Robert Shiller Nobelist

by on October 14, 2013 at 8:04 am in Economics | Permalink

Robert Shiller is best known for warning about the internet stock market bubble and later the housing bubble. What is most impressive to me, however, is that most people who think that markets can be inefficient are anti-market. Shiller’s solution to market problems, however, is more markets! The housing market, for example, has traditionally had two problems. Since each house is unique there has been no market index of housing prices so that people couldn’t easily see bubbles and if they could see them on the ground there was no easy way to short the market (to try to profit from the bubble in a way that would moderate the bubble). Moreover, because there haven’t been good housing indexes a very large amount of each average person’s wealth has been tied up with an asset that can fluctuate substantially in price. Most house buyers, in other words, are putting all their eggs in one basket and crossing their fingers that the basket doesn’t go bust. In recent years, that has been a very unfortunate bet.

Shiller’s solution to the problems in the housing market has been to make the market better—he created with Case and Weiss–the Case-Shiller Index. For the first time, it’s possible to see in real time housing prices and compare with averages over time and it possible to buy options and futures on the index which will help for forecasting. Moreover, it’s possible that in the future insurance products can be built based on local versions of the index–thus you could insure yourself against big declines in the price of housing in your neighborhood.

Shiller’s housing index is also a window into how macro markets could also be used to create livelihood insurance, a type of private unemployment insurance. Moral hazard and adverse selection make it difficult to protect any single individual from unemployment but indexes in the unemployment rate of dentists or construction workers could be used to provide some insurance for workers in these fields when conditions in their entire industry are poor.

I featured one of Shiller’s biggest ideas in Entrepreneurial Economics, markets in GDP. A GDP market would allow shares of GDP to be bought and sold, add to this Hansonian prediction markets and you are long way towards an ideal way to evaluate the effect of major policies. Moreover, a GDP market would allow the creation of many insurance products. We are all less diversified than is ideal. It would be optimal to trade some shares in US GDP for shares in World GDP which is more stable. We can do this if we create Shiller GDP markets throughout the world.

Shiller’s book Macro Markets is truly visionary and I hope the Nobel brings a lot of attention to these ideas.

Ironman October 14, 2013 at 10:24 am

The Nobel for Shiller’s contributions is well deserved – Shiller’s work is what directly made our own contributions to the science possible, and believe it or not, Shiller’s contributions to economic theory are the lesser of his real accomplishments – they are outshone by the quality of his observations.

As we once described it, Robert Shiller is to modern financial theory today as Tycho Brahe was to the science of astronomy in the 1500s – his observations of stock prices and earnings, as well as housing prices, directly enabled much of the theoretical work that has since greatly improved our understanding of how the world of markets really works.

JT October 14, 2013 at 1:21 pm

A market in GDP? That wouldn’t be fair. Paul Krugman would win every time. He’s never wrong. Just ask him.

b a in economics October 14, 2013 at 1:49 pm

For those keeping track, Shiller’s undergraduate degree is a B.A. in economics (not sure if Michigan had a B.S. in economics decades ago). Fama has a B.A. too, in Romance languages. Hansen – B.S. in mathematics. Fama is very well-spoken – his interview in the New Yorker, linked by TC in today’s post on Fama, describes in absolutely minimally technical ways some opinions of Shiller, Posner, and Krugman ,

AaronM October 14, 2013 at 6:18 pm

Most of what I know of economics, I learned from his Financial Markets course.
Available from Yale online courses:
http://oyc.yale.edu/economics/econ-252-11

Errorr October 14, 2013 at 10:52 pm

A few people have tried GDP futures and failed to attract liquidity. If the futures are based on real GDP you have issues with the methodology of how the numbers are generated. If the futures are nominal GDP then I am not sure enough people really understand how to use them properly to jedge risk. Of course Sumner would disagree to a certain extent or claim it is unimportant but people need to believe that the actual hedging works in a way that actually works without exposing them to other idiosyncratic risks.

This isn’t a criticism of the basic idea, I just wonder if our understanding of macro and the mechanics of tje economy are sufficient to allow people to confidently hedge. I think there is a future in this idea but until anyone but the fiercest partisans in the macro dissagreements are confident in their understanding of how macro variables interact with their own risks the ability of anyone to use a market to hedge ones risk will be too illiquid to be useful.

Coop October 15, 2013 at 11:38 am

Do you have any evidence that Schiller predicted these bubbles? Getting credit for doing something in the press is one thing…
And if you conclude he actually did predict these bubbles, did he make money trading against them? If not, please reconcile the (contradictory) facts.

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