Introduction: Finance as a Social Institution¶
Welcome: Finance Is About More Than Making Money¶
My name is Robert Shiller. I'm teaching a course on financial markets. This is a basic course about how finance works in our society. I want to give a sense of the financial theory, but equally important, I want to give a sense of how it's applied. I think this course should be of interest far beyond those people who think they will go into finance or banking.
Finance is not about making money. Well, in some sense it is, but I don't see it that way. We all have our purposes. It's part of human nature to settle on some goal or ideal for us. Usually that isn't making money. Making things happen is what I think finance ought to be about. Almost every human activity that's useful and important needs financing. That's what I want to get at in this course.
I want it to be practical and useful. And hey, at the same time, I think the theory is beautiful because to me it conveys what wonderful things can happen, how people can let their creativity in anything become reality. That's what finance is about. And that's what finance is about. That's what I'm going to convey in this course.
Course Introduction: Finance as a Set of Social Institutions¶
So, how shall I begin? This is the blurb for the course, the blurb that's been in the Yale catalog for a long time. This is a course on finance. It has the word markets in the name, which suggests that it's about trading. But I think it's a broad course in finance. So the blurb says financial institutions are a pillar of civilized society directing resources across space and time to their best uses.
So this sounds broader. I guess the course is broader. I wrote the title of the course many years ago when I created this course and it's been a title for it. But see what really to me this course is about is how we get things done in our society. That's how we incentivize people to do things. Now, most of us are in our lives thinking about ourselves, that's human nature, and about our particular place in the life cycle.
So you may be a young person who's thinking about getting started in life. But when you join an enterprise or an organization, you have to do things for the organization, and you have to take an organizational perspective. You have to help manage a productive venture that involves many people. So there aren't that many things that you can do as an individual that are useful.
You have to join an organization. This is a fundamental principle of human life. So this is a course about understanding how the institutions work and how we can predict what will happen. And things are rapidly changing in the information age that we live in now. So that's what this course is about. I don't consider, well, I don't consider this a vocational course because I think it should be of interest to anybody who is interested in how things work.
On the other hand, this course comes across as more vocational than most Yale courses. At some extent, I pride myself on that, although I consider myself an intellectual. But this is a relevant course. It's not about how to make money. You might say it is, I suppose. But it's about making things work. These are the topics in this course. So risk insurance, diversification, history of finance, innovation, efficient markets.
behavioral finance. Actually, behavioral finance is a little bit more prominent than you might think from its appearance as number seven on this list. Behavioral finance is the application of psychology, sociology, other social sciences to understanding financial events. It's a revolution in finance that I have watched over the whole course of it because I have organized conferences on behavioral finance.
starting in 1991, working with Richard Thaler at University of Chicago. And we just, we've been doing that for 25 years, but we just bequeathed it. There are regular seminars of professors to Nicholas Barberis here at the Yale School of Management. But we'll talk about it, because I kind of believe in a unity of knowledge. So this course will differ from many other finance courses.
And I want to talk about real people and how things really work. Then we talk about debt, the stock market, the real estate market, regulation. Oh, by the way, regulation is an interest of mind too, more so than most people who teach finance, because I think that the markets need to be regulated. Human beings have a tendency to be manipulative and tricky. And finance is used to trick people.
That's why we need regulators. So you shouldn't assume that I want to send you off to Wall Street. I think that you might go to be a member of the, like the Securities and Exchange Commission or something else as a job, and be proud of it, okay? It's important. Then banking, futures market, that has a special meaning in finance. monetary policy, endowment management, investment banking, option, money managers, exchanges, public finance, non-profits.
And finally, the last lecture will be on the purpose of all this. So that's this course. So I wanted also to just reflect on the relative, I said this course looks more vocational in a way, but I don't consider this vocational school. This is, I'd like to say useful. One thought perspective I wanted to give you was, how important is finance anyway? Unless you go into academia, you will get a job somewhere in the real world.
So where are the jobs? Well, I looked up on the Bureau of Labor Statistics, with a publication of the U.S. government, on their website. They have data on just how many people are in different professions in the United States. And they also have a four-class. So what I'm showing, the latest data is for the year 2014, and it has the number of people in thousands.
And then also on there we have the projection for 2024. So you note that at the top, I've got finance profession. These are specific finance profession, not all finance professions. Financial analysts, financial managers, personal financial advisors. They all have hundreds of thousands of people. But I wanted you to note, what about the other majors that you have here?
