Robert Shiller, the Stanley B. Resor Professor of Economics, has become something of a sensation since the publication a month ago of his book "Irrational Exuberance."

The book, which predicts a dire outcome to a very over-inflated stock market, has been cited on the front pages of major newspapers everywhere. It had long and very favorable reviews in The New Yorker and The Economist, among other major publications, and has become a staple topic on many of the financial news programs that have gained popularity with an increasingly market-riveted audience.

Shiller has been interviewed on CNN, ABC, PBS and NPR, to mention only a few of the big networks, and his expert opinion has been sought from all quarters, including the U.S. House Committee on Banking and Financial Services and Federal Reserve Board chief Alan Greenspan. Indeed, while it is unclear who originated the phrase "irrational exuberance," it was Shiller's suggestion to Greenspan in 1996 that the market was dangerously overpriced that inspired Greenspan to utter the phrase that was heard by investors around the world.

Described in a recent New York Times report as a "Wall Street guru," Shiller won a $50,000 prize from the firm Commonfund last month for his prediction that the proverbial sky is falling over Wall Street. The company, which gives financial and investment advice to non-profit institutions, concluded that Shiller's warning about the future of the stock market was both credible and valuable.

The Yale economist recently took time from his hectic schedule to discuss his new book and his views on the state of Wall Street these days. The following is an edited version of that conversation.

Your book, "Irrational Exuberance," has created quite a stir in the media. How are sales a month after its first printing?

I'm not really up to date. I know Princeton University Press printed 60,000 copies, but that was several weeks ago. I don't know where sales are right now. They've done four printings. But for Princeton University Press, for any university press, that's quite a large number.

Did you ever consider sending the book to a trade publisher?

It's still a scholarly book. I like having a university press do it because it encouraged me to be high-minded. Trade publishers would have asked me to put a subtitle on my book like "How you can make a million dollars" or something like that. Fortunately, the editors at Princeton University Press encouraged me to be high-minded; that's what I wanted to be.

You didn't feel that you had to "dumb it down"?

No, I never dumbed it down. What I merely did was omit material that was technical. ... It is pretty scholarly. It cites a lot of academic papers. I tend to do that in endnotes. But it's not exactly a trade book.

The stock market has been like a roller coaster lately. Do you think that's how it's going to continue?

I think it's headed down, but with lots of ups and downs along the way. There's no single watershed event that suddenly changes its course. You never know what the market is going to do very accurately from here on. We had this big drop April 10-14 where the NASDAQ fell 25% in one week, but then it came back up from that. ...

People wonder what that means. I say, it doesn't mean very much. When a market declines it does so by ups and downs -- two steps down, one step up, two steps down, one step up. You don't make much from any one of the movements. I didn't think that that week in April was a watershed necessarily. It was just a bad week. I tend to think that the general direction of the stock market is likely to be down, because we've just had such an extraordinarily confident high. It just doesn't seem like it would last indefinitely.

You are now so much a media star, and your book has received so much coverage -- do you think that you might actually provoke something like a mad sell-off, that it might become a self-fulfilling prophecy?

I am just a minor factor in a world market. ...

But, if everybody is hanging on your words ...

I know. I know. I do believe that sometimes public opinion leaders can affect the market. If that's the effect the book was to have, I wish I had written it earlier, before the market got so high. It would have been better if we never got to this point. It has created false hopes, and it's going to be an uneven course down. Some people are going to get hurt. There's no way to deflate the market now without hurting some people.

Do you think the people who are going to get hurt the most are the ones who had the least to begin with?

Yes. A lot of people come in at the last minute. ... They're tired of hearing about people making a lot of money. It's very painful to hear that someone else made more money in the stock market than you earned all last year on your job. ... I feel badly for those people if they're coming into the stock market now.

What about the idea that having so many baby boomers with so much money to spare, which they've been putting into the market, almost guarantees the market won't collapse?

Well, it's plausibly a factor in the market that we have, and it's viewed as a guarantee by lots of people. In fact, this is a very popular theory. ... I tend to think it's not as powerful a guarantee as people feel. First of all, the baby boom is primarily a U.S. phenomenon. ... There have been big stock market increases in lots of other countries which have less of a baby boom, so it's not so simple. And the idea that this will support the stock market is very tenuous because eventually, if you believe this baby-boom theory, these people are going to be selling when they retire. So the only question is: "Do you think the market is going to wait until that date to crash? Or will people see it coming and sell earlier?"

