Shiller: It’s The Psychology, Stupid

Don’t underestimate the impact psychology has on the stock market and economy — that’s the message Yale economist and housing crisis predictor Robert Shiller recently gave during a lecture at The New School, the video of which is now available on Fora.tv.

“Psychology really matters,” said Shiller, whose new book, Animal Spirits, co-written with George A. Akerlof, delves into the psychology of markets. “Our theory is that animal spirits is what substantially drives economies,” Shiller says. “And this is totally contrary to contemporary macro theory, which describes everyone as rational.”

According to Shiller, the often espoused theory of efficient markets is “one of the most remarkable errors in the history of economic thought” — and the huge bubble build-ups and burstings we’ve seen over the years are evidence.

Shiller also offers his views on the Obama Administration’s stimulus plan, how this crisis compares to the Great Depression, what creates those dangerous bubbles that he says often drive markets — and whether the stimulus plan will lead to another bubble. In addition, U.C.-Berkeley Economist Brad DeLong explains why Shiller’s theory on the importance of animal spirits is right on the mark.