The enormous real estate boom that we have seen in many places around the world since 2000 marks a period of increasing uncertainty about real estate prices. And this uncertainty about the outlook for real estate in the future poses new challenges, as well as opportunities, for innovation in our financial markets.

Real estate markets have shown remarkable inefficiency relative to financial markets, and the inefficiency appears all the more stark at a time of recently booming markets. Better development of real estate derivatives should help reduce the volatility of real estate markets and make its prices more efficient. We have recently seen the development of new futures and options markets for real estate. Many more innovations in real estate finance are likely to come before long.

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Speaker Biography

Economist Robert Shiller is the Stanley B. Resor Professor of Economics at Yale University but is better known as the author of a best-selling book called Irrational Exuberance that predicted the end of the stock market surge in the late 1990s.

He is considered a pioneer in the study of behavioral finance, and with Professor Richard Thaler at the University of Chicago, organized a series of seminars on the subject. He has taught at Yale since 1982 and was on the faculty of the University of Pennsylvania’s Wharton School and of the University of Minnesota.

Mr. Shiller’s earlier book, Macro Markets: Creating Institutions for Managing Society’s Largest Economic Risks, was published in 1998 and was well reviewed. In it he proposes new international markets for claims on national incomes, on components and aggregates of national incomes, and for property such as real estate, arguing that these markets could dwarf our stock markets in their activity and significance.

Before Irrational Exuberance was published in 2000, Shiller had developed his ideas in a series of studies in academic journals such as American Economic Review. He started by proposing that a rational stock market should base market prices on the expected receipt of future dividends, discounted to a present value. After looking at the performance of the US stock market since the 1920s, he took into account the expectations of future dividends and discount rates that could justify the wide variations. His conclusion was that the volatility of the stock market was greater than could credibly be explained by any rational view of the future.

Mr. Shiller has been a research associate at the National Bureau of Economic Research since 1980 and co-organizer of NBER workshops on behavioral finance with Richard Thaler and on macroeconomics and individual decision making with George Akerlof. He is also author of the 1989 book from MIT Press, Market Volatility, a mathematical and behavioral analysis of price fluctuations in speculative markets.