Robert Shiller
Nobel laureate who revealed asset bubbles and market irrationality through the CAPE ratio and narrative economics
Robert Shiller (born 1946) is Sterling Professor of Economics at Yale University and co-recipient of the 2013 Nobel Prize in Economics (with Fama and Hansen). He is one of the founders of behavioral finance, known for two major contributions: the CAPE (Cyclically Adjusted Price-to-Earnings) ratio — also known as the Shiller P/E — which smooths market valuations using 10-year average earnings and has become one of the most important predictors of long-term market returns; and Irrational Exuberance (2000), published at the peak of the internet bubble, which accurately warned of the impending crash, with a second edition in 2005 warning of the housing bubble. Shiller later developed Narrative Economics, arguing that economic behavior is driven by virally spreading stories and narratives, not just rational expectations. He co-created the Case-Shiller Home Price Index with Karl Case, the most authoritative tracker of US home prices.
Methodologies
- CAPE Valuation Application Framework - Use CAPE to assess overall market valuation levels as a reference for long-term asset allocation decisions, not as a short-term market timing tool.
- Asset Bubble Identification Checklist - Systematically determine whether an asset is in bubble territory by checking multiple dimensions including price deviation from fundamentals, narrative propagation, media coverage, and retail participation.
Key decisions and timeline
- 1946 Born in Detroit - Experiencing economic cycles firsthand is an important foundation for forming long-term economic views
- 1972 Received PhD in Economics from MIT - Top academic training and critical questioning of orthodox theory can coexist and produce breakthrough research
- 1981 Published Excess Volatility Paper, Challenging the Efficient Market Hypothesis - Simple, clear empirical tests can drive paradigm shifts more effectively than complex theoretical models
Beliefs and mental models
- Belief 1 - Contrary to the Efficient Market Hypothesis, Shiller argues that investor psychology, herding behavior, and emotional narratives cause asset prices to persistently and significantly deviate from intrinsic value. This deviation is not brief noise but a systematic phenomenon that can persist for years or even decades.
- Belief 2 - By dividing market price by the 10-year average real earnings (eliminating business cycle volatility), CAPE provides a more stable valuation metric. Historical data shows high CAPE (e.g., above 30) is highly correlated with low returns over the following decade, while low CAPE portends high returns. But CAPE cannot predict short-term movements; it only has statistical significance for long-term predictions of 10+ years.
- Belief 3 - Economic events are determined not just by data and rational expectations, but by stories and narratives that spread through society. These narratives infect populations like viruses, changing consumption, investment, and saving behavior. Understanding the propagation of narratives is key to understanding economic fluctuations; economics needs to incorporate epidemiology and psychology.
- Model 1
- Model 2
- Model 3