Transcript Irrational Exuberance Robert Shiller

Irrational Exuberance
Robert Shiller
Economics 71a
Lecture notes 12.4
Outline
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U.S Equity Markets in the 90’s (1-2)
News and the media (4)
New era thinking (5)
Psychology (7-8)
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Anchoring
Herding
Learning and unlearning (10)
The market efficiency debate (9)
Real S&P 500 Price
Real S&P 500 P/E Ratio
Previous 10 Year Earnings (Shiller)
Real S&P 500 P/E Ratio
Latest 12 Month Earnings
S&P Annual Dividend Yield
(d/p)
Precipitating Factors
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Arrival of the internet during strong profit growth
Reduction in foreign economic rivals
Business culture
Capital gains tax cuts
Baby boom
Media financial reporting
Analyst optimism
Defined contribution pension plans
More Factors
 Growth
of mutual funds
 Index funds
 Inflation declines
 Discount brokers
 Gambling opportunities
Outline
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U.S Equity Markets in the 90’s (1-2)
News and the media (4)
New era thinking (5)
Psychology (7-8)
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Anchoring
Herding
Learning and unlearning (10)
The market efficiency debate (9)
News Media
 Record
overload
 Stock market moves and big news
 Tag along news
 Crashes of 29 and 87
 New media outlets and rumors
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Internet sites
Outline
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U.S Equity Markets in the 90’s (1-2)
News and the media (4)
New era thinking (5)
Psychology (7-8)
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Anchoring
Herding
Learning and unlearning (10)
The market efficiency debate (9)
New Eras
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“New economy”
1901
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1920’s
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Trains, electricity, new century
Electricity, mass production, prohibition
Irving Fisher
50’s and 60’s
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Baby boom, computers, credit cards, macroeconomic policy
New Eras
 90’s
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Globalization
Technology
Low inflation (macro policy again)
Profits
Productivity
Outline
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U.S Equity Markets in the 90’s (1-2)
News and the media (4)
New era thinking (5)
Psychology (7-8)
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Anchoring
Herding
Learning and unlearning (10)
The market efficiency debate (9)
Psychology: Anchoring
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Decisions influenced by outside information
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Experiments with random wheel and questions
Spin wheel (1-100)
Ask factual question
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Above or below spin, then final answer
Final answer impacted by wheel
Stock prices
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Recent price as anchor
Psychological barriers (round numbers)
Recent minimums and maximums
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Trading range
Moral Anchors
 Story
telling and explanations
 Good stories and stocks
 Familiarity
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Invest in own company for retirement
Overconfidence
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My judgment is better
Good luck will persist
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Search for familiar patters from past
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“Hot hands”
“representativeness heuristic”
Trading volume
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Study on phone -> online changes (page 59, Odean)
Customers changes from phone to online
Before change 2% above market
After change 3% below market
Herd Behavior
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Individuals influenced by groups
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Information cascades
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Candid camera elevator
Restaurants
Software
Fashion
Technologies
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Word of mouth
News media
News letters
Internet
More Herd Psychology
 Epedimic
models
 Brain maintains conflicting models
 Focusing attention
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Too many stocks
Too much data
Outline
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U.S Equity Markets in the 90’s (1-2)
News and the media (4)
New era thinking (5)
Psychology (7-8)
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Anchoring
Herding
Learning and unlearning (10)
The market efficiency debate (9)
Learning in the Long Term
 Explanation
for run up in the market
 Investors decide market is less risky
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Stocks are the place to invest
Book: Stocks For the Long Run, Siegel
 How
does this explain things for us?
 Risk premia falling over time (k falls)
 What is risk, and how do people
perceive it?
Weakness in this Explanation
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It has been around before
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Siegel data:
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1924: Edgar Lawrence
No 30 year period in which bonds have out performed
stocks
Except 1830-61
What about 10 year periods?
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In 29-38 and 66-75 stocks under performed bonds
Also, performance after all peaks is low (0-2% real)
More learning problems
 Learning
to diversify
 Are investors getting better at this?
 Difficult problem
Outline
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U.S Equity Markets in the 90’s (1-2)
News and the media (4)
New era thinking (5)
Psychology (7-8)
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Anchoring
Herding
Learning and unlearning (10)
The market efficiency debate (9)
Efficient Markets
(Defined Again)
 Risk/Return
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Fair world
 Information
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Prices reflect all information
Markets efficiently aggregate judgements
Are There Clear Holes?
 Shiller:
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Yes
eToys valued at $8 billion
Toys “R” Us at $6 billion
Toys “R” Us has 400 times the sales of
eToys
eToys earnings negative $28.6 million
Toys “R” Us earnings are $376 million
 Can
you use this?
Connecting Markets to Real
Values
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Earnings
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Some periods (20’s) strong
Some periods (90’s) much weaker
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Dividends
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Prices increase more than earnings
Market crashes not justified by falls in dividends
Summary:
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Dividends and earnings don’t move that much with prices
Price variability much larger than earnings or dividend
variability (Shiller figure 9.1)
Counter to Shiller from
Efficient Markets Side
 Markets
not perfect, but
 Markets are still pretty hard to forecast
 Who are the “smart people” making
money off all the inefficiency?
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Mutual fund evidence (Malkiel)
My Thoughts on Market
Efficiency
 Perfect
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efficient market world is wrong
Pockets of inefficiency
 Can
you capitalize on them?
 Do they affect the economy?
Three Perspectives
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Individual investor
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Professional investor
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Should you try to beat the market?
Are there places where the full time professional can add
value?
Policy makers
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Do markets excesses disrupt other parts of the economy?
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AOL/Time Warner
Outline
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U.S Equity Markets in the 90’s (1-2)
News and the media (4)
New era thinking (5)
Psychology (7-8)
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Anchoring
Herding
Learning and unlearning (10)
The market efficiency debate (9)