Animal Spirits: How Human Psychology Drives the Economy, and Why it Matters for Global Capitalism

well it’s great pleasure to have Robert Shiller with us here today one of the world’s best-known economists I had the privilege of studying his work when I was a student I don’t think I’m that much younger than he is but in those days we weren’t about term structure models variance bounds on interest rate models and bearings bounds and stock prices and the temporal behavior of stock price is related in those days to things like the amount of debt in the economy appeared in some of his pictures I remember a very interesting picture to look at a great picture to teach I think a 1981 paper in the AR but over the years Bob Shiller has really been at the forefront of empirical macro finance and has made a number of very distinguished contributions but unlike a lot of analytical economists he actually communicates very effectively with the broader public which he’s done through a number of writings published a number of very important books I had the pleasure of introducing Bob back in the year 2000 when I sat over there and he came and talked about his book irrational exuberance which had some terrific graphs in it and I remember I think the grass might be upside down these days but we I was cooking my neck to sort of see these peaks in the price earnings multiple the Nasdaq say look at that that’s not sustainable see how much it’s gone up and I think about three weeks later it tanked it was quite remarkable very prescient so today he’s going to talk about some work that he’s been doing in the behavioural area and it’s with a net professor of the LSE that’s George Akerlof very distinguished economist as well who cost got the Nobel Prize a few years ago and they between them have been at the forefront of advancing some elements of behavioral economics but always with a keen understanding of what we teach this is stuff founded in the very principles of economics so for the students here you can’t really understand the best stuff of Schiller and Akal off without really learning a lot of economics but at the same time you can get a very good feel for what these people talk about by reading their works and you’ll see today that Bob does manage to contact really make contact with broad audience and the way presents his ideas so I should say this lecture was originally introduced on the Alice’s webs website as animals and economics so for those of you that have come here expecting to meet a zoologist I’m afraid you’ll be disappointed but I think you’ll still be entertained so without more ado I think I just I’d like to say thank you to Bob Shiller for coming yet again to the LSE we look forward to his presentation in terms of the structure we’re going to have essentially a three quarter hour overview of his ideas which are in this book and then we’re going to open it up to the floor for discussions and we have 45 minutes available but we do have to be out of here by two o’clock okay thank you very much well I wasn’t going to talk about animals in economics but actually there is an emerging field of people doing experiments with monkeys and Keith Chen has taught monkeys how to use money and unfortunately they’re starting to develop bad behavior patterns because so the term the title of our book George Akerlof and I comes from an old phrase animal spirits actually goes back to ancient times spiritus animales and that’s Latin it refers to the animating spirit that drives people and animals I guess as well but the point is that psychology matters the term was used by john maynard keynes in his 1936 book the general theory of employment interest and money and he wasn’t there pointing out some of the limitations of rational mathematical economics in that treatise he pointed out that decision theory on if we use the term decision theory but he was referring to it presumes that people know probabilities of future events but in fact they don’t and he thought that if people were completely rational as economic theory how dictates they might they might be paralysed into inaction because if I’m trained to do decision tree analysis I need those probabilities and if I

don’t have them he pointed out that we have business plans that business people construct and they just make it up right it’s part of their imagination nobody knows if you’re going to start a business is this going to succeed or is the world need this or what’s coming and nobody ever knows and the problem is that we have variations in these animal spirits that that drive the economy in my co-author George Akerlof was president of the American Economic Association and a few years ago he gave presidential address entitled the missing motivation in economics pointing out that modern macroeconomics seems to misrepresent what really drives people and I think this ultimately comes around to our failure general failure to predict this crisis because a lot of the things that ought to be in economics the animal spirits are not being modeled and so that’s we intend this book as a serious book about the way macroeconomics should move in the future it’s part of a bigger picture of revolution in economics going on now the behavioral economics revolution and this has been evolving over 20 years now it’s still a minority I think field within the profession it’s been most strong in behavioral finance I’m not quite sure why for almost 20 years I’ve been organizing seminars with Richard Thaler on behavioral finance at the National Bureau in the US and we get bigger audiences there I don’t know why I think maybe because there’s money to be made in behavioral finance so it’s it’s hard it’s a little bit hard to I Richard Posner in his review of our book in the New Republic complained that well behavioral economists haven’t predicted this crisis either most of them well in my reply I said well there are very few behavioral macro account economists and so we need to change the field and so this book doesn’t provide answers to everything but it does have a plea to broadening our scope of macro theorizing so how do I advance the slide anyone have an idea how I use a mouse to advance the slide click on it twice oh there’s a keyboard oh I see got it alright George in his well he won the Nobel Prize for his economics and in his acceptance speech he referred to his favorite cartoonist Edward Corrin who was frequently seen in the New Yorker magazine because Karan sure he shows people these are people by the way but he always makes them look like animals in his cartoons and it reveals something about our animal side and so we asked Corrin to do us our cover for and this is what he came up we asked him to illustrate animal spirits I think we were lucky it shows how our emotions are correlated with the business cycle it doesn’t though I guess we can’t ask too much of a cartoonist but it doesn’t show what is our basic thesis that it’s these emotional changes that are the drivers of the economy or substantially the drivers of the economy the I think it’s been one of the biggest complaints about macroeconomics is that they never said what’s driving the whole thing this is an embarrassing omission in a sense you want to know first the summer energy balance where is it all coming from and people have been worried about that for a long time so Jevons in the 19th century said well maybe it’s the Sun the variations in solar off it that was a nice try but it’s wrong it’s not sunspots as he meant it and people who tried to figure that out over the years in past have thought that it’s probably something psychological as an important driver I mean people feel that they’re reacting rationally to the circumstance but what got us into this circumstance so ACP GU who was a contemporary of Keynes wrote in his nineteen twenty-nine book industrial fluctuations he thought it proper to answer what causes these fluctuations and he didn’t

