• Yale’s Econ 252: Shiller on Financial Markets

    I’m always looking for high quality audio content to enjoy via podcast on my long commute by foot and rail. On the suggestion of Josh Hausman by way of Brad Delong, I tried Yale’s Financial Markets course (Econ 252) taught by Robert Shiller. The course is part of Open Yale Courses, an online repository of course material including audio, video, and documents associated with fifteen Yale courses (as of this writing). Kudos to Yale for expanding access to higher education, and for free!

    Econ 252 works well as a podcast, at least for someone with passing familiarity with basic concepts in finance. Though Shiller used a blackboard during part of his lectures, I did not miss not seeing it. Presumably it is visible in the downloadable video. It was enough that he spoke the few equations introduced in the course. (One can learn a lot even ignoring the equations.)

    Shiller’s treatment of the course topics differed from any I’ve seen in the textbooks I’ve read. Of course he covered the basics of financial institutions (commercial and investment banks, the Fed, corporate structure, and so forth) and financial instruments (stocks, bonds, futures, options, and the like). But his presentation also reflected his interests in the morality of finance, behavioral finance, financial technology, and history of finance, topics he covers in great detail in his published books.

    Shiller framed the course with the moral motivations for the finance industry, talking at length on the topic in the first and last lectures. He emphasized the improvements in human welfare brought about by financial risk management tools and institutions. While he may be correct that the finance industry has improved social welfare, I do not think improving social welfare is what motivates many of its practitioners.

    Shiller repeatedly returned to the ideas of behavioral finance to explain why markets and individuals do not behave rationally. In particular, he comes down pretty hard on the efficient market hypothesis, leaving little doubt that he does not believe it holds in all market conditions and particularly not during the recent housing bubble.

    His enthusiasm for the history of financial innovation clearly shows in his lectures. He routinely reached way back to centuries or millennia in the past to provide the full context of development of financial technology (which includes the inventions of cheap wood pulp paper, filing cabinets, carbon paper, the typewriter, the internet, and a myriad of financial instruments). He brought ticker tape into class to show students how stock prices used to be communicated. Unfortunately he does not own an old ticker tape machine (Thomas Edison’s first invention, I learned). If anyone knows where to get one, let me know. Shiller may be interested and that may present an arbitrage opportunity for me, or now you (I’m joking!).

    The course included four guest speakers, two of whom I thought had particularly interesting things to say. In lecture nine David Swensen described his strategy in managing Yale’s endowment. Under Swensen’s leadership, the endowment had grown from about $1B in 1987 to about $23B in 2008 (it has subsequently lost 30% of its value). Swensen described how he diversified Yale’s portfolio in ways that managers of other university endowments had not considered, investing relatively more heavily in private equity, commodities, foreign equity, and shorting tech stocks (in the late 1990s) and mortgage backed securities (in recent years). Swensen made good arguments in favor of the fundamentals: diversification, sound asset allocation, and not timing the market (though I think Swensen is a market timer, and a successful one).

    Andrew Redleaf, CEO of Whitebox Advisors, a money management firm, spoke in lecture 14. He has a different perspective than Swensen arguing that it is reasonable to try and possible to succeed at timing the market. Redleaf also made a convincing case that markets are not efficient but are effectively so for small investors. (For more along these lines, see my post Efficiency and Rationality in Financial Markets.)

    The timing of the course I listened to (Spring 2008) was closer to the beginning than the end of the current recession and overlapped with the demise of Bear Stearns. Shiller devoted the better part of two lectures explaining the economic crisis and the government’s response to it (lectures 16 and 17). To anyone seeking an overview of the crisis I recommend listening to just those two lectures. They, and most other lectures, can be understood on their own, without having heard any prior material.

    Shiller’s other lectures were peppered with references to the origins and events of the housing crisis, something he has tracked particularly closely since the housing market is his area of expertise. It would be interesting to listen to some course lectures from subsequent years to hear Shiller’s perspective on the evolution of the economy, but I probably won’t do that. Always on the hunt for good podcast material, I’ll sample some of the other Open Yale Courses. I hope they’re as good as Econ 252. Shiller has set the bar high.

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