Transcript: Robert Shiller



The transcript from this week’s MIB: Robert Shiller, is below.

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VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: This week on the podcast, I have an extra special guest. What can I say? Robert Shiller is a legend, professor at Yale, Nobel laureate, author of 10 books, one of the people who helped drive behavioral economics to its position of influence. Today, his new book, “Narrative Economics,” tells a fascinating story of how stories drive markets and economies, and why some stories go viral and others don’t. It’s quite fascinating.

I could babble for all this time about how fascinating it was to chat with him, but rather than me do that, let me just say with no further ado, my conversation with Professor Robert Shiller.

VOICE-OVER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

RITHOLTZ: My extra special guest this week is Robert Shiller. He is a professor of economics at Yale University. He won the Nobel Prize for his empirical analysis of asset prices in 2013. He is perhaps best known for the Cyclically Adjusted P/E ratio, the Case-Shiller Housing Index, all sorts of works in behavioral economics as well as the author of numerous books, most recently, “Narrative Economics: How Stories Go Viral and Dive Major Economic Events.”

Bob Shiller, welcome to Bloomberg.

SHILLER: Barry, it’s a pleasure.

RITHOLTZ: So it’s funny that you, of all people, wrote this book. When — when I think of narratives in the context of behavioral economics, I tend to think of the stories that investors tell themselves to either rationalize buying a company or not selling something that didn’t work out. And you seem to have taken this to a different direction. Your theses/narratives has a very big impact on markets and the economy. Is that different from your prior work or is this consistent?

SHILLER: Yeah. I wrote a book in 2000 called, “Irrational Exuberance,” which focused on — well, I didn’t use the word “narrative” a lot, but it was the effective narratives on the stock market. I have decided that it’s bigger than that. It — it extends to the whole economy. And a — a lot of people know about the importance of narratives, but economists mostly don’t. So it’s — it’s trying to bring the study of narratives into economic because I think it — it matters for the big events that we — we see.

RITHOLTZ: And in the book you describe how other fields use narratives pretty robustly as a way of either explaining what happened or why something happened. Why — why has economics been so be hard at times with this?

SHILLER: Yeah. Well, I don’t exactly know why it is so different. It has something to do with a — a esprit de corps in the Department of Economics and Finance that is built around this maximizing framer that — that people — we don’t describe their behavior, we describe their objectives and assume that they’re maximizing the expected success with these objectives.

And there’s a reason for that in economics that often people know something that we — that — that is guiding their actions, and we better figure out what that is. And so I think there is — that is an interesting direction that economics has taken, and it leads us to things like the optimality of market solutions. And so it’s become — it’s great, but it’s also become something of a religion, and it has blocked people seeing the obvious.

RITHOLTZ: So homo economists, people being profit maximizers, I assume you’re not really a big believer that that is the dominant narrative all the time.

SHILLER: It’s not the dominant narrative all the time. And the human mind is very capricious and it jumps from narrative to narrative, and it’s socially determined. It’s not just narratives I tell myself, it’s important that I tell them to others and they can spread virally.

RITHOLTZ: So that leads to the question about social media. How important is the modern era of — fill in the blank — Facebook, Twitter, Instagram, whatever to economic and market stories going viral?

SHILLER: Well, it changes the scenario. But we did have stories going viral thousands of years ago through word of mouth, the same way viruses go viral from person to person with no intermediary. That’s how you catch a disease usually. You — you meet someone and it spreads from one person to another, so it’s capable of producing big epidemics.

Now it might speed them up, it also allows more polarity. It allows people to find similarly oriented people, and so you might see more diversity in views that come about because of — so I think we have to study the effective social media and other Internet programs. But fundamentally, narratives have been important in driving economy going back millennia.

RITHOLTZ: All right. So let’s talk about some big events, and I want to get your feedback as to how various means impacted them. There seem to have been a — a number of narratives around the Great Recession and the credit crisis. The one that I remember distinctly, home prices never go down. It turned out not to be the case. How important were narrative economics to the build-up to the crisis as well as the subsequent collapse?

SHILLER: I think home prices, that was a major cause of the crisis. We might have still had a recession, but it wouldn’t have been so bad without that. I want to know — I’m interested in the big events and often it’s the contributing factor that makes them big, so the idea that homes are a great investment.

It wasn’t so much that people were saying home prices never go down, it’s that they didn’t pay any attention to the thought that they might go down. I remember I was on stage in a event around 2005, 2006, and I asked a businessman who was on the panel with me — what if home prices go down — in front of an audience. And he seemed perplexed, “What are you talking about?” It’s not like he — he was saying that they never go down, but he said they have — they have never gone down not since the Great Depression. And I said, “Well, what if that happens again?” And he — he was kind of make me like crazy.

RITHOLTZ: He couldn’t even conceive of the idea that prices might fall.

SHILLER: Well, when you haven’t seen them fall substantially since the Great Depression, maybe that’s forgivable. They had to.

RITHOLTZ: Didn’t we see a decrease in prices late — late 80’s after the ’87 crash …

SHILLER: Right, we did.

RITHOLTZ: … and rates had gone up? So it’s not like it’s two generations ago, it was 30 years ago.


RITHOLTZ: If you’re a 50-something year-old business person, that should be …


RITHOLTZ: … in your …

SHILLER: But it’s not in the narrative.

RITHOLTZ: It’s not in the narrative.

SHILLER: It’s not being talked about. We can forget thing — like, for example, the stock market crash of 1987, that’s a little over 30 years ago. But my students don’t know anything about, never heard of it.

RITHOLTZ: What about the dot com crash or the ’08, ’09 collapse? It’s got to be a little fresher.

SHILLER: Well, no, yeah. Well, the dot com crash was in the future in the event I’m describing. But people know about things that are — that are popular. And the 1929 crash is the one that everyone remembers, other ones more recently. How about the 1946 crash or …

RITHOLTZ: Post World War II.

SHILLER: Yeah. Well, it was like one day there was a six percent drop. Nobody remembers. I mean, maybe you remember.

RITHOLTZ: I don’t remember that. That’s before my time.

So let’s talk about another big event. Let — let’s talk about the gold standard. The U.S. for a long time was on the gold standard, then we’re off. President Trump has talked about going back to the gold standard.


RITHOLTZ: This seems to rise and fall over time. What — what drives that?

SHILLER: Well, I think that what drives narratives is a certain creativity that some people have at some moments in their lives to invent a story, and this is something that literature department studied, economists don’t. What is — what is it about a story that works?

You know, often our — I think our attention to ideas is focused by the kind of stories that accompany them. So, for — and it — it — there’s something about visual impact, imagery, something about human interest, something about emotions being driven up, something about tie-ins to other stories that you already liked that the creative art of a writer can sometimes surmount and — and use and create a narrative that will really go viral. It’s a difficult thing to do.

It’s — it’s similar with music. Some music goes viral and some doesn’t. I think it’s — it’s somewhat random, so I think it started and it becomes — developed certain associations, and then everyone is talking about it.

RITHOLTZ: It has to be right time, right place and just a little bit of luck.

SHILLER: And maybe it requires perfection. So …

RITHOLTZ: Perfection.