have any way of proving it but he just said his guess was that 25 percent of the macro fluctuations we see are due to real causes and that means things like wars or in dust they invent the railroad and so there’s a burst of activity while they build railroads that sort of thing a harvest variations 50 percent he said was due to monetary causes the gold discoveries bank runs and failures and that sort of thing and 50 percent was due to psychological causes now you may note that my numbers don’t add up to 100 percent and he actually noted that – that he was smarter than you think he he said these two things interact and amplify each other so it adds up to more than 100 percent but what are psychological causes well approximately quoting him he said these are changes in I’m quoting him in men’s minds that occur even though there’s maybe a constant basis of fact we just think differently from time to time and I think he was referring to a social phenomenon social that we’re all part of a society and we change our thinking as thinking changes we in our book Akerlof and I break down our contribution to this uh inconstancy it by the way I would I would adapt I would change P goes things now because we now have modern central banks that are not contributing 50% to the fluctuate I don’t believe that I think that it’s negative that is they are reducing the fluctuations not adding to fluctuation so that leaves us with if we take P good with psychological causes as the main causes of our economic fluctuations even though at a moment of time we may feel that we’re behaving perfectly rationally but it’s the whole society it’s like an army in retreat for example are they rational well yeah they’re rational because everyone else is retreating I’m going to retreat too but collectively there’s something may not have been rational so we emphasize five things confidence fairness corruption money illusion and stories we start with confidence fluctuations what what’s wrong now with the world economy very simple it’s understood widely it’s wrong that because people think the economy is in trouble so consumers don’t want to spend they don’t want to put a new addition on the house they don’t want to buy a new car because they might lose their job they know they’re in a risky situation so you pull back on all that and similarly companies don’t want to expand operations they don’t want to hire new people because they might have to lay them off again you know things don’t look good and so it becomes a self-fulfilling prophecy everyone thinks times are bad and so they are bad this is something that was widely perceived and in the Great Depression which I will without any shame referred to as an example but I’m not saying we’re going to see that severity right now franklin roosevelt said in his 1933 inaugural speech the only thing to fear is fear itself we are he said we are struck by no plague of locusts meaning nothing real hit the economy it was all psychological now I don’t think that was a very original statement because I think everybody knew that but somehow it’s very quotable because he said it but I’m so so confidence and we talk about a confidence multiplier is it epidemic contagion effect it’s social contagion the human species is empathetic we feel each other’s emotions that’s part of the human design we also tell stories and the stories have a word of mouth contagion like viruses there’s a similarity between the influenza epidemic and the decline in the economy it’s the same sort of thing something is spreading some negative thoughts are spreading because of the contagion they have in this environment we we also emphasize fairness and that is something that is usually not mentioned by economists but it is a it’s a very important element of our functioning of our economy that people want to be treated fairly they want to live feel that they live in a just society they get angry when they’re treated unfairly and this has important impacts notably it creates a downward rigidity on wages the other thing is corruption we believe there’s a corruption or maybe a loser a weaker term than corruption a bad faith cycle that occurs bad faith that’s another of Malo whether Malo fides in Latin is another old idea a businessmen

is not dealing with you in good faith even if that business person is not lying but is not volunteering something that you really should know in this business deal and that kind of thing amp is amplified in boom periods and people become complacent and accepting and trusting and then the trust is abused in the good part of the cycle and then in the down cycle anger develops and the anger is then results in a pulling back of everyone a sense that I when you don’t trust someone then you have to read the fine print you know on some document and so that means you’ll never sign it and that that’s part of what pulls us back and it generates a general sense of anger which i think is partly responsible right now for the the MP expensing scandal that’s happening around us the intensity of the anger is higher than it would have been if it happened at another time and this kind of anger then creates a potential problems that are that are hard to quantify but are variable very real if this situation isn’t corrected forth as we emphasize money illusion and that is that people have trouble protecting themselves against price level changes this was particularly important in the great depression but it hasn’t happened yet now but because there was deflation in the depression and it caused to amplify all debts anyone who owed money owed more in real time and this caused the housing crisis because people had mortgages on their homes which now were amplified they couldn’t pay them they were going bankrupt in huge numbers but it was ultimately a failure to understand price level changes and finally the fifth main element of our thing which is kind of unusual I think to behavioral economic if we want to emphasize the social psychological literature on stories or what I say is narrative based thinking economists tend to present people as having a certain pattern of thinking which is rational and calculating but social psychologists emphasize that we tend to be motivated by stories more than you think and we have trouble remembering statistics and numbers so what do you hear when you go I go to Las Vegas I went there recently for the first time and I did that listen into what people are talking about now you might imagine that they’re calculating probabilities right you listen on the bus to the casino what are they talking about they’re not calculating probabilities they’re telling stories about somebody who won a lot of money in the human interest stories and we believe that the story changes through time and the story drives the economy Robert Sternberg wrote a book called love is a story and it’s about marriage and he argues that marriages are really built around a story that successful marriages you asked the couple to tell stories about each other and they’re warm and loving stories appreciative stories in a bad marriage you are here negative stories and you can tell that there’s something wrong so our lives are and so we have a good story and a bad story the kind of bad story that develops in the Great Depression it was so uncertain the uncertainty was so high that it left the the world economy in shambles for many years so that’s the basic theory now I want it first of all to say I’m hearing stories here similar to the US that that people are complaining see if I have the right button there’s a company I don’t like to glow or claim that I knew the future but since everyone is saying that economists failed to predict including the Queen I’m told has said said that casting aspersions at our profits not true that economists haven’t think I wrote this in 2005 spring edition of my book irrational exuberance I was predicting I didn’t actually predict it I said it could happen I said could lead but I felt when I wrote I remember writing this that this was going way out on a limb I was bringing up the possibility of widespread bankruptcies in consumer Sanel bankruptcies and financial institutions and a worldwide recession but I just wanted to get that on that why did I say this it was not because I had a dynamic stochastic general equilibrium model that was predicting it and it was not because I had a vector autoregressive model with interest rate spreads in or something it was because I

