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Unformatted text preview: Financial Markets: Lecture 21 Transcript April 14, 2008 << back Professor Robert Shiller: I wanted first to just think back a little bit about the lecture we got from Steve Schwarzman on Friday. Before he came, I talked with him in my office and I had the audacity to ask him if he thought there was any chance that his fortune was just due to luck. I said, why we have this efficient markets theory in finance that says that nobody can beat the market. So, what do you think he said? Well, obviously he believes in himself, but I'm inclined to believe in him also. Efficient markets theory never sounded right; one thing about efficient markets theory that has always bothered me is this idea that the so- called "smart money" sets prices in the market. The thing that bothers me about it is, who is the "smart money," anyway? It's as if it's all or nothing thing; there's the smart money and then it's the dumb money and the smart money rules. Aren't there all different gradations of intelligence and insight? It's not like--why should there be just one level of smart money? So, I think he probably exemplifies a higher level of smart money than smart. I think a lot of mistakes people make in judging financial markets is being easily impressed by someone's stockbroker or someone's analyst who seems very smart and is very smart, but may not be enough to outsmart the markets. That's the lesson of efficiency, especially when you're young. I think you may not realize how many smart people there are in the world, so when you're dealing in a--trying to win in financial markets--you have to take account of who is really out there and how much insight and effort and research are they putting into their trading. Do you really think you can beat that? That's the lesson of efficient markets. I don't think the lesson is that you can't--it's impossible for anyone no matter how smart to beat the market. Now of course, Albert Einstein never made any money in the stock market. In fact, TIAA-CREF, the pension fund, had an ad campaign in which they pointed that Albert Einstein left all of his pension investing to TIAA-CREF. He was a professor and they're a pension fund for professors. Einstein didn't think he could beat the market and Mr. Schwarzman very candidly pointed out that he didn't have the greatest math scores. Isn't that how he put it? He said he was no math genius and you think finance requires a lot of math, but I think that it's something about practical intelligence. Psychologists have talked about different kinds of intelligence--this is all supposed to be coming up here now. At least we're seeing something now. This is why I don't like Powerpoint, actually; this kind of thing happens it always seems to happen. So, that's it. I'm not going to use this for a few minutes.--But, remember Carl Icahn, when he talked to us, said something about he always just had some--he was always just good at making money. I think that there are separate talents. I mean, some people love markets and they like to think about them and figure out there are separate talents....
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- Spring '08