Tuesday's Links

Conde Nast’s Porfolio.com, 05/02/2008
Robert Shiller, Yale professor & author of Irrational Exuberance.

Interesting guy, this Shiller. Memorable points:

1. Shiller warned that the housing market slump could be worse than the Depression:.
..speech at the New Haven Lawn Club somehow got amplified. [In a breakfast talk that made doom-and-gloom headlines nationwide, Shiller warned that the housing market slump could be worse than the 30-percent price drop of the Depression, requiring bailouts for millions of homeowners. “I think there is a scenario that they could be down substantially more” than the historic slump of the Depression, Shiller was quoted as saying.] They took from my speech that I was saying that the home-price declines could exceed those of the Depression.

2. Comment on the psychology behind the subprime mortgage-backed securities:
“There’s a famous book written by Irving Janis, who’s a psychologist, about 30 years ago, called Groupthink. He’s a social psychologist, and he points out how even expert groups can make very colossal errors. He did a number of case studies in the book, and what tends to happen—suppose you imagine yourself and a group of experts who seem to have converged on an enlightened opinion which has arguments to support it, and it has prominent influential people saying that. It can be difficult for someone to stand up in that room and air what seem to be half-baked or half-formed doubts about it. It can be kind of damaging to your reputation. And you imagine that they have a reason to dismiss these doubts. But you don’t want to be responsible for bringing it up—especially when they’re reaching a decision. Sometimes they’re trying to make an important decision. And at that time, you would think that people who have doubts should stand up and thrust them to the fore. But, in fact, they often retreat at that point, because they may just have a sense that they’re being annoying, that they will lose status in the group.”