SHILLER: … the most — the most famous — it’s not — exactly –it’s sort of narrative. The ballet, The Nutcracker, that’s the most famous ballet in the entire world. It’s — it’s everywhere. But when Tchaikovsky first wrote it in 1892, it wasn’t a big success. He had to work at it, and then it came over to the U.S. and George Balanchine, the — the ballet writer — ballet director fixed it, made it into a really beautiful ballet. And so it has now gone viral. And it’s — we love this ballet.

People who don’t like ballet will go to that one and repeatedly, so — so there was something about it that — that Tchaikovsky had an idea. He couldn’t quite get it at first and it — it — it involved little details that make it somehow work eventually, bringing the children yet to emphasize the children. And people love to see each other and blossoming on stage in front of them.

RITHOLTZ: So because it’s a Christmas themed event …

SHILLER: And it’s also ties into something else …


SHILLER: … and it is an annual prompt to do it …


SHILLER: … to see it again, so a lot of people go every Christmas. Now this isn’t really an economic narrative, I’m being a little bit different, but it’s the same idea that the — that the — and what’s so special about that story or any other story, something clicked and — and it’s just universal. So, by the way, have you seen The Nutcracker? I recommend you go see it if you haven’t.

RITHOLTZ: The — the story you’re telling about how that went viral reminds me a little bit of — Derek Thompson writes for the Atlantic and wrote a book how hits happened, and he talks about a number of paintings, including all of the impressionists. It’s really a — a sort of fascinating coincidence how a certain group of impressionists became worldwide famous because one of them were collecting other impressionists’ work, left it in their estate to the French — one of the French museums and part of the wall was it had to be displayed, so suddenly just a group of a new style of art that wasn’t popular anywhere else and a group of seven great artists …


RITHOLTZ: … who became worldwide famous. Same sort of thing, very serendipitous, very random.

SHILLER: This reminds me of a book that influenced me a lot years ago. It’s called “The Painted Word” by Thomas Wolfe. It’s a similar theme. He claims that a lot of modern art is not — the — the quality of it isn’t recognizable just by looking at it. You have to read the reviewers, the critics.


SHILLER: And they will tell — weave it into a story. Then when you go back and look at it, you’ll love this painting …

RITHOLTZ: The story …

SHILLER: … but you wouldn’t have known.

RITHOLTZ: Quite interesting. Let’s talk a little about the world of economics and some of the things that either do or don’t go viral.

In the book you write about the Laffer curve, which I’ve always thought of as having an element of truth that there has to be some optimal tax rate that maximizes revenues, but the way it seems to have been applied is — let’s just call it — contraindicated. It was a disaster in Kansas.


RITHOLTZ: It — it had terrible effects. So — so why did the Laffer curve go viral? And why are people so willing to overlook some of the down sides of it?

SHILLER: Well, I have only a partial understanding why it went viral. I compare with the Rubik’s cube, which went viral at the same time.

RITHOLTZ: Right, in the book during Reagan’s term, right?

SHILLER: Yeah. And so why did Rubik’s cube go viral? It’s just a puzzle, right? I mean, it was — the right story was told about it and that it was thought to be somehow deep in importance (inaudible).

RITHOLTZ: An obscure mathematician had created this — had created this …

SHILLER: Yeah, Hungarian engineer.


SHILLER: And that’s a narrative, yeah.

RITHOLTZ: Just those two words, Hungarian engineer.


RITHOLTZ: At the time when we were still — had Eastern Bloc countries behind the Iron Curtain.

SHILLER: Right, so it — all these things — it may not work again today. Hungary has a different story about it now, but I mean the Laffer curve also, there’s a little story associated with it and it’s the story of Art Laffer, an economist, at a dinner at the Two Continents restaurant in Washington, fancy restaurant. And he drew on a napkin a diagram illustrating his theory.

Everyone remembers this napkin.


SHILLER: That’s just an irrelevant detail.


SHILLER: But — but — but somehow it presents the theory as something that ought to be obvious.

RITHOLTZ: It’s also this sort of virgin birth that he whips out a pen and starts doodling and says here’s where we optimize tax revenues. That makes what? Otherwise would be a fairly dry thesis, very compelling and very visual.

SHILLER: Yeah, it’s almost like a joke. I mean, it has a punch line. That diagram has a punch line because it says that there’s always two tax rates to reach any revenue, and one of them dominates the other. It’s kind of something you can explain fairly quickly, and it’s pungy.

RITHOLTZ: Yeah, it — it definitely is. So that kind of raises the question, in general, about narratives and the economy. Which — which came first? Specifically, our story is driving the economy or is the state of the economy driving the narratives people used to explain it?

SHILLER: Well, I’m not an extremist on the answer to that. Economists are an extremist.


SHILLER: Economists say it goes only one way from the economy to the stories so we can just forget. We don’t care about the story. That’s just trivia.

RITHOLTZ: You look at causation a little differently.

SHILLER: I think it goes both ways. And so it also interacts with another kind of feedback, which is the multiple rounds of expenditure. If …

RITHOLTZ: Meaning?

SHILLER: … if the government spends money, that becomes somebody’s income and that person spends some of that and it becomes someone else’s income. This economist have loved this ever since John Maynard Keynes in the 1930’s, but that — that isn’t the only kind of feedback that’s occurring. The other kind of feedback is verbal from person-to-person, spreading a story. And I think these two feedbacks interact. This is something for further research someday. But I mean, qualitatively, I can say what’s happening.

The — the Great Recession that we just went through 10 years ago was partly a result of the standard Keynesian multiplier, but it was also just people telling stories. It resurrected the story of the Great Depression. You can see that in Google Trends or other — other ways of — I do have the various kinds of searches.

There was a huge impact of the Great Depression. The 1929 stock market crash, that suddenly became vivid like this is happening again.

RITHOLTZ: That’s interesting because during the — let’s call it — ’02 to ’07, early ‘08 period, it seemed that a lot of the stories were, hey, you can make a ton of money just buying houses and flipping it …


RITHOLTZ: … and people’s greed monster got stirred up, hey, my neighbor is making all this money buying and selling houses.


RITHOLTZ: I can also. How much of that is also narrative virally going …


RITHOLTZ: … from one person to the next?

SHILLER: Actually, the term “flipping houses” began to appear near the end of the boom. It was often used pejoratively. It was — this is getting crazy.


SHILLER: And that had started to appear around 2005, a couple years or three years before the recession really hit.

RITHOLTZ: Do you recall when some of the shows started showing up on HGTV and those channels flip this house …


RITHOLTZ: … and it was a run of — of buy a house, fix it up …


RITHOLTZ: … sell it television shows.

SHILLER: I think the first one was Property Ladder in the U.K. And then that was such a successful show. It — it displayed flippers. I don’t know if it called them flippers, but it displayed people who bought a house, fixed it up a little bit, used interior decorating instincts, and then made a lot of money fast.

That was a powerful narrative because, first of all, it feeds your ego. A lot of people are — are decorating their own home and they think they’re pretty good at it.


SHILLER: Even Donald Trump think he’s pretty good at decorating hotels. So that’s what — that’s a source of ego gratification. And justifiably, some of these people are talented, so — but that doesn’t mean that it’s their talent that’s creating the profits, it’s the housing bubble that’s creating the profits. And people find it difficult to think logically and rationally about that I have this success because I’m smart or was it just chance.

RITHOLTZ: Just a little bit of luck. Let — let’s discuss fake news. In the book you wrote, quote, “The brain overtime forgets that it once deemed story is unreliable.” Explain what that means.

