PASADENA, Calif. – Behavioral finance, which uses psychological theories to explain market anomalies, may explain 2004′s real estate boom, said Yale University professor Robert Shiller.
Shiller, who published his theories on the subject in his 2000 bestseller, Irrational Exuberance, told the WesCorp 2007 Future Forum audience this morning that the theory is increasing in popularity.
For example, during the recent boom, real estate developed a reputation for being a more lucrative investment than in years past. This perception of easy profits helped drive the market, he said.
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"If you look back at old newspaper articles, it wasn't that long ago you didn't find any speculative talk about home prices," Shiller said.
Shiller also discussed two psychological theories that contributed to today's subprime loan failures: brand new market influences that make outcomes impossible to predict, and group decision making dynamics.
"When you have a group of leaders together, trying to make a decision in an environment of uncertainty, there's a tendency for a mistaken consensus to occur. People become afraid to express intuitive judgment. This effect is especially heightened when you can't prove your point," Shiller said.
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