[A distributed lag estimator is developed here from Bayesian priors regarding the"smoothness" of the lag curve. "Smoothness" priors of the dth degree are represented by a normal density function with zero mean of the difference of order d + 1 of the coefficients, where d will usually be one to zero. Such probabilistic priors, which do not imply any parametrization of the lag curve, are, it is contended here, a more accurate representation of the kind of prior knowledge that has led many researchers to use the polynomial distributed lag estimation procedure, and other parametrization procedures, in the past. The estimator developed here is, moreover, very simple in its implementation. All that is needed is any least squares regression program.]

Tests of a representation of the efficient markets model (the dividend-rtaio model of Campbell and Shiller (1988a)) of the stock market can be made by regressing (transformed) ex-post values on (transformed) actual values and testing whether the slope coefficient is one. Such tests are run here with some improvements. The results of the tests are that the efficient markets model is strongly rejected with U.S. data 1901-1987 in favor of an alternative that stock prices should have been much less volatile.

This address considers the epidemiology of narratives relevant to economic fluctuations. The human brain has always been highly tuned toward narratives, whether factual or not, to justify ongoing actions, even such basic actions as spending and investing. Stories motivate and connect activities to deeply felt values and needs. Narratives “go viral” and spread far, even worldwide, with economic impact. The 1920–1921 Depression, the Great Depression of the 1930s, the so-called Great Recession of 2007–2009, and the contentious political-economic situation of today are considered as the results of the popular narratives of their respective times. Though these narratives are deeply human phenomena that are difficult to study in a scientific manner, quantitative analysis may help us gain a better understanding of these epidemics in the future.

The fact that firms seem to follow an earnings payout policy that results in a dividend stream has often been brought up in criticism of the variance inequality tests that I used (1981a) to call into question the simple efficient markets model. It seems that the smoothing lowers the variance of detrended real dividends, and this may account for the apparent inadequacy of dividends movements to account for price movements. The fact that the present value of actual dividends p* is itself a moving average of dividends d, and hence a smoothed version of dividends, is also brought up in criticism of the inequality that involves p*. However, dividend smoothing or the smoothing implicit in p* does not pose any problems for the theoretical volatility inequalities. As long as (real detrended) price p is the present value of expected (real detrended) dividends d, then the dividends, whether they are smoothed or not, must move enough according to the measures in the inequalities if the price movements are to be justified. Terry Marsh and Robert Merton (1986) use arguments relying on the above-noted smoothing relations to show a sense in which, for sample variances, the variance inequalities in my paper may be thought of as reversed. Marsh and Merton model the behavior of those decision makers who set the level of dividends; the model (13) in their paper is a dividend smoothing model. Moreover, the proof of their Theorem 2 also makes use of the smoothing implicit in p*. However, the feature of the model that causes the variance inequalities to be invalidated is not the smoothing per se, but the nonstationarity in dividends that is induced by the particular dividend smoothing rule (13). Substituting their equation (13) into their equation (2) and then into their equation (1), we find

Robert J. Shiller delivered his Prize Lecture on 8 December 2013 at Aula Magna, Stockholm University.

The institutions for financing owner-occupied housing have not progressed as they should, and the financial innovation that has followed the financial crisis of 2007-2009 has not been focused on improving the risk management of individual homeowners. This paper lists a number of barriers to housing finance innovation, and in light of these barriers, the problems of some major innovations of the past and future: self-amortizing mortgages, price-level adjusted mortgages (PLAMs), shared appreciation mortgages (SAMs), housing partnerships, and continuous workout mortgages (CWMs).

The concept of the Good Society--grounded in principles of reciprocity and the Golden Rule--is as ancient as human civilization. To many the concept may appear in conflict with the goings-on of financial markets. This may be especially true after the financial crisis. Financial theory and financial legislation cannot ignore this apparent conflict, but must instead find ways to reduce it. When teaching economics it is important to convey how individuals and organizations impose rules and standards which help reconcile their deeply-held beliefs with their business practices.

The widespread public and political impetus, in the United States and elsewhere, to revamp social security to incorporate some form of individual accounts creates a time of opportunity. It is a time when people want to see the better exploitation of the available trade-off between risk and return and a time to reconsider the foundations of the social-security system so that it can much better serve its intended purpose as a manager of risks. As I argue in my new book, The New Financial Order: Risk in the 21st Century (Shiller, 2003), the time when we redesign social security ought to be a time when we carefully consider the fundamental intergenerational risk-management problem and define choices in individual accounts that reflect the true problem. It is also a time when we must make creative use of insights from behavioral economics that have emerged over the years. Finally, it is a time for an expanded exploitation of our new electronic information technology. We should not miss this opportunity. This means we must work now toward solving a complex constrained optimization problem where the objective is to maximize a social welfare function involving all generations and the constraints reflect the varying degrees of individual optimization ability, psychological underpinnings of human behavior, and modem information technology.

Experimental evidence shows that an important reason why people tend to imitate others, to exhibit "herd behavior" is that they assume that the others have information that justifies their actions. The information cascade models of Banerjee [1992] and Bikhchandani et al. [1992] are significant developments in showing some general equilibrium and welfare effects of such rational imitative behavior. But these models as specified may be of limited applicability since they assert that differences across groups in herd behavior can be attributed to the random decisions of first movers. Differences across groups in herd behavior might be explained more often in terms of different modes of interpersonal information transmission. Patterns of human conversation imply great selectivity to the kinds of information transmitted within groups.