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Yale economist roils industry with new book

Robert Shiller, 69, earned his PhD at MIT in 1972 and has taught at Yale since 1982. He earned a Nobel Prize in 2013.Craig F. Walker/Globe Staff/Globe Staff

Long viewed as an eccentric among his fellow economists, Robert Shiller worked at the crossroads of economics and human psychology, stepping away from the pursuit of mathematical precision to question his field’s prevailing wisdom. Then he predicted the dot-com crash of 2000, followed five years later by warnings that a national housing bubble was about to burst. After that, in 2013, came a Nobel Prize.

Today, the Yale economics professor is sought by investment bankers, central bankers, and finance ministers, whether to give paid speeches at the Wall Street firms, or schmooze with the central bankers and finance ministers of the world’s biggest economies at a meeting of the Group of Seven. Simply put, it’s good to be Bob.

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“People say they’re honored to meet me,” said Shiller, who earned his doctorate at MIT and whose son teaches at Brandeis University in Waltham. “That was a total change that came after I won the Nobel Prize.”

Success, however, has not changed Shiller, and he is again roiling the financial industry and his colleagues with a new book that looks at how capitalism and financial markets exploit human weaknesses. The book, written with George Akerlof, a fellow Nobel laureate and husband of Federal Reserve Chair Janet Yellen, runs counter to the antiregulation thinking that dominates economics today and the dogma that free markets always provide rational solutions.

“Phishing for Phools: The Economics of Manipulation and Deception” is filled with anecdotal examples of consumers getting duped and distracted by marketers and profit-seekers. These players, the authors write, can divert consumers’ attention with the same skills deployed by “pick-pockets and magicians,” whether it’s health clubs convincing customers to pay big monthly fees when per visit trips are more affordable, or investment banks downplaying the risks of complex investments known as derivatives.

The goal of the book, Shiller said, is to help ordinary people make better decisions by explaining the nuances of complex economic theories and financial products in clear, understandable language. The authors even refer to themselves in the book as “George and Bob.”

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The financial press, however, has not been so friendly. Forbes magazine dismissed the book as “trivial.” The Economist described it as “other peoples’ research, helpfully boiled down into tidbits that are perfect material for cocktail-party chatter.” The Canadian Financial Post called it “anti-market derangement.”

Shiller, who just read the Financial Post review, noted wryly, “I didn’t expect the Canadians to be ones with the worst [review].” (Canada has socialized medicine and tougher financial regulations than United States.)

Shiller, 69, earned his PhD at MIT in 1972 and has taught at Yale since 1982, becoming one of the founders of behavioral economics, a field that combines psychology with economics to provide insights into how and why people make decisions to buy, sell, or do nothing. He uses words rarely employed by economists, such as “impressionistic,” “judgment,” and “truth,” to describe his ideas.

He also is critical of the “mathiness” of a profession that typically rewards theories when they can be statistically proven — whether they work in the real world or not. That kind of academic myopia, he said, “can make it hard to point out the obvious.”

Such limited thinking contributed to the recent housing bust, Shiller said. Economists and policy makers trusted in computer models that showed a national housing collapse was unlikely, but missed that home prices were just too high.

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John Campbell, a former Shiller student who is now an economics professor at Harvard, said Shiller has the ability to look at emerging trends in historical context and spot anomalies that don’t jibe with prevailing theories and thinking. Shiller’s determination to find out why has yielded insights that markets are more volatile than can be explained by the rational self-interest of buyers and sellers, which underpins classic economic analysis, Campbell said.

That, in turn, has helped Shiller identify booms on their way to going bust — even when other analysts only see more good times ahead. Shiller’s 2000 book “Irrational Exuberance,” warned that the dot-com driven stock market had become a bubble, and sharp decline was coming. The business weekly Barron’s labeled him “Dr. Doom.”

“He’ll often start with some sort of observation that something is out of whack, or different than it used to be,” Campbell said. “He’s positioned himself as an outsider.”

Shiller, the grandson of Lithuanian immigrants, said his mother, a high school graduate and homemaker, was also a reader of philosophy who warned her son not to trust celebrity and blindly follow others without question.

It’s advice he has heeded, he said, in his efforts to look at data in new ways or deeper historical context. And that also means questioning what he calls “groupthink” that can occur in institutions and professions.

“I’ve never been clique-ish,” Shiller said. “I’ve never felt group solidarity.”

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Shiller (center, in tie) attended a 1975 conference in Finland. He is one of the founders of behavioral economics, a field that studies how and why people make financial decisions.handout

Raised in suburban Detroit — his father was an engineer — Shiller grew up with varied interests that included math, science, and astronomy. He married his wife, Virginia, a clinical psychologist, nearly 40 years ago and still lives in the same New Haven home they bought decades ago.

His favorite reading includes Wikipedia because the online encyclopedia offers so much foot-noted information on so many topics. He has two sons: Derek, a philosophy professor at the University of Nebraska-Omaha, and Benjamin, who teaches economics at Brandeis.

Benjamin Shiller described his father as a “normal dad” who never raised his voice and, in good humor, became the assistant coach of his youth soccer team — even though the elder Shiller had never played and knew little about the game. “I think he had to learn some of the rules,” Benjamin Shiller said.

Robert Shiller said he was able to spot the trends that helped him predict the US housing collapse of a decade ago through his work with retired Wellesley College professor Karl “Chip” Case — research that led to the Case-Shiller index in 1987. The index, now called the S&P/Case Shiller Home Price Indices, is a leading measure of the real estate market.

The two began collaborating while Case was studying housing price increases in Boston and Shiller the behavioral aspects of economic bubbles. To create the index, they had tracked repeat home sales — what the same property sells for over the years — across the country and back to 1970. Shiller later extended the series back to 1890.

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Too often, Shiller said, economists fail to be informed by the past, which shows that human nature changes little and fear, greed, and wishful thinking continue to make people susceptible to the bubbles that dot economic history. In an era when information is so abundant, Shiller said, many economists tend to focus on the most recent indicators or events, often within the last 24 hours.

Shiller’s views continue to stir debate, even among the economists with whom he shared the Nobel, Eugene Fama and Lars Peter Hansen, both economics professors at the University of Chicago. There is a wide chasm between their philosophies. Fama has theorized that financial markets are rational and efficient, and his work contributed to the decline of financial regulation. Shiller, on the other hand, has argued that markets are not so rational as that.

Fama, a Boston native and graduate of Malden Catholic High School, said in an e-mail that he had not read Shiller’s book and declined to be interviewed. So did Hansen, who developed a statistical model that demonstrated that “Shiller’s results could not be fully explained.”

More than six years after the end of the so-called Great Recession, with a booming tech sector and bull market supported by cheap money, Shiller is not predicting another bubble or the next downturn. Harkening back to the title of his new book, he said no one knows how different the world would be if “there wasn’t so much phishing” and people had better information and understanding of economics, markets, and financial products.

That’s not just a problem for economists, he said, but also everyday Americans trying to navigate purchases, investments, and retirement.

“We’re living in a great world because of free markets,” Shiller said, “and a civil society that stands up when things aren’t right.”


Megan Woolhouse can be reached at megan.woolhouse@globe.com. Follow her on Twitter @megwoolhouse.