Is The Stock Market Driven Mainly by Bullshit?
Last week saw the stock market take its worst plunge in years, prompting fears that—after several years of uninterrupted good times—the economy may be ready to falter once again. Why the new fear on Wall Street? Could the reason be... imaginary bullshit?
Robert Shiller is a Nobel Prize-winning economist most famous for inventing a commonly-used measure to tell whether or not the stock market is fairly valued. (Shiller's book Irrational Exuberance called the tech bubble before it popped.) He is one of the most plainspoken, accessible, and level-headed economic writers in America. His fundamental theory could, perhaps, be summed up as: "People are stupid and irrational sometimes, and finance is run by people. Therefore, finance and the stock market and the business world and will also be stupid sometimes. No big surprise."
In his New York Times column this weekend, Shiller explored the widespread theory that the current teetering of the global stock markets may be a warning sign of global "deflation," which could plunge the world into an era of economic stagnation. (This theory is very widespread.) Is this the case? Shiller's take: Who the fuck knows? What we do know is that if people think this is the case, it can easily become a self-fulfilling prophecy:
Theories that seem to explain the stock market's direction often work like this: First, they cause investors to take action that propels prices even further in the same direction. These narratives can affect people's spending behavior, too, in turn affecting corporate profit margins, and so on. Sometimes such feedback loops continue for years.
The refreshing thing about Robert Shiller's perspective is that you don't have to be an expert in arcane financial theories in order to understand the movements of the stock market; you just have to understand human beings—fearful, greedy, easily spooked, suckers. Don't worry about whether the explanation of the stock market's movements is empirically correct. (Even the people making the explanations don't know that!) Just watch how the herd behaves, and try to run away from it as fast as possible.