9 Fascinating Insights From Nobel Prize-Winner Robert Shiller

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Congratulations to Robert Shiller, along with Eugene Fama and Lars Peter Hansen, for winning this year's Nobel Prize in economic sciences. 

Shiller, a Yale economist who predicted both the dot-com and housing bubbles, says he wasn't expecting the award. But talk to other economists, and they'll tell you they've expected this for years. Shiller's contributions to economics have been giant. He taught us to think about human emotions, not just numbers, and how to view markets through the long lens of history rather than the short-term news filter. 

I interviewed Shiller two years ago in his office at Yale. Here are nine insights he provided about economics. 

On predicting the housing bubble: "In the early to mid-2000s, I created a home price index back to 1890, and I just plotted that and looked at it, and I thought, wow, this is unusual, really unusual. This looks like a first-time bubble, the biggest bubble we have ever had.

"The strange thing is, nobody else had ever made a plot like that. I can tell you, no one had ever seen that picture. It strikes me as odd; why me, why now? People plot all kinds of data. Why wouldn't someone have done that? I still haven't figured it out. We have to always reflect, and maybe this is a Motley Fool-type theme; we have always to reflect that if you swim with the current, you will be thinking the same things as everyone else. You have to recognize that your own thoughts are not your own thoughts. They kind of filtered and percolated in from other people. It all seems like my own common sense, but it's just what everybody is saying now."

On real estate: "Home prices declined for the first half of the 20th century in real [inflation-adjusted] terms. Economists discussed that back then. Why are they going down? The conclusion, if there was any consensus in say 1950, was, of course home prices go down. There's technical progress. They are a manufactured good. Back in 1900, homes were handmade, you know, craftsmen. But now, in 1950, we can get all kinds of power tools and prefab, and they were just better in 1950 than we were in 1900, so of course they will go down.

"From that frame of reference, I think maybe that's exactly what we should expect, too. It's just a manufactured good, and progress is always happening. And on top of that progress, there's the outmoding, the out-of-style factor. So what kind of houses will they be building in 20 years? They may have lots of new amenities. They will be computerized or something in some way that we can't anticipate now. So people won't want these old homes. To me, the idea that buying a home is such a great idea is just wrong. They may very well decline for the next 30 years in real terms."

On the psychology of recessions: "The causes of the decline are very complex. This is history; this is not something that a simple economic metric model will describe. I think of society as a constant feedback loop. Certain ideas rise, and they become viral and they spread, and they become reinforced for a while and they get, they overshoot. So the idea that we have escaped from the risk of a depression, that we live in a wonderful prosperous time, gradually it sank in over the 1990s, just as it did over the 1920s, the roaring twenties. It's the same phenomenon. Then afterwards, we go through a long period of reassessment. So it's not simple to explain, and I wouldn't pin it to any one factor. In my book, Irrational Exuberance, I gave a dozen precipitating factors for the boom. I don't need precipitating factors for the decline from the boom because it's just correcting back down to a more normal state."

On why so many experts missed the 2008 financial crisis: "Experts have always missed big events like this. If you look at the record of statistical forecasting models, they tend to get to the recession when it's starting to come. A casual observer might start to worry about it. Forecasting it years out, they don't get; in particular, if you look at the Great Depression of the 1930s, nobody forecasted that. Zero. Nobody. Now there were, of course, some guys who were saying the stock market is overpriced and it would come down, but if you look at what they said, did that mean a depression is coming? A decade-long depression? That was never said."

On short-term thinking: "I think that there's too much faith in analysis of short-term data. You see some pattern, and you can do a statistical test and prove that will prove that it is significant or passes the smell test to a statistician. But the problem is, the world is always changing. It's not a stable thing. The underlying human parameters may be stable, but you can see that there is institutional and cultural evolution, and it's not something that you can quantify."

On homeownership: "Basically, if I were in the market right now because I wanted a house, I would buy a house. I think most people have a sense of what kind of life they want to live and where they want their family and where they want their kids to go to school, and they value neighbors, maybe. It depends on your position in life and what you are thinking, but quite likely you are living in a neighborhood with a street, with sidewalks, with a playground nearby, a school that's convenient, and you end up buying a house because you want those things. I wouldn't let speculative concerns dominate that decision."

On humans being rational: "I actually wrote my dissertation on rational expectations. But I have to say, right from the beginning, I didn't exactly believe in my own theory. It didn't sound right. It didn't have the ring of truth to it to me, and the whole efficient markets hypothesis. So for me, I spent decades in my life wrestling with these issues, because there was the general impression that there was a vast literature supporting sufficient markets. But as years go by, I have learned not to trust vast literatures and science. They can be wrong. I don't know that I appreciated fully the bandwagon effect when I was a young researcher, and I felt kind of intimidated by the great authorities who were saying that science has shown that markets are efficient. I was a little bit too slow to come to a negative opinion on that idea."

On advice to students: "My standard advice, is be respectful of history. Every time creates its own opportunity, and a time of great economic turmoil is a time of opportunity. You have to think creatively about that. I tell my students, my standard advice, is not to make the mistake of thinking too much in the framework of my life cycle -- I am at this age, it's time for me to take my exams and graduate, then I have to find a spouse, then I have to do such and such. Consider that opportunities come once in a lifetime. Zuckerberg dropped out and found Facebook. That is a good metaphor. I am not advising dropping out, but I am saying life is like that. You have to be alert to opportunities, and the opportunities often take the form of developing your human capital. Okay, I am getting expansive and excited about this advice. I really believe it, and I think that young people don't seem to know this."

On Lady Gaga: "Well, she fits into a new culture. I just got Sirius satellite radio and what strikes me most is the level of obscenities one can enjoy now. It's a new thing for me. Not exactly my style, but we are going through a cultural transformation, and she seems on the vanguard of it. And so I guess I would be bullish on her. She seems to have the kind of Elvis Presley-type reputation. People haven't forgotten him, so I guess; this isn't enthusiasm for her art, but it is a judgment. I guess I would be bullish on her."

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The article 9 Fascinating Insights From Nobel Prize-Winner Robert Shiller originally appeared on Fool.com.

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