SHILLER: Yeah, the way the brain — you — you remember stories that you heard in the past as a story and you don’t always have well tied to that story in the linkages in your brain. What is the source of the story and is it a reliable source?

So the — the source connection is somewhat weak. You have to remember where you heard the story if you’re — if you’re going to be telling the truth all the time, and we try to do that. But I — I think there’s a human defect, so you just don’t remember where you heard the story. But you’re in casual conversation with somebody. What difference does it make?

You know, I might be telling a story that’s not right, but it’s a good story. And I’m not — you know, I’m not saying this in bad faith, I’m not trying to deceive anyone. Nobody really knows what the actual truth is, so all kinds of untruthful stories spread virally. And it isn’t anyone’s ill will that — that accomplishes that.

RITHOLTZ: You — you also explained in the book that, quote, “Truth is not enough to stop false narratives.” So that raises two questions. First is why not, and second, if truth doesn’t stop a false narrative, what does?

SHILLER: Well, it does often stop false narratives. So I don’t — it’s not altogether. But the problem with theories or narratives that counter a false narrative is that they might not be contagious, it’s just not fun.

RITHOLTZ: Not as compelling.

SHILLER: To — we, peoples, like to entertain each other in conversations. So if — if I told you dramatically that something you believe was wrong, you might find that entertaining. But typically, you know, you heard some stories somewhere and it’s may or may not be true, but I’m not fascinated by a good story that it was wrong, it just kind of — it all depends on the exact nature of the story. It can easily be that I don’t — you know, I didn’t really care to hear this correction. I had a nice story that I was telling everyone and you’re telling me now that it was wrong. Okay, maybe.

RITHOLTZ: So a little cognitive dissonance kicks in, but the entertainment …


RITHOLTZ: … value is — so in the book you tell the story about a — a British pop singer named Lily Allen …


RITHOLTZ: … supposedly did a gig in ’09 and turned down the opportunity to be paid in bitcoin.


RITHOLTZ: And if she would have taken that and then held on to the bitcoin she’d be a billionaire. So first, compelling story.


RITHOLTZ: Second, was it true?

SHILLER: Yeah. This may or may not be true. Who cares, right? This is a nice story. I never verified whether it was true. I mentioned it in the book, but it — it relates to a — a basic human emotion called FOMO, fear of missing out. And that — that is a driving force. So you — you also want to take investing tips quickly before you — you, you know, have ruminated on them for a month, so you have to act quickly. So you — fear of missing out is an important instinct that — and it maybe goes back to our caveman days when you had the rush to grab the food before some other caveman got it.

RITHOLTZ: It was a matter of survival not just making a profit …


RITHOLTZ: … in the market. Quite, quite fascinating. So let’s talk a little bit about markets. And if we’re talking about markets, we have to talk about bubbles.

If I had to guess the viral nature of bubbles and the stories surrounding them, how to be a key driver in your desire to write this book, bubbles are perhaps what you’re best known for. Your work in bubbles and behavioral economics very much stood in contrast to the traditional economic thinking that markets are efficient and people are rational.


RITHOLTZ: How much did bubbles have to do with the ideas behind this book?

SHILLER: I think that bubbles was a kind of — the story that markets are efficient is a half-truth that has been mentioned going back 150 years, but it never really became dominant until Eugene Fama wrote his famous article in the late 19 — or when was it exactly — 1960’s, I think.

RITHOLTZ: And you and Fama both shared the 2013 Nobel Prize.

SHILLER: Yeah, that was ironic. It was an interesting experience during Nobel week when I had to spend a week with Eugene Fama who — who is still on the view that I was totally wrong. But it was kind of — it was kind of nice because it turns out that we didn’t really disagree much — much that it was factual. We — we agreed on the fact. It’s like it’s a different narrative, so I like to describe people as swayed by narratives. And he thinks of it as — what is it, it’s changing taste maybe or changing risk aversion that — that people are different. He’s trying to incorporate these things into a theory. He has a company called Dimensional Fund Advisors.

RITHOLTZ: He — he works for DFA, yes.

SHILLER: But he was the inspiration, I think, for the (inaudible).

RITHOLTZ: David Booth is the founder of that, yes.


RITHOLTZ: He has been with them for what 40 years, something like that.

SHILLER: So I — I was congratulating him during Nobel Week for showing decisively how we can beat the market through DFA. And he didn’t like that. That’s not the way he wants to put it, so I stopped doing it. I was — I think it was becoming unwelcome.


I do know I was congratulating him. He doesn’t think that he’s telling people how to beat the market. He’s helping people to manage their risks.

RITHOLTZ: What I find fascinating that you and Fama won the Nobel the same year is that there is — if you draw the Venn diagrams of your separate narratives, there’s a big overlap in the middle. The overlap …


RITHOLTZ: … is essentially markets are kind of sort of efficient and it’s very hard to beat them.

SHILLER: Right, right.

RITHOLTZ: He — he will admit that it’s very hard to beat that. Your narrative also adds and people are irrational and sometimes that leads the markets going wildly out of …


RITHOLTZ: … off-kilter before they return back to normalcy. I don’t think Fama is a big believer that bubbles can be either identified or even …


RITHOLTZ: … defined, it’s just markets reaching extremes.

SHILLER: That’s one thing he said during Nobel Week that I — I challenge you to say when it was that someone could identify a major turning point in the market. But I — I agree with that. It’s hard to — it’s hard to pin down when the turning point is going to come. So maybe — maybe we’re not that — maybe not that …

RITHOLTZ: Not that far apart.

SHILLER: By the way, I admire the man. He’s brilliant.

RITHOLTZ: He — he’s done some tremendous work. Let’s talk about one other narrative that has gone viral. What — what do you make of negative interest rates essentially exported here first from Japan and now …


RITHOLTZ: … Europe. How do these happen? Are we going to see these in the United States?

I recall you had said a long time ago, well, negative rates can never happen, it violates the basic laws of economics.

SHILLER: Yeah, I used to teach that.


A (inaudible) out of minus a half percent in — in the E.U. So that’s — but it never — it can’t get down to minus five percent, it can’t because you would hold cash instead.


SHILLER: And it just reflects the difficulties of actually storing cash and there’s also …

RITHOLTZ: Especially when there’s so many trillions of dollars of it slushing around the system.

SHILLER: Right. So it’s an interesting observation there. Now I wonder do you know this, where their negative interest rates 50 or 100 years ago. They probably were, at some point.

RITHOLTZ: I don’t recall ever reading about negative interest rates before the 1989 Japan situation, but I have to imagine that at one point in time it is true.

SHILLER: It must have been, right?

RITHOLTZ: Right, you would think.

SHILLER: It’s just — it’s just not part of our narrative in the Econ Department.


SHILLER: It must be that somebody in the 19th century had $1 million in cash and he wanted to store it somewhere. And so — so I’m going to charge you, I don’t — you know.

RITHOLTZ: But if you think about the gold standard, that’s effectively the equivalent of negative interest rates because you have to pay for storage and security for …


RITHOLTZ: … gold bars. How is that any different than negative interest rates …

SHILLER: Yeah, right.

RITHOLTZ: … for bonds if they’re effectively the same credit risk?

SHILLER: So we used to talk to our students about the zero lower bound just because it’s kind of cool, just like the gold standard (inaudible). That’s why I talk about the gold standard in my book. The — the public didn’t really talk about the gold standard, they were just aren’t.

