Shiller Nobel prize lecture

The American Economic Review also published the Nobel Prize lecture of Robert Shiller. What a contrast in style and point of view from the Fama lecture. Shiller provides a spirited case for markets not always being rational; nevertheless, he does not speak with the same sense of certainty in his convictions as Fama. He sees facts that do not make sense and then tries to offer some alternative explanations.

He started out as a  believer in market efficiency but his views of the evidence pushed in  different direction. A reading of this lecture shows the subtlety of an active mind grappling with difficult issues. I have never been a big fan of the discount models of Schiller to show that markets are "too volatile", but I fully appreciate that his work opened a set of questions in a world market efficiency certainty.

He grants the fact that the word bubble is too often used to describe markets, but then provides some strong evidence that markets do deviate from what would be market efficiency.  The driver of his world of analysis is the difference between the expected present value in price and actual prices which seems to suggest that markets are excessively volatility. The reason for this difference could be a model used. Market efficiency is always a joint test, but the evidence from Shiller is displayed in a number of different forms. A close inspection shows that some more detailed models can reduce the amount of excessive volatility, but the evidence is still the same. Prices variability is much greater than the variability in dividends. The results of these more detailed models have been the same. The stock market is a poor forecaster of what the present value of stock prices should be.

He is willing to clearly admit that individual stocks are generally efficient and the best approximation of market behavior. His work also moved into looking at market efficiency with real estate, one of the largest markets in the world. Here again he finds prices that do not match what should be expected with a discounted present value approach.

He is a believer in the behavioral finance as one approach to explain excessive volatility but his willingness is based on the poor results of the status quo. He leaves room for other alternatives. I may not agree with all of his views or his research but I have profound respect for his approach to research and his attempt to answer difficult questions.