transcript07 - Financial Markets: Lecture 7 Transcript...

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Financial Markets: Lecture 7 Transcript February 4, 2008 << back Professor Robert Shiller: Today's lecture is about behavioral finance and this is a term that emerged into public consciousness around the mid-1990s; before that it was unknown. The term "efficient markets" is much older; I mentioned the idea goes back to the nineteenth century and the term goes back to the 1960s. But behavioral finance is a newer revolution in finance and it's something that I have been very involved with. I have been organizing workshops in behavioral finance ever since 1991, working with Professor Richard Thaler at University of Chicago. We've been doing that for eighteen years; amazing, that's a long time for you, right? When we started we were total outcasts, we thought; nobody appreciated us. I had tenure so I could do it but the problem is, you don't want to do things that are too out of fashion. Fortunately, we have a system that allows it to happen and I'm very happy to have that. What behavioral finance is a reaction against extreme--some extremes--that we see in efficient markets theory or also in mathematical finance. Mathematical finance is a beautiful structure and I admire what the people have done and I've worked in it myself, but it has its limits. Eventually--you know the way a paradigm develops--it goes through a certain phase. When mathematical finance was new, say in the 1960s, it was the exciting thing and nobody wanted to work on anything else; you wanted to be doing the exciting thing. As the '70s and '80s wore on, it got to be a little bit overdone; people run with it too far, they think that's all we want to do, and we don't want to think about anything else. Then they start to get sometimes a little crazy. Than we had to reflect that, well, things aren't perfect. The world isn't perfect and we have real people in the world, so that led to the behavioral finance. Behavioral finance really means--what does it mean? It's not like behavioral psychology. It doesn't mean behavioral psychology applied to finance. It really means something much more broad than that. It means all of the other social sciences applied to finance. The economics department is just one of many departments in the university that teaches us something about how people behave, so if we want to understand how people behave we can't rely only on the economics department. I think that it's coming around to a unifying of our understanding. Since then--since the beginnings in the '90s, our behavioral finance workshops have grown and grown and, of course, so many people are involved in it now; it's now very well-established. Before I get into that, I want to give some additional reflections on the last lecture. I have this chart, which you saw last time--actually it's an Excel spreadsheet that--I also put it up already on the classes V2 website so you can play with it. I just want to reflect again--I know I'm repeating myself a little bit, but it's very important. What we have in this chart is the blue line, which is the Standard & Poor Composite Stock Price
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This note was uploaded on 03/17/2012 for the course ECON 252 taught by Professor Robertshiller during the Spring '08 term at Yale.

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transcript07 - Financial Markets: Lecture 7 Transcript...

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