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transcript18 - Financial Markets: Lecture 18 Transcript...

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Financial Markets: Lecture 18 Transcript April 4, 2008 << back Professor Robert Shiller: The fundamental point that I want to make today is that while economic theory describes people as managing their--maximizing their--own utility and subject to constraints, most people have a lot of trouble doing that, particularly as regards to investing in financial markets. Most people are confused and find it just very difficult, so we have an industry of people who help people with their investments and we, moreover, have a whole array of regulations regulating the industry of people who help others with their investments. The problem is that most people are not that good at dealing in financial markets. They're mysterious, they're difficult, and, moreover, there's a tendency of psychological biases that cause people to get into mistakes. We talked about overconfidence--that most people think they're smarter than others--and it seems like people can easily get overconfident about their ability to beat the market. What naturally happens, if not regulated, is that there will be others who will victimize and exploit these people. The classic story is some kind of stockbroker who promises to make great wealth for you by trading your portfolio and, in fact, doesn't really know anything; the guy is just a showman who is just pretending. There was a 1940s book called, Where Are The Customers Yachts? , which was a best-selling book. The title refers to the fact that stockbrokers give the impression that I deal with a very wealthy successful crowd of people and you are now one of the chosen people that I'm managing for. Some stockbrokers will pretend to be very wealthy--create the appearance of that--like they're associated with the rich people and it draws people in. But in fact, the customers often don't do very well because the stockbroker may churn their portfolio, keep coming up with new trades, and the broker is making money from commissions. That's the kind of problem that arises. As a result, a lot of people recognize the importance of giving help to people, so that's what we're talking about. I want to talk mostly about portfolio managers, but I'll first talk about financial advisors and also financial planners and then I'll move to fiduciaries or institutional investors. We do not live in a world where people freely do business as they would like. The financial world is especially heavily-regulated. The first thing is financial advisor; again, most people don't know about these markets and they need someone to give them advice, so people set themselves up as financial advisors. In most countries, these are heavily regulated by the government. In the United States-- Now, what is a financial advisor? I should define that for you. It's someone who gives advice about investments for some kind of fee or commission. It excludes lawyers, bankers, insurance salesmen, reporters from newspapers, professors. Even though these people may all give financial advice, it's not considered as
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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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transcript18 - Financial Markets: Lecture 18 Transcript...

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