Bubbles, Human Judgement, & Expert Opinion
I have a confession to make, I have an intellectual crush on Robert Shiller. I have been watching his classes on financial markets online via Open Yale and they are quite stimulating. Here is one of his papers on bubbles and human judgement. Click Here To Skip The Introduction & Read Robert Shiller’s 2001 Article On Bubbles & Human Judgement
Background On Robert Shiller (Wikipedia)
Robert Shiller – is an American economist, academic, and best-selling author. He has been a research associate of the National Bureau of Economic Research (NBER) since 1980, was Vice President of the American Economic Association in 2005, and President of the Eastern Economic Association for 2006-2007. Shiller serves as the Stanley B. Resor Professor of Economics at Yale University and is a Fellow at the Yale International Center for Finance, Yale School of Management. He is the founder and chief economist of the investment management firm MacroMarkets LLC. He is ranked among the top 100 economists of the world.
Research Introduction/ Abstract (Via SSRN & Robert Shiller)
Research in psychology and behavioral finance is surveyed for evidence to what extent experts such as professional investment managers or endowment trustees may behave in such a way as to help perpetuate speculative bubbles in financial markets. This paper discusses scholarly psychological literature on the representativeness heuristic, overconfidence, attentional anomalies, self-esteem, conformity pressures, salience and justification for insights into weaknesses in expert opinion. The role of the prudent person standard and the news media in influencing experts is considered. The relevance of the literature on testing of the efficient markets theory is discussed.
Excerpts (Via SSRN & Robert Shiller)
“The widespread public disagreement about whether the stock market has been undergoing a speculative bubble in the past few years reflects an underlying disagreement about how to view human judgment and intellect.”
“There are many who have been arguing in effect that the market (or major components of it) has been undergoing a bubble. These include some who write for The Economist, The Wall Street Journal, and Barron’s. It would seem that it is essential to their notion of a bubble that investors’ actions are, in one way or another, foolish.”
“The kind of errors that people have been making and that underlie the recent stock market bubble do reflect human shortcomings, but they reflect exactly the kind of shortcomings that caninfect professors’ analysts’ and trustees’ thinking just as much as anyone else’s.”
“The essence of a speculative bubble is a sort of feedback, from price increases, to increased investor enthusiasm, to increased demand, and hence further price increases. The high demand for the asset is generated by the public memory of high past returns, and the optimism those high returns generate for the future. The feedback can amplify positive forces affecting the market, making the market reach higher levels than it would if it were responding only directly to these positive forces. Moreover, a bubble is not indefinitely sustainable. Prices cannot go up forever, and when price increases end, then the increased demand that the price increases generated ends too. Then, a downward feedback can replace the upward feedback.”
Click Here To Read Robert Shiller’s 2001 Article On Bubbles & Human Judgement
