Bubbles & Behavior: Highlights From Robert Shiller’s Talk

On Monday, Robert Shiller spoke at Seattle Pacific University about the causes of the housing bubble and his new book Animal Spirits. Shiller is a Yale professor of economics, who together with Karl Case, created the Case-Shiller Indices that track home prices (they released the latest numbers this week). Shiller talked a lot about the social and psychological forces behind changes in the market.

Bubbles Beget Bubbles
Shiller discussed how the crash of the 1990′s stock market bubble fueled the real estate bubble. The 1990′s stock market bubble changed how we think about careers, money and work. People made so much money investing in stocks; people began to think work is for chumps – investing was the way to go.

When the market crashed, investors didn’t question whether they should be investing in speculative markets. They just went looking for another market instead. In their eyes, the stock market was flawed, not their strategy. Investors went on to make the same mistakes in the real estate market that they had made in the stock market.

Don’t Rock the Boat
Throughout the talk, Shiller often mentioned the power of consensus – how people don’t like to rock the boat. He cited Bear Stearns as an example of how bad things happen when people are reluctant to go against a consensus. Shiller referred to the book Groupthink: Psychological Studies of Policy Decisions and Fiascoes in which Irving Janis shows how a bunch of smart people can make big errors because individuals are reluctant to rock the boat.

Seattle Housing Market
Shiller talked about the Seattle market only long enough to say that compared to the Case-Shiller 10-city composite, the Seattle bubble lasted longer, prices rose slightly higer and the bottom 1/3rd of the Seattle market grew faster and higher than the top 2/3rds.

1885 LA Housing Bubble
One of the best parts of Shiller’s talk was his analysis of the 1885 housing bubble in Los Angeles. In 1885, cut-rate railroad fares brought more and more people to Los Angeles. Housing prices shot up, then crashed. He quoted a newspaper story from after the crash in which the writer says that the residents of Los Angeles have learned their lesson: housing prices can’t keep rising forever and they have to be based on reality. For Shiller, this bubble was different from today’s bubble because it was local; the crash didn’t affect the national market.

We’re On A Sinking Ship
During the Q & A, someone asked Shiller about the government’s attempts to fix the economy. He cut to the chase and said, “We’re on a sinking ship.” One that’s sinking so fast, we don’t have time to figure everything out; we need to try something. He said the Obama administration is doing something.

What’s The Future Holds
Shiller was reluctant to make any predictions about the real estate market and he often qualified his statements with, “That’s not a forecast.” However, during the Q & A section he did share some of his ideas about the future:

  • We can’t keep falling at this rate
  • The rate of catastrophe is declining and will continue to slow down
  • The market will flatten out, it won’t shoot back up again

Via = Miracle Whip?
Shiller also spoke to 1,400 people on Monday morning at Seattle Pacific University’s Downtown Business Breakfast. I didn’t attend the morning session, but you can read Aubrey Cohen’s coverage of the morning talk. I love Shiller’s claim that Starbuck’s Via is today’s Miracle Whip.

For another take on Shiller’s afternoon talk, take a look at Tim’s post on Seattle Bubble.