was thinking about what was going on in people’s minds and so I don’t mean to say that I can do this ever again but I’m saying that the problem is that the econ profession has gotten formalistic in certain way I admire what goes on in the profession mostly and this is a correction I admire mathematical economics so that’s not exaggerated but we were missing something when it comes to macro forecasting we’re missing kind of the obvious so I had a taxi driver in Miami Florida around 2005 lay it all out for me and he said we were driving he was he did this without even knowing I was an economist he just does this to everyone he gives her a ride to and he said look at all those building cranes just amazing so I’ll give you another view and he’s driving me to look at that he says there’s a bubble going on here something’s something’s going to end badly so I went back and looked at the Federal Reserve King papers series to see what they were saying at the same time the taxi driver was too and I went through many working papers and I found hardly any mention of even the possibility of a bubble I found one paper that did it and then the guy took it back immediately in the next sentence so I called him up and asked him about that and he said well I have to be careful you know we’re the central bank here anything we say so he wasn’t going to say anything so okay so I just want to give you a sense of the magnitude of it doesn’t look too bad this the blue line here is u.s. real GDP and you can see that’s you can see that it’s tipping down recently and this is on log scale so it’s in percentage it looks like we’re on a pretty it doesn’t look very impressive does it that’s looks very scary but the point is it’s going down maybe it’s not so scary maybe you know this is another event that would just forget about on the other hand we don’t know right now it doesn’t show any sign and the data of turning out I have the red line which is residential investment that’s construction of homes of additions to homes in construction of apartment buildings and you can see that something is really the downturn is related to a construction crash so it’s not you know let’s not exaggerate this crisis then unless it’s in the future but it looks you know the question when will this thing turn that’s the big question and then I’ve got the same thing for the UK but I only have it back to 1958 so UK the next more volatile doesn’t it than the US it looks worse but I’m not sure that’s just the way it laid out you see a turn down at the very far right and it does look related again to a housing cycle but I think the housing cycle both in the u.s. in the UK have been story driven I’ve come back to the theme about stories the boom period our periods when people tell stories about flippers I don’t you know this right there than TV shows and lots of human interest about someone who was outsmarting you while you were making humdrum wages in some job somebody else bought three houses and and that was the story that part of the story that drove this so again I’m going back to the US this is the the unemployment rate from 1890 to 1947 I wanted to show the whole range that’s as far back as you can take it for the US and you can see the two depressions the depression of the 1890s that data is incidentally the Christina Romer data she’s the chairman of the Council of Economic Advisers and she said the 90s depression wasn’t as bad as you think so she’s revised the numbers down but hey it looked pretty bad in the 1890s and the the big one is the 1930s depression which really stands out that’s what we call the Great Depression we now have a name for it a word in the language everyone knows Great Depression and and it’s associated with vivid stories and images in fact cuz there is good photographers back then so I think of images of people standing in bread lines or soup kitchen lines someone selling apples on the street corner unemployed person and those images are really almost images of human hopelessness and despair and it the word depression links up with a psychological theory of depression it seems in our in our story that it was a awful time to be alive what we’re seeing now is to go to the far right is nothing like either of

those two depressions but hey it hasn’t stopped climbing yet it seems to be going the funny thing about these there’s lots of Wiggles in there you see them smaller those are called recessions and they tend to come to a very abrupt end notice how sharp those peaks are that seems to be more of a u.s. phenomenon of the US and UK shown on top of each other here so red is UK but one of the first lessons I want to emphasize here is that US and UK are very similar in all of this not very you call that very similar I’d say it’s similar every time there was a crisis in the u.s. there was also a crisis in the UK and I think that it’s part of the theme of social psychology that I want to emphasize and that is that we have a world culture now and that it goes beyond the US and the UK this is a world depression recession but I don’t think that we necessarily need only economists to explain why it’s so ubiquitous it’s because the same stories go from country to country I’m what really impresses me is the real estate Story I try to elicit this when I visit any foreign country and it’s quick it’s easy to do get into the cab and you ask the cab driver what’s the real estate market looked like and they’re very happy to talk about that subject I was in Moscow recently and the cab driver who spoke English said oh let me show you he find it out an apartment building on Red Square he said did you know that an apartment sold there recently for $100,000 per square metre and I think it’s just amazing I can’t imagine who’s buying that I got the same feeling in Moscow and I’ve seen it in lots of country it’s part of the culture it’s a culture of real estate excitement that we had recently and and the evaporation of the change in that excitement is I think responsible for what’s going on here so I mentioned that the depression story is a story that is being retold and brought back I don’t know if you have this in any other country but the Survey Research Center at the University of Michigan started in 1951 asking people about this story and so the question was which is more likely for the next 5 years continuous good times or periods of widespread unemployment or depression they use the D word and they’ve been asking this regularly I think this is a very important question because it really relates to the fundamental despair that is the cause of depressions that if people think that it’s going to be hopeless for five more years this is the kind of thing that would cause them to pull back and not spend any money it would cause institutions to shut down plans and fire it lay off people it’s exactly this the negative view of it so they created a score but you might call it depression confidence based on this answers to this question from ordinary people and it was a high number if people are confident they think they’ll have continuous good times and it’s a low number if they think will have widespread unemployment or depression so I’ve got a plot of this for the United States going all the way back to 1951 and that’s this blue line the remarkable thing well it’s remarkable to me I wish I could can I walk over there maybe not all this is my mic the eye you can see that we’ve had four Great Depression scares that’s alright I can I think since since World War two and the latest one was in June of 2008 amazingly it’s over according to these numbers in May the score went back up to 95 which is virtually out 100 which means this just as many people say depression is or say continuous good times as depression so we’re it’s it’s over this is the funny and this is what people are wondering now the the stock market’s every country of the world every major country of the world has had a sizeable boom in the stock market since March 9th so it isn’t that’s what you’re wondering isn’t about people are wondering maybe we just got our confidence back could it be that that could be just that just disappears though I guess the whole problem would disappear if we got all our confidence back we’d start back into bidding up home prices flipping homes again are we going to do that one thing I thought I

see from this chart is that this thing has a lot of reversals in it from an econometric statement it’s negative serial correlation and if it jumps up it’s the good chance it’s going to jump back down but there’s a number of surprising every time I look at survey data about that reveals what people are actually thinking I always find puzzles it’s not what you think well one thing that’s interesting from this chart is that the period in starting from 9:00 in the 1950s confidence was extremely high and this seemed contrary to what I heard I thought that after World War two people thought we would sink back in the depression we had been in depression for over ten years in the 1930s then we had World War two so what happens when the government cuts back on expenditure at the end and everyone’s deeply in debt because of the war but you think they would go back into the depression and economists were warning about this but the public didn’t have the leadest worried about it that was the most confident time we’ve ever been in then we crashed into these depression scares one in 74 another one in 79 80 another one in 1990 and we’re in the fourth great depression scare or we just ended it we’ve just left it maybe I think we’ll go back into it actually so we’ll see I won’t say it’s over and but were the least of the scares and in terms of the general public so you wonder what was going on what was happening in the in the 74 scare and in the 80s care what it really was was it’s different if people answered as a depression scare but I think what people were worried about them what was the big issue it was that inflation was getting completely out of control and this was happening all over the world it was happening in the UK and in the US and you elected Margaret Thatcher all right because because of if you look at public opinion polls this is it because people thought that advanced countries of the world were beginning to look like the less developed countries and they thought that inflation is a terrible disease it shows it’s like getting terribly obese or something you’ve lost control of your of your and the government is not making good sense what they thought was that the central banks would have to clamp down on the economy in order to kill inflation and that would bring on a depression and as you know our central banks did do something that’s how he got high unemployment around that time but it was a worse scare than we have now because I think inflation was more visceral we can look at the story people thought about inflation every time they went shopping and there was an oil there was the first and second oil prices and they thought about that every time they filled up their gas tank now the this scare I think is a more of an intellectual scare who is most worried it seems to me a commercial real estate people are the most worried that I’ve met after that bankers people who understand balance sheets are worried because they know and they know that the assets are not evaluated properly and there’s going to be problem but the general public so far in both the US and the UK the government has prevented any bad depression like stories from happening so Northern Rock failed and then there was lines forming outside the bank it looked like another one of those Depression era runs but the Bank of England immediately stepped in and bailed them out and this is highly controversial but similar things have been happening in the u.s. we had Washington Mutual fail and it started to looked like a run on the bank but immediately the FDIC went in and corrected it and they opened the doors again you can walk into Washington Mutual today and it looks just the same the government’s running it now there’s been very controversial why did our governments do these bailouts it’s not in economic theory it’s not because the vector autoregressive model told them to do that they did it on gut instinct they felt we can’t let confidence crash if we let bad things happen it’ll be remembered for 50 years if we see that our max can’t be trusted they may never be trusted again within generations and so it was instinct I was at a speech recently Larry Summers who’s I think the economic intellectual of the US White House gave and he was complaining that he can’t get advice about the things he really wants to know from the econ profession because he’s an econ he was president of Harvard as you know so you think he would be more boosting of his own profession he said I could get tons of expert advice on inflation targeting if I wanted that but that’s kind of all on the back burner now that’s not what he wants to know how to do these bailouts and and and that that’s not immediately forthcoming okay so I wanted to look I may have shown this I was here