RITHOLTZ: Right. It was a given.

SHILLER: But then it became a moral value in the 1890’s, particularly, when there was talk of bimentallism. So …

RITHOLTZ: Bimentallism meaning …

SHILLER: Oh, that — yeah. I — I compare it with bitcoin.


SHILLER: I think the emotional content of the narrative was very similar to bitcoin. It was a new financial innovation.


SHILLER: It started to be talked about it around the 1870’s – all of the gold standards have two standards, and this kind of — it’s going to stimulate the economy. That was a time when they were probably right because it would expand the nice supply.


SHILLER: And that would cause inflation, and that would wipe out the real value of debt. It would help farmers who were oppressed by deflation, so it has some element of truth. But the point is it sounds like bitcoin. It was a — a shocker that someone would have it — would go off the gold standard. We’ve — everything has been predicated on gold as the real thing, and you want to put some cheaper metal. You’re debasing the currency, that’s a crime.

It got very emotional and it got emotional in ways that we’re regional, that East Coast intellectuals tended to be in favor of keeping the gold standard. And people out west who maybe had less college — most of them didn’t have college at all — they were thinking they were pretty smart to have discovered this new bimetallism.

RITHOLTZ: Was it William Jennings Bryan who said …


RITHOLTZ: … we — we don’t need to be hung on a cross of — of gold? I know I’m mangling that somewhat.

SHILLER: Yeah, that’s in my book, too.


SHILLER: It turns out he did. During the 1896 Democratic Convention, William Jennings Bryan said, “You shall not crucify us on a cross of gold.” But it turns out — and that’s a — that is so famous a quote that people still remember it today.

The crowd went wild there. They — they — they thought it was the second coming of Christ or something like that. It turns out that William Jennings Bryan was quoting somebody else and he didn’t say so.

The — the other guy who said it it was a congressman who just said it in some speech, didn’t get noticed. It was — it was that moment he was giving his acceptance of the democratic nomination for the presidency at the convention. And there were newspaper reporters there and the crowd went wild, and it just became a narrative that never got forgotten. Although we forgotten — we forgotten bimetallism pretty much, we still remember that quote. We don’t know what it means anymore.

RITHOLTZ: Quite interesting. We were talking earlier about bitcoin, and of all the stories that — that have narratives around, the — the bitcoin narrative seems to be quite fascinating. I think of it as millennial libertarian gold.


RITHOLTZ: It’s — it’s a younger generation with certain political beliefs, love the idea of this independent currency free of government restraints, although that really hasn’t seemed to be the way it — it’s worked out, has it?

SHILLER: It was a great story, yeah.


SHILLER: The government is capable of taxing you. We now know that on your bitcoin profits, so they — they can get at your bitcoin …

RITHOLTZ: They can as have hackers. You know, there — there are all sorts of new telephone hacks and they’re using it …


RITHOLTZ: … to go after people’s bitcoin wallets.

SHILLER: On top of that, a lot of the trades on the bitcoin exchanges are — are fake trades …

RITHOLTZ: Oh, really?

SHILLER: … just to — in fact, most — on some of them, yeah.

RITHOLTZ: Are you going to say most of the bitcoin trades on certain exchanges are — are fake, are not real trades.

SHILLER: Well, I’ve read this so I’m sorry. Now I don’t want to accuse someone of a crime, but they’re not regulated and they’re doing — the story is this is a narrative, which I’m repeating is that they do wash trades to — they want to show a lot of volume.

RITHOLTZ: Right, which makes it more credible as a currency.

SHILLER: Yeah, that’s how you — there has been in the history a lot of stock manipulation, too. And we have to thank the SEC for — for clamping down on that because that — that would happen.

RITHOLTZ: So — so some of the things we’ve talked about have been conspiracy theories, to some degree. Why in the modern era with our access to all this science and technology and — and fact-finding and truth sites, why have — have these conspiracy theories become so prevalent? Is this something fundamental about human beings and the way our minds operate? I mean, not just the moon landing hoax, but anti-vaxers. There’s even …


RITHOLTZ: … a rise of flat-earthers. What — what is that about?

SHILLER: Well, there is a — first of all, there are conspiracies in — we know that there are conspiracies, so a rational person has to be alert to possible conspiracy. But we also know that there is a — a personality type that — or maybe it’s — yeah, a personality type that is very influenced by conspiracy stories.

They used to — in the American Psychiatric Association’s Diagnostic and Statistical Manual, they used to talk about paranoid schizophrenic people. They — they have hallucinations about conspiracies. But in the latest edition, they have separated it from schizophrenia and they now have something called “paranoid personality disorder.” So these are the extremes.


SHILLER: And they are not schizophrenic, they’re just something out about and they’re constantly imagining conspiracies. So there’s a certain fragment of our population and people who are — who are not suffering from any disorder but who are very inordinately focused on — on conspiracies are even more numerous. So if you find someone who believes one conspiracy, talk to him further and there will probably be many more conspiracies that this person — if it — it goes a little bit — it can get a little bit crazy.

RITHOLTZ: So the Federal Reserve has been a subject of all manner of conspiracy theories.


RITHOLTZ: Going back to the book, “The Creature from Jekyll Island,” what is it about central bankers that lend themselves to these theories? Is that just a good narrative tale of a bunch of bankers secretly manipulating the economy from, you know, behind …


RITHOLTZ: … the curtain? What — what makes this such a compelling — and there’s a whole group of people who — whose narratives are they just hate the Fed, we should — and the Fed, get rid of the Fed. What is it about central bankers that lends itself so easily to — to the theories?

SHILLER: Well, I think it’s — it sounds — Okay, I’m trying to focus like a literary expert who explains why some story is popular. It’s partly because we’re impressed by our monetary — just like we’re impressed by bitcoin or bimetallism, so it’s a story about something mysterious. We have these pieces of paper in our right pocket and why are they valuable. They’re just pieces of paper. It’s kind of a mystery.

It has to do with power and feeling small. It makes you feel bigger and more important if you discover a — a conspiracy, resentment of people who maybe look more successful than you. And it’s — it’s — it’s — yeah, it’s a bit of a mystery story, too, that you’ve uncovered something that nobody knows that most people are not evilly assumed isn’t happening. So you can tell it’s — it’s a good narrative.

RITHOLTZ: So — so since we’re talking about central bankers, in the book, you referenced Stefan Ingves, Governor of Sweden’s Riksbank who said, quote, “I’m a weatherman, I’m a showman and I’m an economist, but above all, I’m a storyteller. I tell stories about the future.”


RITHOLTZ: How true is that for — for central bankers?

SHILLER: Yeah. I think he’s right. The question, to me, is what’s more important, the actions they take or the words they say after the FOMC meeting.

RITHOLTZ: Was it the meeting or is this the press conference afterwards?

SHILLER: Yeah. Or — or the nature of their statement. So I — I like to think that when the Fed cut the lower bound to the federal funds rate to zero, and right after this — the rate recession that — that story brought up another narrative that is dangerous, and that is a narrative of Japan in the 1990’s when they cut their interest rate to zero, the Bank of Japan. And they were — and they had — it stuck at zero or negative, it still is. That’s like 30 years later. And they had a lost decade and it turned out to be a lost decades.

