Irrational Exuberance Robert Shiller Economics 71 a Lecture
Irrational Exuberance Robert Shiller Economics 71 a Lecture notes 12. 4
Outline à à U. S Equity Markets in the 90’s (1 -2) News and the media (4) New era thinking (5) Psychology (7 -8) n n à à 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 à à à à 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 à Growth of mutual funds à Index funds à Inflation declines à Discount brokers à Gambling opportunities
Outline à à U. S Equity Markets in the 90’s (1 -2) News and the media (4) New era thinking (5) Psychology (7 -8) n n à à Anchoring Herding Learning and unlearning (10) The market efficiency debate (9)
News Media à Record overload à Stock market moves and big news à Tag along news à Crashes of 29 and 87 à New media outlets and rumors n Internet sites
Outline à à U. S Equity Markets in the 90’s (1 -2) News and the media (4) New era thinking (5) Psychology (7 -8) n n à à Anchoring Herding Learning and unlearning (10) The market efficiency debate (9)
New Eras à à “New economy” 1901 n à 1920’s n n à Trains, electricity, new century Electricity, mass production, prohibition Irving Fisher 50’s and 60’s n Baby boom, computers, credit cards, macroeconomic policy
New Eras à 90’s n n n Globalization Technology Low inflation (macro policy again) Profits Productivity
Outline à à U. S Equity Markets in the 90’s (1 -2) News and the media (4) New era thinking (5) Psychology (7 -8) n n à à Anchoring Herding Learning and unlearning (10) The market efficiency debate (9)
Psychology: Anchoring à Decisions influenced by outside information n Experiments with random wheel and questions Spin wheel (1 -100) Ask factual question u u à Above or below spin, then final answer Final answer impacted by wheel Stock prices n n n Recent price as anchor Psychological barriers (round numbers) Recent minimums and maximums u Trading range
Moral Anchors à Story telling and explanations à Good stories and stocks à Familiarity n Invest in own company for retirement
Overconfidence à à My judgment is better Good luck will persist n à Search for familiar patters from past n à “Hot hands” “representativeness heuristic” Trading volume n n 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 à Individuals influenced by groups n à Information cascades n n n à Candid camera elevator Restaurants Software Fashion Technologies n n Word of mouth News media News letters Internet
More Herd Psychology à Epedimic models à Brain maintains conflicting models à Focusing attention n n Too many stocks Too much data
Outline à à U. S Equity Markets in the 90’s (1 -2) News and the media (4) New era thinking (5) Psychology (7 -8) n n à à Anchoring Herding Learning and unlearning (10) The market efficiency debate (9)
Learning in the Long Term à Explanation for run up in the market à Investors decide market is less risky n n Stocks are the place to invest Book: Stocks For the Long Run, Siegel à How does this explain things for us? à Risk premia falling over time (k falls) à What is risk, and how do people perceive it?
Weakness in this Explanation à It has been around before n à Siegel data: n n à 1924: Edgar Lawrence No 30 year period in which bonds have out performed stocks Except 1830 -61 What about 10 year periods? n n In 29 -38 and 66 -75 stocks under performed bonds Also, performance after all peaks is low (0 -2% real)
More learning problems à Learning to diversify à Are investors getting better at this? à Difficult problem
Outline à à U. S Equity Markets in the 90’s (1 -2) News and the media (4) New era thinking (5) Psychology (7 -8) n n à à Anchoring Herding Learning and unlearning (10) The market efficiency debate (9)
Efficient Markets (Defined Again) à Risk/Return n Fair world à Information n n Prices reflect all information Markets efficiently aggregate judgements
Are There Clear Holes? à Shiller: n n n Yes e. Toys valued at $8 billion Toys “R” Us at $6 billion Toys “R” Us has 400 times the sales of e. Toys earnings negative $28. 6 million Toys “R” Us earnings are $376 million à Can you use this?
Connecting Markets to Real Values à Earnings n n Some periods (20’s) strong Some periods (90’s) much weaker u à Dividends n à Prices increase more than earnings Market crashes not justified by falls in dividends Summary: n n 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 à Markets not perfect, but à Markets are still pretty hard to forecast à Who are the “smart people” making money off all the inefficiency? n Mutual fund evidence (Malkiel)
My Thoughts on Market Efficiency à Perfect n efficient market world is wrong Pockets of inefficiency à Can you capitalize on them? à Do they affect the economy?
Three Perspectives à Individual investor n à Professional investor n à Should you try to beat the market? Are there places where the full time professional can add value? Policy makers n Do markets excesses disrupt other parts of the economy? u AOL/Time Warner
Outline à à U. S Equity Markets in the 90’s (1 -2) News and the media (4) New era thinking (5) Psychology (7 -8) n n à à Anchoring Herding Learning and unlearning (10) The market efficiency debate (9)
- Slides: 31