I'm not diminishing them, but economics, economists, not so many. But you might also be interested in astronomy. I actually love astronomy. When I was a kid, I thought I'd be an astronomer. But I had to reach reality. There's lots of exciting fields where there are almost no jobs. So there's how many astronomers are there, sociologists, political scientists, or mathematicians.
This is not to diminish your majoring in those fields, but you just don't expect to get a job in those fields. I also put down at the bottom, massage therapist, okay? I didn't know that was a profession, but there's projected to be about 200,000 massage therapists in the United States in 2024. So we don't have a massage therapist. massage therapy major here, but that's a sign of how the market makes things important.
Now Rana Foroohar might be right about this. There's something wrong with having so many finance people. Maybe we need more massage therapists than finance people. But there's a sense of reality that I think that part of the reason that there's so many of them is that they deal with important issues that can't be quickly, it can't be more easily solved. We need all these people.
That's why I take some pride in this course in being connected to the real world. There are real job opportunities in finance. And there are also, I think, in the new industrial revolution period, they will still be, I think this is one of the fields that is not going to be totally replaced by a computer. The problem with the finance is a high inequality in this field. Some people make a lot of money.
On the other hand, you have to give it away. This is another thing about this course. If you make a lot of money in finance, it's a game, you enjoyed it, now give most of it away. That's going to be a theme.
How to Learn This Course: Chalk Talks and TA Time Outs¶
Hi, I'm Arun Gupta. I'm a doctoral student in finance at the Yale School of Management. I'm from Los Angeles originally, and I've lived across many different cities in the United States, but I'm very much enjoying my time here at Yale in New Haven, Connecticut. I've had the pleasure of working with Professor Shiller on his Coursera course for all of our learners around the world.
I'm thrilled to be your Coursera teaching assistant for this course. You'll see me throughout this course in two main ways. The first is in our chalk talks with Professor Shiller, these videos provide further explanation and reflection from the lectures. So, for example, Professor Shiller talks about the idea of regressions in his lecture videos. So in our chalk talks, we'll delve a little bit deeper into what regressions are and try to give some examples.
The second way you'll see me throughout this course is what we like to call a TA timeout. So you'll be watching a lecture video and suddenly I'll pop up onto the screen. And so I'm doing this to provide an explanation or definition of something I think that you should know. And afterwards, I'll disappear in the lecture video will just continue. I hope that you find both the Chalk Talk Talks and TA Time Outs helpful as you navigate financial markets.
We sincerely hope that you enjoy this course.
Finance Can Do Good—and Harm¶
So the idea is, I said this before, finance is a technology. It can be used for good or evil. It has a tendency for successful practitioners to start attracting a lot of money. But that doesn't mean that you can't be a moral and ethical person in finance. So one thing I note in giving talks around the world, that when you go to poor countries and give a talk, they are intrinsically interested in finance because people today recognize that financial markets are part of economic success.
They understand that in China, they understand that in Russia, they understand that in Brazil, and many more countries, because finance is a real technology. They're not so interested in getting forward, they don't need foreign aid. They just need the right principles and the wealth will appear on its own. So this is not a course about how you can lead a rich and self-indulgent life.
It's a course that involves some moral purpose. Andrew Carnegie was one of the richest men in America. He said that he thinks that rich people, who succeed in business. He doesn't use the word business. People who say, succeed in affairs. That sounds different today, but affairs meant business back then. People who succeed are people with a natural practical talent.
And the business world selects for people with this natural talent. And so when they make a lot of money, it is their obligation to give it away for the benefit of society and not to their useless children or spoiled children. Moreover, Andrew Carnegie said, you can hear him say this, he said that you should give it away while you are still young. Because you've amassed all this wealth, what's going to happen to it?
It's absurd the story that happens. Young people make a lot of money, when their talents are at their strongest, then they get old, and they don't know what to do anymore. They become, either they work until they don't Either they work until they die or they become self-indulgent. And it ends up with their children. And then it ruins the children's life because now they have no purpose.
They're just filthy rich. And they just squander it. So like Vanderbilt, his grandson, William Henry Vanderbilt, made huge amounts of money. And then his son married a socialite, the famous Mrs. Vanderbilt, who spent all the money in showing off her wealth. and having big parties. Maybe that was good in some sense, but you don't want that to happen. So what Carnegie said is you have to retire early and use and become a philanthropist.
That's the second stage of your life. So I'm going to come back to this theme, that if you go into finance, think of your life as having two states, like Bill Gates. You know, Bill Gates was running Microsoft. Then he retired and set up the Gates Foundation. And he's actively working on giving it away. So this is not a course, again, I repeat, not a course on, it's a course on how you can make your mark on society, but it's not a course on how to get rich.