The story was that Japan looked like the greatest strongest economy in the world in the 1980’s. They wrote lots of books about that. And then something went wrong and then they couldn’t get out of it. So I think it was a mistake to put ourselves into the camp of zero interest rate countries. They could have kept it at 25 basis points and not used the Z word, as I call it.

RITHOLTZ: Right, the — the zero bound word.

SHILLER: Because then it makes the Japanese narrative our narrative.

RITHOLTZ: Right. If you look at the Nikkei bubble in the 80’s, I believe I’ve seen some — some analyses that say they were four times as expensive as the dot com stocks. It was a giant bubble.

SHILLER: Right, right.

RITHOLTZ: Really, so that collapse is still unwinding.

SHILLER: And the CAPE ratio was getting up 60 or 70. It was really high.

RITHOLTZ: And where are we, in the 30’s during the dot com collapse (inaudible)?

SHILLER: We got up to — the maximum at the dot com peak was 46 …


SHILLER: … in the United States.

RITHOLTZ: So this is almost doubled that in (inaudible).

SHILLER: Yeah, it was a lot higher.

RITHOLTZ: Wow, that’s amazing. Let’s talk about another narrative that I found fascinating from the — from the book. The shift from conspicuous consumption to the modern frugality in early retirement, how does something like that change over — what was it, 20 years from the conspicuous consumption era to spend as little money as possible? And — and the fire group, the …


RITHOLTZ: … invest and retire early group.

SHILLER: Yeah, that might be happening. That is not — we still have a very strong consumption demand at this point in history. That might be something that would turn around with the next recession if and when it comes. But the big time when it did turn around and is legendary is the — in 1929, so in the — in the roaring 20’s people were — you know, that was the great Gatsby time. People loved conspicuous consumption, and then something changed quite quickly after 1920 — after the stock market crash of October 28, 1929.

I’ve — I’ve found that narratives — well, first of all, Christina Romer, economic historian and CEA Chairman at one point, showed that consumption demand dropped immediately after the ’29 crash, like why did people stop spending right at that moment. One way of learning about it is to go to the Sunday following the crash and listened to sermons. And it used to report sermons in newspapers.

Famous preachers would get into the newspapers for their sermon. It doesn’t — it doesn’t happen anymore, so I can read a little bit about what this — and the sermons were very moralizing about where — we — we’ve been in this age of excess and now the stock market is crashing, and it serves them right, these pretentious, rich, show-off people. So — so there was something already brewing. There was some dissatisfaction with the 20’s that was developing, and it led to a different attitude in the 30’s that Winifred Holtby was a columnist back then. And she said in one of her — one of her columns, “Dare to the poor. There’s so much more,” and I can’t quote her exactly, but there’s so much more to life than just keeping up appearances and showing off. So that attitude came back and I think that was part of the Great Depression.

It also means the Great Depression wasn’t, as all together, bad as you might think because it relieved you of the — of the obligation to show off. You could blame it on the recession and people would be perfectly on the — on the depression. People would be perfectly understanding. They knew that some tragedy had fallen. Unfortunately, this was also a self-fulfilling prophecy. It kept us in the depression, but it may have made life more livable.

RITHOLTZ: So that raises an interesting question. Can — can we talk ourselves into a recession? If the economy is otherwise fine and people are starting to get nervous about maybe it’s a manufacturing contraction, maybe it’s part of the trade war, tariffs. Can — can we convince ourselves that a recession is coming and that affects our behavior that makes a recession come?

SHILLER: Absolutely, that — that’s what I think is at risk right now. If you go to Google Trends, you will — to look — that allows you to find out what people are searching for through time. There was a huge surge in searches for the term “recession” in 2007 just before the recession began, and we see another surge right now. So Google Trends has venues to predict influenza epidemics. It can also be that way of predicting economic narrative epidemics. So somehow we are really talking about recession and we’re not in a recession, so we’ll see what happens. It may well trigger a recession.

RITHOLTZ: Let’s talk about something that’s been around for a long time and it’s how technology is going to take all our jobs away. First, it was automation then it was artificial intelligence, now it’s robots are coming for our jobs.


RITHOLTZ: Why is this such a persistent theme throughout a hundreds of years?

SHILLER: It goes back thousands of years actually but not as strong. It’s — it started with the Luddites in 1811 and then the swing riots in the 1820’s where common labor was being replaced by we — you know, fabric machines and factories or — or agricultural devices that simplified harvesting. But it’s — it — so this narrative has been around for about 200 years, but it — it flares up at certain times. It’s like a disease. It mutates and the narrative mutates and it flares up, and it can cause problems. It did that in the 1870’s and — or in the 1890’s and in 19 — specially in the Great Depression of the 1930’s.

They were talking about robots in the 1930’s.


SHILLER: And they were worried that this is it, this is a major — this will go down in here — the year 1929 will go down in history as a major turning point when people of common labor will be impoverished from now on. That was something a lot of people believed and discouraged them from spending because they thought, “I better start saving for this future that’s coming.”

But then we — that’s not part of our story about the Great Depression …


SHILLER: … because that was something that didn’t — it was something that — false fear, it didn’t happen. And — and so we just don’t no longer attach that to the explanations of that event.

RITHOLTZ: So what about the modern era where we’re seeing automation replace a lot of jobs. We’re seeing software and artificial intelligence. On Wall Street, half the trading desk have been replaced with software. There’s — there’s …


RITHOLTZ: … talk about accountants and lawyers seeing a lot of their — their work being automated by software. There’s even artificial intelligence writing news stories by just identifying specific facts and — and putting them together.

SHILLER: Well, they have sports. They can do sports with a data feed.

RITHOLTZ: So — so is there a reason to be concerned or let me rephrase that. Some of these stories would sound silly and scary, in retrospective, appear to have some degree of truth that …


RITHOLTZ: … technology does replace certain — at least repetitive non-creative jobs.

SHILLER: Well, I wouldn’t say is translation a repetitive non-creative? Again …

RITHOLTZ: Probably.

SHILLER: Well, if you’re translating poetry not.

RITHOLTZ: If you’re translating something from French to English or from, you know, Google Translate, you could basically get a not great, but usable …


RITHOLTZ: … translation of — of just about any language to any language.

SHILLER: So I think there is reason to worry, and it goes back to the notion that economists have that the — in an — a competitive equilibrium — perfect equilibrium, people’s wages are equal to their marginal product if — if you have to sell for what you can get …


SHILLER: … and there’s no sympathy or morality that intervenes, then you’re — you’re going to get what you can contribute at the margin. And the — the problem with that is that technology changes that. It’s not your fault, so there’s no reason to think that it can’t happen. It hasn’t happened, but maybe — maybe the turning point is about to come or has already started coming. Inequality is rising, it’s partly — the problem is whether we can invent new roles for ourselves that would value people as opposed to robots.

I think we don’t know, but — but nobody can speak authoritatively about the future. So — so it becomes a place for narratives.

RITHOLTZ: So — so let’s talk about not the future, but the past. How do narratives change over time? You — you mentioned the Great Depression. It sounds like the narratives around the Great Depression have morphed several times from the 20’s to the 30’s to the present day.

SHILLER: Yeah, the — the — if you do account of the phrase “Great Depression,” it has been growing ever since — maybe the end of World War II. They didn’t call it the Great Depression in the Great Depression.

RITHOLTZ: What — what was it called then?

SHILLER: They — they would call it “hard times,” but it wasn’t singling it out with a special name.