in November about another booklet this is a my favorite chart which I started plotting in 1990 around 2000 with my book irrational exuberance the blue line is the US stock market from 1871 until I stopped it on May 15th of this year it’s in real terms corrected for inflation and what I think is really remarkable is at the far right you see the peak in 2000 when the stock market was higher than ever before you note that there is a huge run up and down a crash and then another run up which peaked in at the end of 2007 and then another crash so we are now down 52 percent in real terms from that peak the thing I want to stress is that this how in my time now am i okay I don’t want to wear out your patient so the the market is down 52 percent that boom was virtually unprecedented where do you see in US history do you see that happening before well you see it happening once maybe I have to point see that that’s the roaring 20s and that was the peer which historians often described as exuberant the the and fearless in terms of investing and it peaked in 1929 and the market went down 80% everything looks smaller than because everything was smaller I don’t have this on a log scale but it’s proportionally similar what we’ve haven’t gone down as much as but it’s there could have a ballpark similar things the the green line if you can see at the bottom is earnings on the S&P index and you can see that there have been movements in earnings that correspond to these price movements and so some people would say well the price is just reacting their earnings but that’s not true the problem is that earnings are being driven by the same feedback cycle I talked about this in irrational exuberance you have people getting excited when prices are going up so they they get excited and they spend more money they think everything’s great and they start telling stories that embellish this idea and it causes prices to go up more but it also causes earnings to go so you have price to earnings to price to earnings to price in an upward bubble and it’s very rarely acknowledged that this kind of feedback is happening and then on the way down unfortunately it reinforces again prices start falling so people start pulling back first of all they have less money they might be bankrupt by the way but even if they’re not they’re just worried because they see prices falling and so they stop spending so earnings go down and then that reinforces further price tea so it’s another feedback on the on the way down and I think that’s that’s what’s then happening and again the movements were always accompanied by stories so in the boom period of the 90s we had stories about internet millionaires these young people who made so much money in three months time more than I’ve made in 10 years but it was also embellished the idea that somehow technology was driving it the idea that psychology was driving it never took hold and it never got Authority the economics profession would just steadfastly stay away from me just look at the talk that they generate they wouldn’t tell these bubble stories I look at textbooks of economics and finance and look in the index for bubble and it’s not there it’s starting to get there in some of them but it’s almost like the economics profession didn’t want to acknowledge the phenomenon it’s a little bit like if you know if you brought up bubble in an economic seminar it would be like bringing up astrology and horoscopes at the Astronomy Department seminar and you would be immediately branded as someone who shouldn’t be here so this is the price earnings ratio of the same data and I show the price earnings ratio in 2000 at 46 I computed a way that was recommended by Benjamin Graham and David Dodd in 1934 which is price divided by a long average of earnings I think it’s more revealing and work that I did with John Campbell and show that this seems to forecast the market when the price is high it tends to go that when the price earnings ratio was high the stock market tends to go down afterwards so you can see there have been two major peaks in the price earnings ratio in 1929 and 2000 now I have a long-term interest rate they’re shown but that doesn’t explain the actual behavior of the price

earnings ratio economists might want to try to fit some model there was a model that was called the Fed model popular around the peak of the market in 2000 which said that if you look at data for just the last 30 years you can see there’s a negative relationship between interest rates and the stock market and since interest rates are so low now that justifies a very high market in fact alan greenspan said this but you notice that as soon as he said it it became untrue interest rates kept going down and then the market crashed so I think it’s it’s what happens when people are too focused on what one of the causes of this crisis was bump with it come back to that one of the causes of this crisis is that economics profession became very focused on quantitative methods and they they tended to use short data peer and would it happened again and again the models that were motivated by empirical correlations would just turn out to be untrue later with more data and so I think we have to go back to thinking more about fundamentals of what drives all this so this is just the footsie 100 and the S&P 500 again both in real terms i deflated the footsie buy the RPI and the S&P 500 by the u.s. CPI and it’s just remarkable how similar these two countries are again I think that reflects cultural similarities we really do speak the same language and maybe you don’t read our newspapers and we don’t read your newspapers actually we do we read the Financial Times now everywhere but the writers for these newspapers read each other’s newspapers and so there’s an enforced of similarity in thinking so another example showing similarity this is the halifax home price index for Greater London in real terms directed for inflation since around the early 80s and then the S&P case-shiller home price index this is a index that Carl case and I developed and it’s now published by Standard & Poor’s this is for Los Angeles and I just kind of think isn’t it interesting that these two countries are really almost on there 9 hours apart or 8 hours apart they’re almost on the other side of the globe and they look like it’s like the same thing right Los Angeles was like a suburb of London here it’s so similar notice is it simply look at the picture both of these cities went through huge booms in the 80s and then they came all the way back down you kind of wonder how do people get the idea that home prices only go up given that this is the data for US and UK it looks like the bubble in the 80s came earlier in London than Los Angeles but the bust in Los Angeles came a little earlier than that in London so they’re further along I don’t know what this pretends for London home prices but I’m a little worried so this this is going back to Los Angeles this shows we have low middle and high priced homes and you can see that the bust the boom and the bust was biggest in the low priced homes it’s not those millionaires rushing out to buy all those maybe the most dramatic stories although this may not generalize to the UK I don’t know that this reflects partly I think a decline in lending standards that occurred it was based or corruption theme in a sense I know it’s I don’t know if it’s corruption but what happened is that loans were being given to low-income people who really were not suitable for these loans they were given it with almost no money down and these people are defaulting now in huge numbers and it’s bringing down the low of sight of the house the red line is the dropping a lot more than anywhere else so I just wanted my last slide is the slide I have showing the US real estate market back to 1890 I created the red line here just to get some sense of how unusual this cycle is in historical perspective and you see that on the far right the far right of the red line you see that up and down that’s the current bubble in a long historical perspective bubble and burst we’ve never seen anything like this before in US history we did see it in individual cities but it was never so national and actually I would say so

