how unsettled the underlying question remains.
- Identifying a speculative episode in advance is far harder than describing one afterwards. Several of his best known warnings were followed by long periods in which prices carried on rising, which is expensive for anyone who acted on them immediately.
Lessons for investors
Plain-English takeaways. Context for learning, not advice to buy or sell anything.
- 1Prices move more than the facts underneath them, so a large move is not automatically news about the business.
- 2A valuation measure can tell you something useful about a decade and nothing at all about next year.
- 3Stories spread between people the way infections do, and they move prices for as long as they keep spreading.
- 4Two careful researchers can read the same evidence and reach opposite conclusions, which is worth remembering before treating any single measure as settled.
Notable quotes
“Irrational exuberance is the psychological basis of a speculative bubble.”
“Stock prices are far more volatile than the dividends they are supposed to represent.”
Context: Shiller's excess-volatility finding: share prices swing far more than the dividends they are supposed to represent.
“A bubble is a social epidemic whose contagion is mediated by price movements.”
Frequently asked questions
Who is Robert Shiller?
Robert Shiller is an American economist born in 1946 and a professor at Yale University. He is known for research showing that asset prices move more than fundamentals justify, for the cyclically adjusted valuation ratio, and for the Case-Shiller house price index.
What is the CAPE ratio?
It compares a market's price with its average inflation-adjusted earnings over the previous ten years. Averaging across a full cycle stops one unusual year of profits from making the market look cheap or expensive when it is neither.
What is the Case-Shiller index?
It is a measure of United States house prices built with Karl Case using the repeat-sales method, which tracks the change in price of the same properties over time rather than averaging whatever happened to sell in a given month.
What did Shiller mean by irrational exuberance?
He used the phrase for the self-reinforcing enthusiasm that builds during a speculative episode, where rising prices generate the confidence that pushes prices higher, independently of any change in the underlying businesses.
Does a high CAPE ratio mean a crash is coming?
No. Historically it has been associated with lower average returns over the following decade, which is a statement about long horizons. It carries no information about the next quarter or the next year, and it has stayed elevated for many years at a time.
Why did Shiller and Eugene Fama share a Nobel Prize?
The 2013 prize was awarded for empirical analysis of asset prices, and their work sits on opposite sides of that question. Fama showed prices are hard to predict at short horizons; Shiller showed they are partly predictable at long ones and swing more than fundamentals.
What is narrative economics?
It is his argument that popular stories about the economy spread between people much as infections do, and that the spread itself changes behaviour and therefore outcomes, so the stories deserve to be measured rather than treated as background noise.
Related quotes
Other people in the library writing on the same themes.
“The key to making money in stocks is not to get scared out of them.”
Peter Lynch“Speculators may do no harm as bubbles on a steady stream of enterprise, but the position is serious when enterprise becomes the bubble on a whirlpool of speculation.”
John Maynard Keynes“The market always goes up, but it is a wild ride along the way.”
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