RITHOLTZ: When did that start?

SHILLER: There was a book written in 1934 by Lionel Robbins at the London School of Economics called “The Great Depression.” So, yeah, it was a book and it was talked about so you’ll see references to the Great Depression from 1934 on. But it became kind of a story of our lives later and it gradually grew. It was growing continually, pretty much continually in terms of accounts of — use of that.

In the 1950’s, John Kenneth Galbraith wrote a book called “1929 The Crash.” That was a bestseller and it got a lot of attention. People began to worry. They’ve been worrying all that time about it possibly coming back, but it — it didn’t because there wasn’t — the — the narrative was growing, but it wasn’t focused on something that’s about to happen, and it came back in 2007 with vengeance.

When George W. Bush gave a speech that was later described as very much like Franklin Delano Roosevelt’s, “the only thing we have to fear is fear itself” speech. So George W. Bush translated that into anxiety can feed anxiety. There was — he gave the same talk. So — and a lot of people remember that.


SHILLER: You would think that one talk from 1933 would still be remembered. We’re very selective on what we remember.

RITHOLTZ: That was such a catchy phrase. The only thing we have to fear is fear itself.


RITHOLTZ: You know, it’s funny you mentioned George Bush heading into the financial crisis. During ’08, ’09, I was calling it the financial crisis, but it seems a few years later we started calling it the Great Recession.

SHILLER: All right.

RITHOLTZ: That — that name seems to have — it was a credit crisis, it was the subprime debacle …


RITHOLTZ: … it seemed to have changed over time. How common is that historical revisionism with these …


RITHOLTZ: … giant viral events?

SHILLER: By the way, the term “Great Recession” was first applied to the 1974, ‘75 recession …


SHILLER: … in a book by Otto Eckstein. I think that was the title of his book, “The Great Recession.”

RITHOLTZ: And that was a giant — by the way, for people to remember, stock market fell almost the — the same amount as it fell in ’08, ’09. It was about a 57 percent drop at least the Dow Jones …

SHILLER: Yeah, yeah.

RITHOLTZ: … almost (inaudible).

SHILLER: And we had a serious recession.

RITHOLTZ: Sure. Oil embargo, that whole early and …


RITHOLTZ: … and big inflation. That was not a fun period.

SHILLER: And then in 1980 through ’82, we had twin recessions.

RITHOLTZ: The double dip.

SHILLER: Yeah, this is the second oil crisis now. And there were people around, at that time, who called the — the Great Recession. But none of those stuck and I’m not sure why, and you can’t control this — this narrative epidemic, so I have to admit I now sometimes refer to the 2008, ’09 recession as the Great Recession because everybody knows what I mean when I say that.


SHILLER: You — you lose the battle. I’m saying, no, it’s the 1974, ‘75 recession. Also even the word “recession” wasn’t used until 1938.

RITHOLTZ: Oh, really. What was the more common phrase?

SHILLER: Depression.

RITHOLTZ: Really? So I know we had a number of market crashes and economic events throughout the 19th century before there was a Federal Reserve. Those were not called recessions, they were called depressions.

SHILLER: Well, there might have been some creative use of the word, but it wasn’t the name for them. So, yeah, they would talk about business depression. They didn’t say depression either, they did say business depression. But it wasn’t clear that that was a name for a phenomenon. It was just, yeah, like business downturn I could say.

RITHOLTZ: Right. Economic contraction, is that a more modern usage?

SHILLER: I have to check that one.

RITHOLTZ: All right.

SHILLER: It sounds — that sounds like it came in with Burns and Mitchell in the 1946 book. I — I’m not sure, but language does change. But the language changes means something because different words have different connotations and associations in our mind.

RITHOLTZ: Quite fascinating. Before we get into some questions we didn’t get to, I remember you and I doing a television ad together. It had to be like ’05 or ’06, talking about the house flippers and how …


RITHOLTZ: … prices had run away. And people looked at us like we were crazy.

SHILLER: Was it CNBC townhall?

RITHOLTZ: I think it was, yeah. It was — it was …

SHILLER: Griffeth, his name …

RITHOLTZ: Bill Griffeth.

SHILLER: Bill Griffeth.

RITHOLTZ: I mean, my memory isn’t as good as yours.

SHILLER: I think — I think I remember that event.

RITHOLTZ: And I just recall that anytime you — anybody brought up the possibility that, hey, you know, these things don’t grow to the sky forever. Rates are crazy low, they can’t …


RITHOLTZ: … stay that way forever. In the midst of the boom, if you bring up the narrative that this is going to end in end (ph) badly, people look at you like you’re — you know, like you have the plague. It was an astonishing period.

SHILLER: Right. Yeah, I — I remember that. It was emotionally difficult appearance (ph) to me. And …

RITHOLTZ: Although you’ve never been afraid of taking a unpopular contrarian position …


RITHOLTZ: … most of which turned out to be correct over time.

SHILLER: Yeah, it was some anxiety though because I’m basing it on things that are not leading indicators identified by statisticians.


SHILLER: And I have a sense that some of these leading indicators became leading indicators because of a self-fulfilling — once people believe they’re a leading indicator, they — they — they make it happen.

RITHOLTZ: So there’s a little chicken-and-egg problem with that because they don’t become resonant until they have a track record, so some of it just becomes a little luck as to what happened to important …

SHILLER: Yeah, right.

RITHOLTZ: … ones before. How — how important is luck to not just one thing going viral, but something becoming a regular resource that people use for decades?

SHILLER: I don’t know how to answer that. I would say it reminds me of a book by Nassim Talib called “Fooled by Randomness.”


SHILLER: … and it takes the form of a — it’s a great fun about a man named Nero Tulip, which is the author — just a distortion of the author, so it’s autobiographical. But you go through life feeling ashamed and elated.

When random events made you a success or a failure …


SHILLER: … and you just can’t believe that it’s just random.

RITHOLTZ: Well, we have a tendency to want to take credit for things that work out and want to blame outside factors for things that don’t.

SHILLER: We’re trying to do that, yeah. But you might actually blame yourself. People do blame — they won’t do it publicly, but internally they get depressed.

RITHOLTZ: And that’s — that’s because they — a little imposter syndrome or — or — or something.

SHILLER: Yeah, yeah.

RITHOLTZ: So a couple of questions we didn’t get to that — that I have to ask you about. So you’ve written a ton about market bubbles and investor behavior, but behavioral economics is more diagnostic than prescriptive. It tells what could be done rather than advise people what to do. And that kind of reminds me a little bit of the bias blind spot, how people have an inability to see their own biases. So — so what can investors do if we know we’re all biased, but we personally don’t see our own biases.

SHILLER: Well, I don’t have a good — I — I can tell you what books o read. How about Danny Kahneman’s “Thinking, Fast and Slow”?


SHILLER: That’s been a bestseller and it — it tells you about lots of biases that you probably have and you didn’t know about it.

RITHOLTZ: And then two stories I had — I have to ask from the book. One is about blue jeans, just dungarees. How has that …

SHILLER: I’m wearing them.

RITHOLTZ: I’m wearing — I’m wearing stretch blue jeans …


… which kind of made me think of how blue jeans have changed over time. It started out …


RITHOLTZ: … that this was for farmers and ranchers.