With the whole new venue of telecommunications and bio-technology opening up, isn't it still possible that some really smart people will be able to spot the future leaders, invest now and still make out like bandits, even if there's a crash?

Yes, there'll be some such people. And I believe that smarter people probably do better investing, although not as much better as they may think, because there's so much "noise" in the market, so much that's unpredictable. But there are some Internet and high-tech companies that are going to do very well. Some people who are smart can still have a better-than-average chance of getting onto these. I think people have to bear in mind that there's a tendency to be overconfident. Just being smart doesn't mean that you're able to predict confidently what some investments are going to do. There are so many uncertainties.

What kind of "smarts" would you need to analyze tech stocks?

There are lots of studies about the ability of professional analysts to predict stocks' returns, and they do appear to have some ability, but it's not enormous. I believe that some people who have a better business sense -- the Warren Buffets of the world -- probably can do that somewhat, but even they are buffeted by "noise." ... Being smart in terms of having high SAT scores isn't the same thing.

Are there any funds managed by people who are especially adept at those kinds of tech stocks?

There may be. But again, studies show that there are some funds that seem to outperform others, but not so strongly as you'd think. [Yale professor] Will Goetzmann here at SOM did some studies of "hot hands" in mutual funds -- a "hot hand" is a mutual fund that knows what to do -- looking at the question: "If you have a mutual fund that has performed well, is that a real indicator that it will perform well in the future?" And they found that it is, a little bit. But never as much as you might hope. There's this overconfidence tendency that investors have where they think they're going to do fabulously well. Well, if you pick the right mutual fund, you'll probably do a little better, but it's not a fabulous road to riches.

You have described over-optimism as a kind of epidemic. Could you expand on that a little bit?

I looked at the epidemic models that are used in the medical school, and there's a contagion effect -- one person infects another. The infection rate may go up and down with time depending on circumstances. The kind of market that we're in now is partly to be understood in terms of such a contagion -- that there's a word-of-mouth transmission. People are more likely to act on advice that comes from another person than advice that comes in a written form -- that's what psychologists say. This suggests that some kind of interpersonal "contagion" plays a role in financial booms and busts.

One thing I found in my surveys is that people really do talk a lot with each other. For example I did this survey on the crash of 1987, and I asked participants, "How many people did you speak to on that day?" The average investor talked to five to seven people on that day. These are individual investors. In fact, most people heard about the crash of '87 from word of mouth, not from the media. ...

In times of great market dislocations there are such fundamental uncertainties, and the answers that one tries to get from the usual sources are so unsatisfactory. What would you do if this were a day when the market was dropping 22%? You might turn on your computer screen and see what somebody says who has an online service. But you'd probably also want to talk to some other people, because you'd say: "I'm not making any sense of this." On the day of a big drop, people are trying to judge the psychology of the market. It comes back to that. Many people start thinking: "What's going on is inherently psychological, and I'm trying to guess the mood of the other investors," and "When is this going to turn around?" ... Word of mouth plays a role in that. It's kind of a contagion of the emotions. ... So it's a phenomenon that's not easily modeled in terms of mathematical precision.

How close are we to replicating the events leading to the crash of '29?

There are some similarities. One is that the market is very overpriced. Another is that we have a strong sense of "new era" right now. We have the Internet right now. In the Twenties they had the radio, which was quite a dramatic innovation. ... That was the decade when a lot of families got their first vacuum cleaner, their first washing machine. They got a car. ... It seemed like all of a sudden, they were living in modern times. So, writing in 1929, economists said, "We have this brilliant future ahead of us. We're coming into a great new era." And it seemed so believable. ... I think that impression was similar to what we have now, maybe stronger. It's easy to argue that the Twenties were a more dramatic new era than we have now.

Was investing in the stock market as popular then as it is now?

I think that it was growing in popularity, but it wasn't as popular as it is now.

Is that good or bad?

It's good that people are learning about investing, and the need to diversify. But it's bad in the sense that people have too much faith in investing. They think it's going to save everything. It has gotten to the point where now [presidential candidate] George Bush wants to create stock market investments for people in lieu of part of their social security. That's kind of what you'd expect you might see when people believe in the stock market. We should change our national motto to "In the Stock Market We Trust."

