Editor's Picks

Robert Shiller: Making Sense of the Irrationality of Markets

The question of what motivates a trader to buy or sell shares at any particular moment is probably as old as the stock market itself. Given that trading securities often is a pursuit largely devoid of rational behaviour – though many would have you believe otherwise – the answer remains elusive as ever, and that’s not for a lack of trying to devise ways and methods with which to foretell the conduct of the market and the players therein.

Nobel laureate Robert J Shiller has made a distinguished career analysing the world of finance in general and more particularly the way it responds to events. Professor Shiller takes as his starting point the premise that in a fully rational market, investors would base stock prices on the expected receipts of future dividends.

That, of course, is not the way it happens in real life. By analysing vast amounts of data, Prof Shiller concluded that investors are mostly guided by emotions, hunches and other, often rather primeval, feelings. Now that the crunching of big data is in vogue, these conclusions are yet again put to the test. They still hold true.

In the course of his academic work, Prof Shiller warned in 2006 of an impending housing crisis. He had identified a bubble that just had to burst. With the benefit of hindsight, this may not seem like rocket science but at the time pundits were almost unanimous in their verdict that housing prices would not just be sustained but increase further fuelled by an ever buoyant stock market. We now know what happened and who was right all along.

So, the smart money would want to heed Prof Shiller’s latest warnings about the digital currency Bitcoin that has a growing number of investors enthralled. He calls it “an amazing example of a bubble.” Prof Shiller is at a loss to explain the excitement of his students at Yale University over Bitcoin. “I tell them ’no, it’s not such a great idea at all’”. In 2013, the value of a Bitcoin increased by over 6,200%. “It may be an inspiration because of the computer-powered crypto science Bitcoin relies on, but in fact represents a return to the dark ages for the lack of clarity surrounding the digital currency.”

Still, Bitcoin fits the mould when it comes to behavioural finance and as such constitutes a most interesting phenomenon to watch. The prestigious Foreign Policy journal has named Prof Shiller as one of the top global thinkers. His contributions to creating a deeper understanding of market volatility, asset pricing and the lifespan of bubbles have been nothing less than formidable.

CFI

Recent Posts

Is the MBA Still Worth It? Weighing Value, ROI, and Leadership Impact

In an era of rapid disruption, does the traditional MBA still hold its weight? We…

2 days ago

Jefferies Trades Lone-Wolf Culture for Team-First Strategy in Bid for Wall Street’s Top Tier

For decades, Jefferies built its reputation as Wall Street’s maverick outpost — the last independent,…

3 days ago

When Trust Erodes: Unpacking the Anatomy of Corporate Scandals

Corporate scandals, from Wells Fargo’s fake accounts to Enron’s fraudulent accounting, shatter public trust and…

2 weeks ago

The Evolution of Elite: A History of Hedge Funds

From Alfred Winslow Jones’s 1949 experiment to today’s trillion-dollar hedge fund industry, the story of…

2 weeks ago

The Vanishing Vault: Has Digital Banking Closed More Than Just Branches?

As physical bank branches vanish from high streets across Europe and North America, the shift…

3 weeks ago

AI Dividends Arrive: Big Tech’s Earnings Surge Shows Power of Scale and Strategy

Meta, Microsoft, Apple, and Amazon deliver robust earnings, reinforcing their central role in markets—and highlighting…

4 weeks ago