SHILLER: Well, even — yeah, it’s right, they were work clothes. And in the 1870’s, I think, there was a governor of Indiana called “Blue Jeans Bill” who would wear blue jeans to formal occasions and (inaudible) thought he was — but it made him famous …


SHILLER: … and he would just — didn’t want to be pretentious.

RITHOLTZ: Was it — was it real? Was he a man of the people or …


SHILLER: Yeah, he was a real governor and he …


SHILLER: … man — yeah, man of the people who wanted to show that he was. And it’s had that sense to it ever since. It — it’s — I’m — I’m real, I’m not fake.


SHILLER: It — it developed in the 1920’s further with the Dude Ranches. That was another new — that’s where you would go to a ranch and you’d ride horses and lasso and …

RITHOLTZ: Pretend to be a cowboy for a week.

SHILLER: Pretend you’re a city person but you could …


SHILLER: … do it for a week. And you’d buy a pair of — of blue jeans and then it kind of showed that you were into the — in things, you were doing dude ranchy things. And then in the 1930’s, it became fashion, and that’s when they started ripping their blue jeans and making them look worn …


SHILLER: … to — to heighten the effect.

And then it got more impetus from the Rebel without a Cause, James Dean movie …


SHILLER: … where he fashionably wore blue jeans for the whole movie. And it had — that was a powerful narrative. That — that movie was admired by …

RITHOLTZ: He — he died in a crash driving a Porsche …

SHILLER: Oh, yeah.

RITHOLTZ: … like a month before the movie came out kind of …


RITHOLTZ: … that kind of made the movie go viral, didn’t it?

SHILLER: Yeah, it depends on things like that. Becoming assassinated helps your narrative or murdered or — or — or die in a accident that reveals your reckless side, which is what James Dean did. He was speeding.

RITHOLTZ: Right, and that was part of the character in — in the film.

SHILLER: Yes, it — it was a — it was a good movie.


SHILLER: It resonated.

RITHOLTZ: So — so the other thing I had to ask you about was on expectations. Pedro Domingos is a machine-driven linguistic processing expert at hedge fund D.E. Shaw. And — and his quote, “Emerging narratives determine expectations, and expectations determine everything else.” How …


RITHOLTZ: … important are expectations to — to narratives?

SHILLER: Right. Well, I think this is older tradition in economics where people would ask people what — what do you expect the inflation rate to be this year. George Katona who was a — the founder of the Michigan Consumer Sentiment — well, one of the founders of the Michigan Consumer — said that he interviewed people and I talked to them directly, and he would ask them, what do you think the inflation rate will be this year? And he got the impression. He said that people don’t really — they — they looked lost. What? What is the inflation rate? I don’t have any clear idea.

And then if you press them, they’d come up with a number.


SHILLER: So he said they don’t exactly have expectations, but maybe — at least a lot of people don’t. But maybe it’s — it’s more like stories about — they — they — they heard that the price of something went up 10 percent over the last year, and it’s been doing that. And so they’re upset and they’re angry. And they can talk like that. If you force them to do it, then they’ll just say, Okay, my expectation is 10 percent, but they didn’t have it.

RITHOLTZ: Someone once said that the reason oil and gasoline prices are so important to people’s expectations — inflation expectations is it’s the only product you buy that the price is displayed in 20-foot tall numbers on 40-foot tall signs.

SHILLER: Oh, yeah, yeah.

RITHOLTZ: And so you — everybody sees that you can’t help but notice it. How important is that to stories of prices rising or falling?

SHILLER: Yeah, and so if visual images matter for stories, also sense of identity matters. So the inflation problem became the most serious problems facing the country, according to Gallup polls, in — sometime in the 70’s, 80 — maybe say 70’s.

RITHOLTZ: And we had a very big bout of inflation during that era.

SHILLER: Right. So — but I think that — what I was going to say is that it not only affected people’s lives directly, but it also made them angry. And they started blaming labor unions for the inflation, for bidding up — for forcing companies to wage price — raise prices in order to pay the higher wages they were paying the unionized members. And it led to a public reaction against unions, and it led to — ultimately to Ronald Reagan and a general defusing of the power of unions.

RITHOLTZ: Now by the time the 70’s and 80’s came around, hadn’t union strength been falling for — for some time?

SHILLER: Well, I don’t — yeah, when I — when I named Ronald Reagan I don’t mean that he invented the narrative. He was — he — good politicians know that they can’t routinely invent — you can — you can add some similar narratives that strengthen it, but you have to accept that people are on to a certain story. And to be a successful politician, you want to — you want to repeat the story.

RITHOLTZ: So he fired the air traffic controllers when they went on strike, which I believe …


RITHOLTZ: … was the first time something like that had happened. That played right into the we’re-not-going-to-take-it-from-unions-anymore narrative.

SHILLER: Right, so he knew how to create a new narrative built around the emerging narrative, or so it would become part of a constellation of anti-union narratives.

RITHOLTZ: And — and that had an impact on prices or just public perception of — of unions?

SHILLER: But it did. That was a major turning point not just for the U.S. but around much of the world that the inflation rate was up in the double-digit range per year and that — it started to come down right from that date. So these are big changes in economics events that are narrative-driven. So economists tend often to be focused on predicting month-to-month fluctuations and not — why did there — why was there a global peak in inflation around 1980, and that, I think, has to be understood through changing narratives.

RITHOLTZ: Now I would credit Paul Volcker and his actions as Fed chief raising rates …


RITHOLTZ: … double-digits in order to break the back of inflation, but you’re suggesting the narrative favors what Ronald Reagan did.

SHILLER: Well, I think they both were important — it’s a complicated story.


SHILLER: But Volcker might not have had the political capital to — to do that if — if the public wasn’t already angry about inflation. So it was a — it was a courageous thing for him to — to create the Great Recession it was called at the time in — in the 19 80’s, but he — he was judging, I think, that he did have these — that people were angry about it. There have been all this talk about controlling inflation and it just gets worse and worse.

And they also believe this was part of the popular narrative then that it eats into my wallet. They didn’t — they didn’t think as many economists did that it would — it would get into their paycheck as well even though they weren’t unionized by — by market forces.

RITHOLTZ: Quite, quite interesting.

SHILLER: So now let me get to my favorite questions that we ask all of our guests. This is sort of our speed around. Feel free to go as — as short as you want.

RITHOLTZ: Tell us the first car you ever owned, year, make and model.

SHILLER: My parents gave me a Rambler Ambassador in the 1960’s because it was a safe car. And I don’t follow my parents too much in detail, but I’ve been buying safe cars ever since.

RITHOLTZ: I recall taking a cab with you once. And in the backseat, you put on the seatbelt. I don’t know a lot of people do that …

SHILLER: Oh, yeah.

RITHOLTZ: … from a safety perspective.

Not …


RITHOLTZ: … the Rambler, by the way, not the Porsche Speedster that James Dean drove.

SHILLER: That’s right. I’m not a James Dean type.

RITHOLTZ: What’s the most important thing people do not know about Bob Shiller?

SHILLER: So I don’t know what’s important about me. Is it something about my personality or …

RITHOLTZ: Well, what — what do people not know that you?

SHILLER: Well, I — Okay, I’m thinking this is just off the wall thought, but I think people differ in their — their ability to focus attention and their ability to complete projects. I think I did — I was a project-oriented person from childhood but distractible.


SHILLER: My secretary will tell you I’m distractible, but I keep coming back. So I think that people like me should do things like write books.

