In New York’s real estate community, the winner of this year’s Nobel Prize in Economics is a household name. Robert Shiller, a Yale economist, is the co-founder of the Case-Shiller Home Price Index, arguably the most important indicator of the strength of the U.S. housing market.
But the index isn’t the only reason why real-estate professionals should know his name. Robert Shiller’s most important research – cited on Tuesday by the Nobel committee as the reason why he was chosen alongside Eugene Fama and Lars Peter Hansen of the University of Chicago – sheds a light on how irrationality shapes asset prices and creates bubbles.
In the early 1980s, Shiller made a name by questioning the “efficient markets hypothesis”, which states that asset prices are determined by rational expectations of future returns. Instead, he claimed that asset prices change so often and so strongly that irrational behavior has to play a role.
Shiller’s major breakthrough was the bestselling book “Irrational Exuberance”. Published in 2000, it analyzed how irrational behavior creates bubbles in stock and real-estate markets. In 2000, he predicted the bursting of the dotcom bubble, and three years later he predicted the collapse of the housing market.
“I’m grateful to the Nobel committee for this honor,” Shiller is quoted on Yale’s website. “Many of the problems that beset financial markets — and that are behind the financial crisis of the last five years — can be fixed, with the application of our improved understanding of asset pricing. Despite problems, our financial markets do serve people and can serve them better in the future.”
