Robert J. Shiller

• 1. Introduction

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  Robert James Shiller was born on the 29th of March, 1946, in Detroit, Michigan, and he would grow up to be one of the few economists who actually warned the world about a financial catastrophe before it happened. Twice. Most economists are measured by the elegance of their theories. Shiller is measured by the accuracy of his warnings. His book Irrational Exuberance, published in 2000, called the stock market a bubble at the very height of its peak. Five years later, he was on a television panel warning that the housing market could not sustain its own momentum. The world did not listen. Then came 2008. How did one economist, trained in the cool logic of interest rates and discount models, come to believe that fear, euphoria, and storytelling drive the markets more than any spreadsheet can capture? And what did he do with that conviction once he had it?

• 2. Roots and Formation

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  Benjamin Peter Shiller, Robert's father, was an engineer and entrepreneur, and the household Robert grew up in was one shaped by practical problem-solving. His mother was Ruth R., born Radsville. The family was of Lithuanian descent, and Robert was raised as a Methodist in Detroit. He began his undergraduate studies at Kalamazoo College before transferring to the University of Michigan, where he graduated with a B.A. in 1967, earning the distinction of Phi Beta Kappa. He then moved to the Massachusetts Institute of Technology, completing his S.M. degree in 1968 and his Ph.D. in 1972. His doctoral thesis examined rational expectations and the structure of interest rates, and it was supervised by Franco Modigliani, himself a Nobel laureate. That pairing planted in Shiller an early tension: the reigning orthodoxy said markets were rational; the data he was beginning to examine suggested they were not. He married Virginia Marie Faulstich, a psychologist, and the two had two children. Her discipline would prove relevant to his work in ways that neither the economics department nor the finance industry was prepared to accept.

• 3. Challenging the Orthodoxy

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  In 1981, Shiller published an article that put him directly at odds with the dominant view in his profession. The efficient market hypothesis held that stock prices incorporate all available information and reflect the underlying value of assets. Shiller tested this against the actual record of the U.S. stock market going back to the 1920s. He asked a pointed question: could any rational account of expected future dividends and discount rates explain the wild swings in stock prices that history showed? His answer was no. The volatility in the market far exceeded what any reasonable forecast of dividends could justify. He called this the excess volatility puzzle. The article was later named one of the top twenty articles published in the hundred-year history of the American Economic Association, a recognition that came only after the rest of the profession had time to absorb just how disruptive the finding was. The October 1987 stock market crash gave behavioral finance the credibility it had struggled to earn. Shiller was already doing survey research by then, asking investors and stock traders directly what drove their decisions. The results supported what his 1981 article had argued: emotion, not calculation, was often at the wheel. That survey data has been gathered continuously since 1989.

• 4. The Index That Measured a Nation's Houses

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  Karl Case was studying unsustainable house price booms in Boston when he and Shiller began their collaboration. Shiller was approaching the same terrain from a different angle, examining the behavioral aspects of economic bubbles. Together with Allan Weiss, they formed Case Shiller Weiss in 1991. The company built a repeat-sales index using home sales price data from across the country, tracking the same properties over time to produce a cleaner picture of price trends than simple average prices could offer. Fiserv and Standard and Poor later acquired and extended the index, giving it the name most people know today: the Case-Shiller index. At his Nobel Prize lecture in 2013, Shiller explained how the index had grown out of a deeper frustration. John Maynard Keynes had compared the stock market to a beauty contest in which participants bet not on who they find attractive, but on who they think the majority will find attractive. That kind of self-referential speculation, Shiller argued, meant that more and better data about real asset prices was not just useful but necessary. The Case-Shiller index was his answer to that need. Without reliable information about what homes were actually worth, the market could not even pretend to be efficient.

• 5. Calling the Bubbles

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  Irrational Exuberance arrived in bookshops in 2000, became a New York Times bestseller, and warned that the stock market had become a bubble at precisely the moment the market was at its highest point. The timing was not coincidence; it was the result of years of research into how asset prices deviate from underlying value. In 2005, Shiller appeared on a CNBC program called "How to Profit from the Real Estate Boom" and made the case that house prices could not sustainably outpace inflation. His argument was straightforward: except on land-restricted sites, home prices tend toward building costs plus a normal profit. His co-panelist David Lereah had just published a book called Are You Missing the Real Estate Boom?, which in retrospect marked the top of the housing market. Shiller refined his position in the second edition of Irrational Exuberance in 2005, writing that further rises in stock and housing markets could lead to significant declines, a possible worldwide recession, and a serious risk that was not widely acknowledged. In August 2006, he wrote in The Wall Street Journal that there was significant risk of a very bad period involving falling prices, rising defaults and foreclosures, and a possible recession sooner than most people expected. In September 2007, almost exactly one year before the collapse of Lehman Brothers, he published an article predicting an imminent collapse in the U.S. housing market and subsequent financial panic. By late 2006 and early 2007, the world had begun to believe him.

• 6. The Nobel and What It Proved

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  On the 14th of October, 2013, it was announced that Shiller would share the Nobel Memorial Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen. The prize was awarded for empirical analysis of asset prices. The pairing was notable because Fama was the architect of the efficient market hypothesis that Shiller had spent his career challenging. At the prize ceremony, Shiller used his lecture to lay out the case against Fama's framework directly. He showed that dividend growth on stocks had been running at two percent per year, a figure that the efficient market hypothesis could not adequately explain, because market prices swung far more than that growth rate would predict. His Linearized Present Value model, developed in collaboration with his colleague and former student John Campbell, showed that only one-half to one-third of stock market fluctuations could be explained by expected dividends. Variables such as interest rates and building costs, he told the audience, did not explain housing market movements either. Thomson Reuters had named him a contender for the prize the prior year, citing his contributions to understanding financial market volatility. The Deutsche Bank Prize in Financial Economics, which he received in 2009, had already recognized the practical policy implications of his research on asset price dynamics across fixed income, equities, and real estate.

• 7. Narrative, Risk, and Later Work

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  Narrative Economics, published in 2019, extended Shiller's long-standing argument into new territory. The book argued that stories go viral and drive major economic events, and it received favorable reviews, appearing on the Financial Times list of best books of that year. It was not his first collaboration with George Akerlof; the two had previously co-authored Phishing for Phools, a Princeton University Press book on the economics of manipulation and deception published in 2015, and Animal Spirits, which examined how human psychology drives economies, published in 2009. His 1993 book Macro Markets had earlier won TIAA-CREF's first annual Paul A. Samuelson Award. In 2010, Shiller publicly backed the idea of contingent capital, a new kind of bank debt that would automatically convert to equity if regulators determined a systemic national financial crisis was underway and the bank was simultaneously in violation of capital-adequacy requirements. The proposal was a direct response to the 2008 crisis. In 2017, he called Bitcoin the biggest financial bubble of its time, drawing on the analogy of the Cincinnati Time Store to argue that cryptocurrencies represent a speculative bubble waiting to burst. In June 2024, he was among sixteen Nobel laureates in economics who signed an open letter warning that Donald Trump's fiscal and trade policies, combined with efforts to limit the Federal Reserve's independence, would reignite inflation in the United States. Shiller has been a regular contributor to Project Syndicate since 2003, and has appeared in the New York Times on at least two dozen occasions.