Aside from diversifying, do you have any other advice for individual investors?

Yes. The important thing is not to borrow against their assets. The ability to get home equity loans has proliferated -- you can borrow so easily on that -- and there's a temptation to put that in the stock market. There are people who are doing that as they approach retirement and that's a serious error because a lot of people retire with little more than their house as their asset. So you shouldn't be investing that in something risky.

How about buying stocks on margin? Is that a scary thing?

Yes. That's something that's increasing: buying stocks on margin. For many people, it's like they're gamblers who are getting bored with the game. They want to up the ante. So instead of just buying stocks, they buy them on margin. They get double their play. ... I actually wrote an op-ed piece in The Wall Street Journal a couple of weeks ago advocating that the Fed raise the margin requirement. .... People should know that buying on margin is a risky thing, and I think the requirements are a little bit like the warning label on a liquor bottle: "This is a potentially hazardous thing." But raising the requirement is not really a cure.

In a recent New York Times article, you wrote: "If we exaggerate the value of the stock market, then we may invest too much in business start-ups and expansions and too little in infrastructure, education and other forms of human capital." Can you explain what you mean?

I have seen among my own students this strong sense that there are vast sums of money to be made in either Wall Street or in some kind of high tech start-up. I believe that that's an exaggerated impression and that people are perhaps neglectful of other things because they think, "This is it. I'm going to make so much money this way." ... Some people might not spend time developing their skills, thinking: "I'm going to be rich. Why should I bother?" Or they might not take a job at a humdrum business that is stable, that's providing a useful service, thinking: "That's not a great investment."

Apart from individuals, how do you think an exaggerated faith in the stock market might translate in terms of public policy?

I think the government should encourage people to save. These individual accounts that George Bush recommends -- if it is viewed as an impetus to saving then it's a good thing. It's just that we don't want to destroy the Social Security system, the social insurance that we have. There's a general trend in our country to think that it's every person for himself or herself, that people should be making investments the modern way. The unfortunate thing is that this may be leading us to take a view that we don't have any responsibility to each other as a nation. That's not the direction we should be going. ...

So, it's all very much related?

Usually a book about the stock market would have a graph of a financial page on the cover. This has no graph on the cover, because it is actually broader. It's not really a book just about the stock market, although it focuses on that. The stock market is a reflection of our national zeitgeist right now, our attitudes. ... Given the prominence of the stock market in our culture, it is very important to a lot of things that are going on.

Now that you're considered a "Wall Street guru," does Alan Greenspan listen to you?

Well, I don't know. Somewhat.

So, what comes next?

I don't know. What comes next? Well, I'm actually writing another book. ... I don't think it will be as popular a book, but I want to do it anyway. It will be about risk management -- kind of a history of risk management and the future.

T H I SW E E K ' SS T O R I E S

$5 million to fund student exchanges

Shiller predicts 'uneven course down' for the stock market

Janeway, Srinivasan are named as new members of the NAS

Seven from Yale are among the new fellows of the AAAS

Summertime at Yale

Chemistry lecturer honored with national award

Yale program for children lauded at dedication

Commencement Information

Show celebrates adventurous 'Art of Bloomsbury'

'Dance of the Dragon' traces use of mythical motifs in Chinese art

Study shows arthritis drug aids premature babies' brains

Roundtable discussion inaugurates Corporate Law Center

Newly unveiled portrait features first Yale graduate from China

Leffell's 'Total Skin' offers insights into our outer layer

Nurse practitioners group cites Grey and Safriet for their work

YSN and Connecticut Public Radio creating show on care of ill, elderly

'What is a Pathologist?': Young students have winning answers

Historian wins award for his creative use of technology

Multimedia projects receive special grants from the DMCA

Marrakech honors two at Yale for their volunteer contributions

Panelists decry nuclear proliferation in India, Pakistan

Students find 'creative outlet' in Battin' & Chattin'

Search committee formed for School of Drama Dean

In the News

Bulletin Home|Visiting on Campus| Calendar of Events|Bulletin Board

Classified Ads|Search Archives|Production Schedule|Bulletin Staff

Public Affairs Home|News Releases| E-Mail Us|Yale Home Page