international what has happened that is unprecedented in history is that people have gotten the idea that buying a house is wonderful investment wherever you go you could you know it used to be you had to buy it in London Angeles but now you can do it anywhere that that was the theory that developed and so I think it was a change in our speculative Alton some of our theories that encouraged people it really was true I did questionnaire surveys of people in various cities and in some cities like Los Angeles during the boom we asked people what do you think will be the average home price increase per year for the next ten years and what in our worst example we got a mean response of twenty two percent a year but more consistently than that was that as always about a third of the people thought it would be some astronomical number these people have never thought through it can’t be that home prices go up at ten percent a year every year do you know what that would compound to it’s not true in fact what I did that I found that home price in this home prices in the US have done just about flat from a hundred years in real terms from 1890 to 1990 so what developed is a theory that we’re running out of land and so home prices should just keep going up and up but it didn’t happen for a hundred years I think the theory is wrong and misleading I also think it’s wrong and misleading in the UK people said well that’s the US you’ve got huge amounts of land and we in the UK don’t but I don’t think that really makes a difference because what will tend to happen is that the UK will move and maybe as a political difference but this is talk about the basic fundamental the UK will just gradually move out of agriculture and agriculture and the world economy will move to places like the US and if your politics allow you’ll spread out over that agricultural land the price of land will be the same in the UK as anywhere else because there’s a world market for land it should all be the same that’s that’s an economic theory home prices shouldn’t go up in the UK because there’s technical progress it’s been going on for a hundred years they build them more and more efficiently and with more more and more uses intense use of land prices this may not apply to London central London but people don’t think like that and they created an intense bubble there anyway I’m done with my slow let me just say I in just in concluding I think that fortunately in both the UK and the US and around the world are national leaders and our central bankers have not constrained themselves to the kind of responses that would be suggested by economic theory they’re going back to their intuition and their that’s that’s a good sign their public spirited people and I think that they can see what’s happening and they have done a constructive response so we may be emerging from this depression scare I don’t know my suspicion is that we’re going to help drops in confidence again as new bad news develops but at least so far they’ve been prevented any real serious damage I think though that the stimulus package may be inadequate or probably is inadequate the IMF recent study said that the average country advanced country has been spending something like 2% of GDP on stimulus but we’re seeing drops the UK GDP dropped 1.9 percent in the first quarter of this year so that making a two percent stimulus for the year doesn’t sound like enough so Akerlof and I thought that the government should have an aggressive fiscal target right away an aggressive credit target to get the economy to prevent the economy from generating any evil stories and fortunately they’ve gone partway to that and maybe if we’re if if we’re lucky that that we will come out of this I don’t I mentioned this book is is a work in progress I don’t have a good way of forecasting then we come back to the central question which is on everyone’s mind is it possible that we just got our confidence back is it that crazy I write my own answer to that is maybe it is that crazy maybe maybe it is we haven’t had bad news for a while the government’s have been reassuring and we start getting into a positive feedback I wouldn’t be too sure but I’ll give that as a possibility and finally let me just say that I think that I’m hopeful that this crisis will generate some good efforts to expand our

capitalist economy to work better for the people and that means responding to this crisis with longer-run measures that are informed I this is my other book so I won’t get into it subprime solution I talked about applying behavioral economics to redesigning our economic institutions but not just applying that but applying financial theory a mathematical finance does show a way toward reducing risks and if we apply it to help people we can help prevent this kind of crisis from happening and in another generation or so thank you very much okay well let some people love you have to leave so if they could clear the floor then we’ll have our questions okay could you these quick as you can those that that have got to go and then we’ll settle down and get into the discussion yeah well effective thanks very much Bob for a very stimulating talk actually before we have some questions I think I might ask you one myself if I may so mine will be slightly academic the lot of what you’ve talked about today is sort of very plausible no I think would appeal to lots of people as an explanation of what’s happening in the world and it’s a story that corresponds to a lot of our experience yeah but as a academic economists we sort of release some of those actors therefore at least believe that we’re doing science and we’re trying to we’re trying to discover regularities and explain regularities and we try to look for factors that might be common across sets of phenomena and we get lots of students to do the current well that sort of stuff that you’ve taught lots of them to do a lot of time series cross sectional analysis to pick up on this is this something that we can actually get there really to grips with in terms of key economic factors that are going to crop up time and time again or is it really an add-on to what we’re doing in a set of cautionary tales to limit what might sort of conclude from our economic analysis yeah well first I hope it was clear that I am Pro economic analysis and I’m Pro econometric I you know I’ve made my fortune with econometrics in a sense because we didn’t I wish I did but I did these S&P case-shiller index if that’s econometrics and not behavioral economics and I love mathematical economics I think that in some sense attention to behavioral economics is not a threat to mathematical economics it’s the salvation for it the problem with mathematical economics is that those models are only so good that they have limits they’re only applied in certain circumstances they’re designed for a certain application and you just can’t generalize them but they’re developed an atmosphere in the profession where people would do the dumbest generally it would apply them where they just shouldn’t be applied so it’s a little bit like theoretical physics you develop models of the planets in a vacuum but when you come down to earth you got to take account of friction and and now you’re right though about the this particular animal spirits discussion is that it seems a little bit hard to make scientific because I’m emphasizing a story where we are emphasizing George and I that there’s a story that drives the economy and that sounds it almost takes a different mental faculties so there’s cognitive scientists have pointed out that there are certain regions of the brain that are devoted toward quantitative analysis and there are other regions of the brain that are that are devoted toward what they call a model of mind our brain is designed to keep us focused on what other people are thinking and we develop in our mind a view as to what other people are thinking some of us are better than others at it some of us who are very poor at judging other people’s thinking we label as autistic or they have problems we have to make use of that mental faculty and it’s that mental Faculty of theory of mind is hard you can’t quantify it’s hard it’s a matter of human judgment so it may be that it’s difficult it’s difficult to be

