Today I continued with Yale’s Financial Markets course, which discussed the Efficient Market Hypothesis. The well-dressed elderly professor said, “The term efficient markets was popularized by Eugene Fama, who won the Nobel Prize with me…”

It turns out he is Robert Shiller, a Nobel Prize winner in Economics!

Professor Shiller speaks very slowly, not eloquently or boastfully, but rather with a certain meticulousness that makes his speech somewhat halting. He is extremely humble and immensely charismatic. You might think he is talking about economics and finance, with perhaps a touch of psychology—Robert Shiller’s most famous book, “Irrational Exuberance,” is a classic in behavioural finance, and he often mentions his wife who holds a PhD in psychology. But it’s not just finance and psychology; he is practically speaking about philosophy! Outside the classroom, there are many salon discussions where students always ask practical questions about money and investment, such as how the middle class should invest in a low-interest-rate environment, or what investment advice he has for individuals who are risk-averse and afraid of entering the market, or what an ideal financial market looks like in his mind. Shiller never answers these questions directly, which is very clever because investment advice can never be given in such a public setting. He always goes off on a long tangent that seems irrelevant at first glance. Your initial reaction might be that he is dodging the question and not answering it at all. But if you read between the lines, you will find that he is consistently expressing his personal attitude towards investment and financial markets. This is a Nobel laureate’s investment philosophy. Such valuable wisdom!

Student’s Question: How are sort of unsophisticated, middle-class people supposed to invest their money now with the interest rates so low? What is there to do? Like what can you do?

Shiller’s Answer: Now here is a fundamental issue about rationality. And most people are not financial wizards, as your question implies. And so what should we do? Should we have the government invest for them? Somehow there’s something wrong about that, too, because the governments don’t have a particularly good record of deciding how to investments either. The United States has been an example of capitalist institutions going way back. We have had lively stock markets and other kinds of speculative markets. People have lost money and had been taken advantage of over the years. But on the other hand, it produces an atmosphere of attention to business that produces a general culture of sympathy to business. If you invest in businesses, then you’ll be less likely to vote for a strong man leader who will corral businesses. So the US has set an example to the world about. Just letting some of these things happen. So you’ve got this guy, Thomas Edison, with these electric lights, he might be a nut, who knows. But some people invested in him. And there were other stories that didn’t work out so well. But on balance, over 100 or 200 years the US system has looked pretty good, and it’s become spread. I mean, not just the US’s, but I’m saying having free markets and involving people at large in some investing decisions, it has worked out well, even though it doesn’t work out well for everyone.

Student’s Question: Today’s economy, there’s so much uncertainty and many potential investors are fearful of getting involved in the market. Is there a message that you think you would share with potential investors about what’s going on today with fluctuating markets and how to continue to stimulate our economy?

Shiller’s Answer: So I think, you know, the free market system that we have just kind of looks bad to a lot of people and you see people being taken advantage of sometimes, and you think, “there should be pure system that let a lot of people towards various forms of socialism.” But on the other hand, it just seems like all the fun stuff happening in capitalist countries, I don’t know if it’s a capitalist but countries that have markets and prices. Let people do things for themselves on their own initiative and suffer the consequences. So, the world has come in this direction. You can’t really escape the fundamental problem that business involves intuitive judgement, risk taking, you’ll never know all the risks, you know, that you have to be at some point, just think, “hey, I’m just going to try it.” And you might get a bad outcome, but I think… I think what we’ve learned about human society is that as funny as this system looks, it’s a good system.

Student’s Question: Do you have in your mind, an ideal of what future (of financial market) looks like?

Shiller’s Answer: See there are people who proposed like Karl Marx for example. Robert Owen who’s the guy who coined the term socialism. They had ideals which they sold on the public as simple and obvious. But I think it’s not quite so simple and obvious. The human species is the product of evolution, that gave us a number of different mental quirks that served us well as cavemen. But now they don’t really fit into the modern world. We might be too focused on our own personal lives. And we have to invent something different, and it won’t be a perfect world, just like it’s never been a perfect world, but it’s exciting and it’s getting better.

Shiller believes that people are inherently driven by incentives, willing to take risks, and selfish. Financial markets leverage people’s self-interest to accelerate the flow of resources and increase social efficiency. Financial markets encourage risk-taking, and a healthy sense of risk and adventurous spirit is the source of innovation that drives the human civilization progresses. He encourages people to actively participate in the market and supports advanced financial products that enhance risk control and market freedom. Socialism is not the ideal scenario. Humans are complex, always evolving. A simple and ideal utopian world would deprive humans of the joy of invention and progress. Financial markets or the world are unlikely to become simpler, but with new inventions, they are becoming better and more interesting. He also constantly emphasizes the market turbulence caused by human factors, noting that greed sometimes drives financial markets to extreme madness, for which the participants ultimately have to pay the price.