RITHOLTZ: Okay. And this is what, your sixth book, your eighth book?

SHILLER: Well, it depends on how you — it — it could be 13th. I say 10th book.

RITHOLTZ: Tenth book, wow. Who were your early mentors? Who affected your career be it in academia or economics?

SHILLER: Okay. In elementary school, I don’t know his first name. Mr. Keener (ph) was my science teacher, and he encouraged me. I wanted to be a scientist.


SHILLER: I am a social scientist, I did it.


SHILLER: And also my high school geometry teacher, Mr. Sussy (ph). I think it was Roger Sussy (ph). I don’t know his first name, who encouraged me about mathematics. I wrote a — (inaudible) a paper for his course, but he didn’t even ask for in which I used the differential calculus to derive a formula for the length of a spiral. And he was so encouraging, “You’re doing original mathematics. I assume somebody else has already done that, but I — I don’t know where.” I assume I got it right, I don’t know.

RITHOLTZ: So tell us about some of your favorite books. You’ve mentioned numerous books so far. What — what books do you really enjoy? What do you read for pleasure or fun?

SHILLER: So one thing is that I am distractible, so I often don’t finish them.


SHILLER: I jump around and look for interesting places.

RITHOLTZ: Are you reading like three to four books at once?

SHILLER: What I’m doing right now, it’s strange. I — I bought in an antiquarian bookstore a bound volume of — for 1849 of “Littel’s Living Age.” Ever heard of it?


SHILLER: It was an intellectual magazine like the Atlantic or Harper’s from that time. And I thought I’ll just do — you know, every night I’ll read one issue of it, and it just brought me — brings me into the year 1849. I’m letting them decide what I read.

RITHOLTZ: Do you — do you …

SHILLER: I make discoveries about the past. For example, I discovered that women’s liberation was already. I just read a story about famous women poets in that — in that volume.

RITHOLTZ: In 1840’s?

SHILLER: 1849, yeah. They didn’t mention Emily Dickinson, so then I looked it up. She was only 19 years old in 1849.

RITHOLTZ: What — what are the books have you — what — what do you like to recommend to people? What — or what book just resonated with you?

SHILLER: See, I don’t know if I recommend books very often, but I like autobiographies or diaries, so the autobiography of Benjamin Franklin influenced me.

RITHOLTZ: His autobiography, not somebody else’s biography, Okay?

SHILLER: He wrote his own life.


SHILLER: And the — the diary of — the name — the person who wrote the life of Samuel Johnson, James Boswell.


SHILLER: And I just like real — I like to hear our people from the past talk to me. That’s what “Littel’s Living Age” is doing for me and what the …

RITHOLTZ: Having people from the past talk to you.

SHILLER: I want to go back there and hear them.

RITHOLTZ: So James Boswell, his own autobiography.

SHILLER: You know, in fact, it was written on a daily — it’s really a diary what he did today. And he did a lot of things that were not entirely moral, right. He didn’t plan to publish it apparently from the standards of his age, but he was overall a nice person.

RITHOLTZ: What do you do for fun? What do you do when you’re not researching and writing your own books?

SHILLER: I read things. I — I sit with my wife. Now I’m watching television more but it’s whatever she chooses.

RITHOLTZ: What sort of stuff are you watching on TV?

SHILLER: Oh, things like John Oliver and — oh, the PBS NewsHour. These are her choices, but I like them, too, so.

RITHOLTZ: That — that’s interesting. Tell us about a time you failed and what you learned from the experience.

SHILLER: Well, I — I had a firm called Macro Markets that failed, but it didn’t completely fail. It — it went under, it collapsed. It’s no longer exist, but it did leave a legacy.

RITHOLTZ: Which was what?

SHILLER: Well, we — we wanted to create markets for real estate for (inaudible) family along.

RITHOLTZ: Oh, sure, I recall this.

SHILLER: And there still is — well, the Chicago mercantile exchange still has a market that we help them create based on the S&P Case-Shiller …


SHILLER: … home price — now CoreLogic Home Price Indices. So I think what we did change the world and even if it doesn’t make us rich.

See part of the inspiration — part of the pleasure, I’m living out my father’s dream who wanted me to be an entrepreneur. There’s something about creativity that is rewarding even if the business doesn’t succeed.

RITHOLTZ: Well, you created the CAPE Ratio and I know there are a number of mutual funds based on that.

SHILLER: There are, yeah.

RITHOLTZ: That — that’s fairly entrepreneurial, right?

SHILLER: Yeah. I — I — I have the American — it’s not just American, the entrepreneurial spirit that I — I — I got from my father.

RITHOLTZ: What are you most optimistic and/or pessimistic about today?

SHILLER: I don’t like to be too pessimistic, I like to do that, but I am worried about things like global warming and possible — possible crisis in the planet. You know, we don’t like to think about these things. I think we should be more concerned about making agreements with other countries about how we’re going to handle environmental crises like global warming. We might not be able to see them now and identify them, but we should have some risk-sharing agreements.

What are we going to do if global warming gets so bad, for example, that some country is unlivable? Where do they go? You know, who wants to take them in?

RITHOLTZ: That’s a problem. That sounds like quite a problem. So if one of your students came to you or a millennial came to you and was looking for career advice about working in the field of either behavioral economics or — or finance, what sort of advice would you give them?

SHILLER: Well, this would be very general. I think that finance is an important field. I teach — I have an online course that’s free, by the way, on Coursera called financial markets. And I’m very proud of that because I have educated so many people not just from Yale but from all over the world who went into finance. So I — I think finance is a good field because it solves problems, and it’s not the government solving problems, although it can also be. There’s government finance as well.

And behavioral finance is just finance coming into reality. I — I think it’s not as — behavioral finance is not a job category like finances, but I think in order to be well-rounded, one should know something about it.

I tell my students in my course, financial markets, even if you don’t want to go into finance you should take this course because finance is about making things happen. Realistically, how do you finance the activities that are useful for society?

RITHOLTZ: Quite interesting. And our final question, what is it that you know about the world of economics and narratives today that you wish you knew 40 years ago?

SHILLER: I — I think I’m stalling on this one. I wish I knew everything that had come up, and there’s so many details. One thing, I — I just visited the Behavioral Insights Team in the U.K. last week. I’m very impressed with all they’re saying, but now these are sprouting up everywhere. There are — there — there are consulting groups effectively that — that help people do their — their financing more effectively in — in account of — of what we know. And there’s so much not — a lot of it is experimental, and you have to try things out and see what — how people react because how people react is not — not — and mostly predictable based on just the first theory.

RITHOLTZ: Quite interesting. Thank you, Bob, for being so generous with your time.

We have been speaking with Professor Robert Shiller of Yale University. His new book, “Narrative Economics: How Stories Go Viral and Drive Major Economic Events,” was released on October 1st. If you enjoyed this conversation, well, be sure and look up an inch or down an inch on Apple iTunes and you can see any of our prior 250 or so conversations we’ve had over the past five years.

We love your comments, feedback and suggestions. Write to us at Go to Apple iTunes. Give us a nice review. We really appreciate that.

I would be remiss if I did not thank the crack staff that helps put this together each week. Atika Valbrun is our Project Director. Michael Boyle is Booker/Producer. Caroline Ria (ph) 01:15:12 is our Audio Engineer today. And Michael Batnick is my Head of Research.

I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.



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