quantitated sure but I don’t think that we want to be I think there’s different approaches that are scientific like experimental economics or obviously the use of survey date so they did yeah so we’ve got quite a lot of questions actually I’ll take yours first Bernhard we’ll move here and then over there then I’ll go upstairs yeah where are Casey from Warwick University um I suppose my question is since we’re a university is why don’t people learn and the notion of contagion which you did use this term once is not entirely new to us we dealt with questions of contagion we’re confronted with that 10 years ago in the Asian crisis and we clearly didn’t learn anything from that now the next question is then people seem to have extremely short memories or perhaps it comes back to that question of you know who is building these models and what periods of time are they feeding into them and there are these sort of questions about you know kind of have we ever seen 25 standard deviations movements and yes we have if we bother to look far enough into the past so why don’t we learn it is my first question my second question which is related to this is okay in terms of animal spirits and in terms of contagion would you not agree with my theory that what we’re not worried about and suffering from at the moment is a Thea it is Mexican flu but rather it is guarding swine at fever what is that Burnet the garden sir those of you who actually study their Bibles and whatever will know about the gardening swine these are the people these were just not just ordinary pigs the garden swine these are the people the pigs who really behaved extraordinary badly and were pushing their snouts into the troughs harder and faster than everybody else I reckon you’re healing for bankers Isis I suspect ologies do any bankers a lot of God or in swine Oh Ryan okay thank you very much okay it’s a very interesting a very interesting question how smart people make mistakes and people have written books about this you mentioned the Asian crisis why didn’t we learn about that Paul Krugman wrote a book right after the Asian crisis or during it called the return of depression economics and he had some kind of negative outlook expressed in there he became in some ways the laughingstock of the nation five years later he wrote a book saying the return of depression economics and and now here the harm is just booming and but I don’t if you noticed it’s in all the airports now he’s got the book a new edition I bought it it seems like we make some very elementary mistakes that that maybe Krugman was right you know about this but maybe it’s going to take another ten years before the bad stuff to happen and that seems like an awfully naive mistake but it does seem like we get experts who are very sophisticated in one way and are making some really big mistake in another way but like the like the idea of I was at a conference recently and someone was a couple of years ago and he was analyzing correlations optimal portfolios for us there are housing markets in stock market and he was using the RPX data on home prices and he pointed out that it’s amazing return on houses and I asked him I said but wait a minute your data only covers the boom period that and he said well but I like the RPX data and it doesn’t go back before too and he’s and then he said believe it or not this is that a big carpet this is what everyone does isn’t this appeal to and so it’s it they’re social psychologists worry about this and it’s a term called groupthink that is used to describe the errors that experts make and it’s related partly that we have pride in our expertise and we will not bring up something that doesn’t seem to conform to the accepted forms of evidence will disallow certain evidence because it’s not professional and people self-censor their views and so you can have a seminar when actually seventy percent of the people are thinking you know this doesn’t look right to me but they won’t say it because it would be rude and impolite and they don’t have estimate how many other doubts there are

the classic thing of Irving Janis and his book groupthink and that’s it he talked about the Bay of Pigs invasion when Jack Jack Kennedy ordered a u.s invasion of Cuba and it was an utter fiasco it almost lost him the presidency and he interviewed everyone in the Pentagon and they all told him they doubted it but they didn’t want to enter the president had decided and they weren’t going to raise these doubts which seemed intangible and hard to hard to quantify this could you identify yourself too soon my coffee from Imperial College and in your talk and also in your recent books you’ve been talking mostly about financial markets and the housing markets of property which are prone to these bubbles there are also other things like comms and in the old days tulips where you get bubbles but there are large states of the economy where you don’t tend to get this and I just wondering whether conventional textbook models of economics actually apply in these other sectors really rather well where as these bubbles prone one maybe there’s some kind of different thing going on then if so why would that be yeah I have to agree with you that this is not a condemnation of all or even most of economics I remember I served on the National Science Foundation panel to evaluate economic research proposals a number of years ago and I was in kind of a negative mood expecting a lot of bad proposals but this if you look at what comes forth among economic research there’s so much variety of different things that they do and it’s not all I’m not able to criticize all of that it’s it’s but you know what what it is it seems to me is in some sense we’re finding a Fault in our academic incentive system that I have graduates do I just had one the other day he took my course in behavioral economics and he came to me discussing his dissertation proposal and it was a little bit far out on the rational side and I said you took my course well why are you doing this and he said and quite honestly said I’ve got to find a job and he said I don’t think I don’t think that this is the thing that but it’s also is it’s also a thing that we have certain methods that we’re good at and unfortunately those guys in the psych department we don’t get along too well with them and we don’t know how to do what they do anyway and so we’re kind of following a method and that’s not altogether bad I mean I think that we do have I’m still I’m writing a paper right now on pricing of financial derivatives that uses a rational optimization model I would think that I would also expect that there will be bubbles in these markets but the first step is to say well how would they work when everyone’s rational dude over here on the right yeah I’ll come to you next yeah just to follow up on the earlier academic question you make a very eloquent case for taking account of the insights from applied ethics sociology anthropology in particular G but I’m still not entirely clear whether you’re arguing for co-opting the insights from these disciplines into the soup a new super paradigm of economics where they capture systemic regularities whether or you’re arguing instead for more interdisciplinarity and when studying particular problems like financial markets and interdisciplinarity to try and establish the boundaries of applicability of standard economic model so in other words are you looking for a smarter new Imperial paradigm of economics or a more interdisciplinary approach well I don’t if there’s a clear distinctive okay sure I can’t answer one or the other it seems like the profession is a is not skeptical enough of these rational models actually it’s a trend though I think it’s being corrected in a sense I’m outdated to describe the profession as not I find it interesting to go through successive editions of textbooks so I recently went through successive editions of really admires corporate finance and I found in a nineteen 1980s edition of their textbook they had this remarkable statement about efficient markets and they said the fundamental lesson that we learn from lots of research I’m paraphrasing them is that one should trust markets they excise that line from the book by the late 80s oh there’s no extolled efficient market now in the early 2000s they are talking extensively about work questioning the efficient markets hypothesis so we’re moving in that direction I would really wish that we could come up with a new canonical

