Robert Shiller, the Arthur M Okun professor of economics at Yale University and a member of Central Banking Publications' advisory board, was today awarded the Nobel Prize for Economics, along with Eugene Fama and Lars Peter Hansen, both of the University of Chicago.
In an interview with Central Banking journal last year, Shiller said the failure of economists, and specifically central bankers, to predict the crisis of the last six years was down to ‘groupthink', adding that groups like the Federal Open Market Committee (FOMC) "are vulnerable to self-censorship".
The committee awarding the prize – established in 1968 thanks to a donation to Sweden's Nobel Foundation from the Sveriges Riksbank, on the occasion of the bank's 300th anniversary – said Shiller, Fama and Hansen had shown how it is possible to foresee the broad course of bond and stock prices over "longer periods, such as the next three to five years", though short-term predictions are impossible.
Shiller in particular was honoured for showing that stock prices follow a predictable pattern in the long run, as a high ratio of price relative to dividends in one year will tend to be followed by a fall in prices relative to dividends over subsequent years, and vice versa.
More recently, Shiller's contribution has been around the identification of mispricing in financial markets – spotting bubbles early and understanding the dynamics of asset pricing. His latest book, Finance and the Good Society, argues that financial markets can be a powerful benefit to society if used correctly.
In his interview with Central Banking, he said the world is "less than halfway" to democratising finance through the wider ownership of capital, but pointed out that Karl Marx, who first had that insight, "seemed not to understand that elderly people owning capital don't really exercise power – they delegate to someone else in the form of investing in some enterprise."
While he believes innovative financial products can transform people's lives for the better, Shiller said this "is a process that unfolds over centuries". Nevertheless, he highlighted three examples that have arrived recently: benefit corporations in certain US states; ‘social impact bonds', which have been trialled in the UK in recent years; and the US ‘Jobs Act', passed in 2012.
Turning to decision-making on the FOMC, he said the members of a group such as that may all be "harbouring doubts about a decision that is about to be reached, but view the doubts as something that they cannot articulate in a suitably professional way, so they quiet themselves and it creates an illusion of consensus".
Having spent time as an adviser to the Federal Reserve Bank of New York, Shiller said he had experienced the feeling himself. "The discourse is at a high and professional level," he said, likening expressing his concerns about bubbles to "bringing up astrology at an astronomer's convention".