Robert Shiller

Definition

Robert Shiller is a prominent American economist, best known for his work on behavioral finance and market volatility. He contributed to the understanding of how psychological factors influence financial markets, challenging the notion that markets are always efficient and rational. His research on bubbles, particularly in the housing market, emphasizes how human emotions and irrational behavior can lead to significant market anomalies.

5 Must Know Facts For Your Next Test

1. Robert Shiller was awarded the Nobel Prize in Economic Sciences in 2013 for his contributions to the analysis of asset prices.
2. His book 'Irrational Exuberance' discusses how market psychology can create economic bubbles, particularly highlighting the tech bubble of the late 1990s and the housing bubble of the mid-2000s.
3. Shiller's research supports the idea that investors often act irrationally, leading to price movements that deviate from fundamental values.
4. He developed the Case-Shiller Index, which is widely used to track changes in home prices in the United States.
5. Shiller advocates for the use of behavioral insights in economics to better understand financial market phenomena and improve economic policies.

Review Questions

• How does Robert Shiller's work on behavioral finance challenge traditional views on market efficiency?
  • Robert Shiller's work demonstrates that markets are not always efficient and that investor behavior plays a crucial role in price movements. Traditional views suggest that markets reflect all available information and that investors act rationally; however, Shiller highlights how emotions and psychological factors can lead to irrational decisions. This perspective introduces significant anomalies, showing that human behavior can cause markets to deviate from expected norms.
• In what ways did Shiller's analysis of market bubbles contribute to understanding economic crises?
  • Shiller's analysis provided critical insights into how psychological factors drive market bubbles, particularly through his identification of 'irrational exuberance.' By examining past bubbles, such as the dot-com bubble and the housing crisis, he revealed patterns of investor behavior that can lead to unsustainable price increases. His findings emphasize the importance of recognizing these bubbles early, which can help mitigate economic crises caused by sudden market corrections.
• Evaluate the impact of Robert Shiller's research on modern economic policies and financial regulation.
  • Robert Shiller's research has significantly influenced modern economic policies and financial regulation by highlighting the importance of incorporating behavioral insights into economic models. His findings have prompted policymakers to consider how psychological factors affect market stability and investor behavior. As a result, regulatory frameworks have begun to adapt, focusing on protecting consumers from irrational market swings and promoting transparency in financial markets, ultimately striving for a more resilient economy.

Related terms

Behavioral Finance: A field of study that examines how psychological influences and cognitive biases affect the financial behaviors of individuals and markets.

Market Volatility: The degree of variation in trading prices over time, which can be influenced by investor sentiment and economic news.

Irrational Exuberance:

A term coined by Shiller in his book that describes the phenomenon where asset prices rise far above their intrinsic value due to investor enthusiasm.