theory there was some hope of economics there was some hope when Khanna Minh and torski published their prospect theory in econometrics in 79 because that looked like something you could you could cut out the expected utility model and paste in the prospect theory model and to some extent people have done that but it’s been a disappointment and maybe that’s because the prospect theory model isn’t quite as elegant and clear as to because it has a issue about framing which is ambiguous and so we still haven’t got that I guess what I would say is that we want this we want interdisciplinary work and that seems to be a lesson for academia we’re getting but maybe we can develop some new theoretical favor we haven’t completed we haven’t done that but but I think your co-author George Akerlof to the importer of sociology into economics I mean he was here last year and talked about his identity as a concept in sociology and tried to explain a lot of economic phenomena over there that’s right he’s writing a book with Rachel grant and on identity and economics and they make the important point economists tend to describe people as wanting to consume that’s all we care about we’re completely selfish and we want to maximize our own present discounted value of the utility of consumption but he points out something that sociologists have talked about enormous Lee about social norms that norms affect our behavior and I mean why do we leave tips you leave a tip behind in a restaurant even though you’ll never be back there again this kind of behavior is because there’s a social norm to do that I guess or some moral the economists don’t talk about morality enough that the people are actually motivated by principles the over here the same row yes some economic theory has always been heavily influenced by political theory since the days of Karl Marx and the prevailing theory for the last thirty years in the US and UK has been freaking out market economics and today free market economists are actually saying the lesson of the crash is not that some there should be more government regulation but less government regulation because the crisis was actually caused not by the banks but by the government because they forced the banks to make all these loans that they would never have done otherwise if the market had been led to function itself these problems would would never have happened and they say that things like hedge funds which are not regulated came through unscathed which I find which is simply not true I believe in spring of 2007 to hedge funds went busting us which caused the seizing up the interbank market which seems to have generated the immediate cause of this crash and you know free market economists are saying you it’s it’s all the government’s fault you know nothing to do with with the banks do you buy this some theory obviously I don’t the – I think it’s it’s it’s remarkable that we don’t even have any agreement on that it goes back to my thing what drove what drives the economy so there are a number of a couple of books one that comes to mind is John Taylor who was as Stanford University professor has a new book out claiming as you say that the whole thing was caused by a government he’s at the Hoover Institute it’s kind of a it seems me politically the left versus right so the right wing is more likely to want to blame the government well obviously but the remarkable thing is that that that our books are at such opposition we’re saying that it’s the people and the irrational exuberance the animal spirits that’s driving things and he thinks it’s Alan Greenspan and George W Bush that that could that cause this it doesn’t sound right to he have to do it on an international basis to make that all these different governments of the world developed very wrongheaded policies at the same time I guess maybe the truth is somewhere in between but I tend to think of the government’s mistakes as the same that they have the same origin as the mistakes I’m talking about so what was it what did the Fed or the central banks do wrong in this crisis well they didn’t appreciate it they thought there was no

problem they believed in efficient markets of Alan Greenspan was years behind his time he wasn’t reading the efficient market the behavioral economics literature and so he thought that there was nothing to do he repeatedly said that he respected the markets and he wouldn’t even though he was so highly esteemed a leader wouldn’t presume to judge the markets so I I wish we could have closure on this point did the government do this or did the governments of the world do this I don’t think they did and I guess the reason why it stays alive as a congress is because it’s it’s tied our political feelings seem to be tied up with a lot of our views of ourself as well and our self-esteem so people who have a more conservative that tend to value the sense of in put an independent I’m not a political sciences but it seems to me that it’s right that that our book looks left-leaning relative to Taylor’s book and and there’s some wishful thinking that affects our judgment that may distort our sense of the origins of these things and it the origins of all of these booms is sufficiently difficult to trace I guess we can let our imaginations which doesn’t go too far our direction I’ll take this you then you you know ok the young lady there in the third fourth row from the back hi so I’m not studying economics so I think my question might come across as a bit naive but I’m wondering when you’re not studying you know I’m not letting economics okay so I am wondering when do we know that the economy has recovered because there are so many fluctuations in your charts so I’m wondering what if what is normal in the economy because obviously we can’t return to that peak moment since that has proven not to be sustainable so I wondering how do we know the economy has recovered well the it’s it’s does seem that historically it you never know that it’s recovered because there might be a recovery apparent recovery where the stock market is going up that’s where we are now might continue to do this but you never know when it won’t turn around and go back in in the go back to the Great Depression example I showed you that 80% decline in stock prices the bottom doubt in 32 the economy seemed to reach about them in 33 with the election of President Roosevelt I know the Europe UK was earlier about and however in the US there seemed to be an inspiration and the economy went on this great recovery but then it faltered again and collapsed again so there are these double-dip there’s these w-shaped recoveries that happen so you won’t know what you will know you want me to tell you when I give you an all clear sign and how many quarters of good solid economic growth or is that this kind of a big bubble burst history suggests could lead to many years of suboptimal behavior and I think it’s not wrong to bring the Japanese example up they had twin bubbles in the housing market in the stock market and it was different because they were alone in the world to have such big bubbles and it was associated it was different now we have a global story it’s a story about capitalism triumphant everywhere but in the 1980s it was a story of Japan triumphant and it didn’t have a epidemic it didn’t spread to other nations and then it burst in Japan and then they have had since then almost twenty years of suboptimal performance and the housing market decline from 1991 to 2006 there were 15 consecutive years of decline now why did that happen it’s not well understood and I guess you get many different opinions but to me it has something to do with the change in animal spirits in the 1980s Japan was an inspired country and they were winning and everyone was and then they it affected their culture and it’s not too bad Japan has been growing over this whole period but slower and that’s the kind of thing that could happen and I find it hard to quantify or predict that from tune I am just a quick question or a short short question I got from your presentation that you now think that stories drive the economy but I’m all from the old school that fundamentals drive the economy where would you sit on

that argument well the problem yeah the question is what are the fundamental what what fundamental changed now you could say that it was government I guess that’s what people would say that the colossal errors made by Mervyn King and Alan Greenspan is that the source it doesn’t seem right to me I can’t believe that these guys are the source of all of our problems and so what other fundamentals you know people talk about what gold discoveries have driven have driven the world booms in the past I mentioned the railroad or the invention of the airplane they drove they drove the econ so is there something like that happening in Reverse now I don’t know what it is I’d go back to I said franklin roosevelt said there’s no plague of locusts he couldn’t think of anything real that would account for the depression nothing so people are grasping around trying to find some explanation and they naturally turn to this guy sitting in the central bank is vulnerable because this person is making regular decisions that impact the economy that’s the guy to blame but it doesn’t sound right to me no it’s we blame Fred Goodwin these in this country so Fred a little bit much other this big pension and I think you were first and then you know professor I’m a little disturbed by what I hear in the sense I hear you flipping backwards and forwards between admiring the economic profession and then putting it down somewhat and they don’t have an explanation for what has happened and I don’t think that explanation for what has happened lies with behavioral economics although I appreciate what the work you and your colleagues do you can go back and you can claim the Greenspan King were guilty of taking the eyes off the ball and allowing this thing to emerge you can go back even further and argue the globalization in its in its basic form allowed this to happen because we allowed Asia to go on with its growth and move into the savings surplus and I know that there’s a lot of debate about whether two savings of Gladwell by spending if too much spending but the end of the day this thing would this crisis would not have happened that we not had this enormous savings moving through reducing interest rates and the results of this reduction of interest rates and this expansion in in the US and elsewhere and this this desire for return by the banks where resent returned to form solo they were quote forced no one forcing but forced to go out and look for other avenues of a return so I I’m a little confused because I I think there is a role for behavioral economics I think the observation you make in your latest book about how after the crash the dot-com crash Enron and and we’ll we’ll welcome calls people to rethink the investments in equities and I said that they didn’t understand what they were buying because the accounting submits led them there there was nothing there was they were paper tigers and therefore there was an added incentive for people to move back to a bricks-and-mortar and this was an added factor but not the factor that caused people to move to bricks and mortar and I I take your point about Taylor that this is I read the book and I understand it and I’ve read his article understand and but there’s no question the manual policy was still accommodated it’s not debate about that there’s now debated the regulatory environment what was completely conducive to this the circus we are in now there’s no debate that the politicians not coerced but created the environment where they had to look after the subprime people and create sub problems so when you can’t ignore all that and I know you don’t yeah but then you you come back to this the stories and in a sense the story we have now of people around the world buying property because it was it was a no-brainer and was a piggy bank is a story also to do with the end of a hundred years war the this Great Moderation we had with inflation came down so economists can to a degree to a large degree explain what has happened so you’re asking whether or not he agrees with what you said no not like I’m not quite clear because I think that that we you know the there is an acknowledgment I’m in Kindle

burgers book many years ago about bubbles acknowledged that economists look at bubbles it was in his title Kindle but when you brought it up the he was my teacher by the way well you were lucky fortunate I thought he was a outcast on that view with hi I’m Laura but he read the book and so I said do you agree I mean that’s the evidence that economists would put forward of okay I think you’ve made the point here Bob yeah how well okay I did first of all the savings glut theory I know that it’s been proposed it’s obviously a factor it is not as if there was a world arise in this world saving rate because it was high in Asia and relatively low in the US and Canada and I guess in Europe so there was no saving glut for the world but there was a there was indeed a effort from Asian countries to invest abroad notably in the US and that that created pressure to invest the money in the US and that’s part of the story part of that though we talk about in our book the question is why were the Asians saving so much that you say that you’re describing that as an exhaustion is factor which I suppose it’s part of the story I don’t think it’s the whole story but this take that is given why were they saving so much and we talked about this we try to get into the minds of the Chinese people and maybe it’s difficult for us to do that but part of the reason I think that’s fundamental to this is that the Chinese have in mind a very powerful story that drives them which is the story of renewed Chinese greatness that China was the one of the earliest civilizations they invented the printed book they invented gunpowder they invented all sorts of things it’s a great country and it has been held back but it’s returning now to greatness and this 21st century is the Chinese century I may be over something this is a caricature of what they feel and they feel a duty to make this happen this is a time of transition and so this is not a time for conspicuous consumption some of them do it but I’m saying overall people have this sense of mission a Chinese culture is very aim devoted to our children people today really don’t feel like buying big inexpensive things at the expense of saving because they have this sense of mission and purpose you go to other countries advanced countries we don’t have this feeling we don’t and so I think a story I mean if I set it right exactly but it is a story driving high Asian saving and isn’t a different story driving the negative saving rates we’ve seen in the United States what’s the different story the story is right well caricature but it’s something about proving your worth by by showing that you you’ve made it and you really want to buy this big McMansion in the nice part of town because that’s your children will get ahead by living in that it establishes us as an important family and they’ll meet other children who are going places look good but that these stories that are ultimately behind the things that you talk about monetary policy being too accommodating that was driven by a story Alan Greenspan was accommodating and at the same time he was getting a lot of press for his wisdom in understanding that we don’t need to choke off inflation that that productivity is going through an amazing boom now tied to the internet and other advances and and he was thought to be a genius for recognizing this and again it was a story that was driving his think he ultimately that’s how we form our intuition about things well I think I think it’s just a sort of slight interjection and that they mean it’s fair to say though that the US has got a pretty high wealth to income ratio and the Chinese quite low and the Chinese have regulated their exchange rate which is help this a lot of factors yeah but the S or one-child policy of growth if that’s example rather than children and that’s sir they’ve got nobody to play their pensions other than us we don’t have any kids either so there you go okay over over here ah somebody at the top you get you kill my god running out of time yeah can you be quick we’ve got to get one question from the top of the

world it was a story where animal spirits are important and I think people accept that including probably most economists in their heart at least even out in their papers so but this this question that you raised why they don’t allow animal spirits into their models and you mentioned prospect theory is one paper the econometrics articles one paper which could have perhaps changed things but in really and my question is can you imagine you know let’s say the abstract of a paper in econometric area whatever that would somehow change this practice of economists so what could potentially change the academic practice of how people writes models and economics well I don’t know the best answer is this crisis will change the situation so I think that this is a crisis for he can economically –scent issue of Business Week had a cover story it was in big black letters what good are economists anyway and and I it’s it seems to me that there will be a response I find it very hard to predict what kind of research will go on maybe that’s not a good answer but I can’t chant I can’t lay out of course for the whole profession um I’m afraid that we now have a lot of questions unfortunately they’ve all come a little bit late for the forest of hands yeah Laura can I ask one short question from the top then we’ve got to go okay I’m getting instructions from the back okay somebody from up there I think the chap in the white shirt is all in the book well sorry thanks very much um a question on what you would say to policy makers now because I think you’re trying to tell us that animal spirits can be understood well by policy makers now asymmetrically in the sense that they’d probably be very skillful dealing with animal spirits in the last year and it from a negative basis so from tempering pessimism but how would you recommend policy makers say you’re having lunch with having King tomorrow on the tempering yuphoria i I think that Mervyn King and other policy makers are constrained by public opinion so maybe our book is trying to alter if we were so successful the public opinion so that they’re not constrained they seem to have the right instincts but they maybe are vulnerable to criticism and the kind of thing is that happened in the Great Depression they didn’t put on fiscal policy strong enough they did they did this deficit spending or they called it pump priming they didn’t do it strong enough and the national debt was starting to rise and people got worried about that and they since they didn’t do it soon enough and aggressively enough the public started demanding that they pull it out and so they stopped they pulled back on it on fiscal stimulus and they and they tightened interest rates because there was a fear of inflation believe it or not in the Great Depression and and so I I guess our message on immediate message is we like what we’ve seen happening in the UK in the u.s. we wish it would had more social support and we have people like John Taylor just dissing that’s it we have to try to establish some academic rationale I have to bring things to an end sadly it’s 2 o’clock now so I’d like to thank you the audience for your active involvement and of course the usual round of appreciation for very interesting talk yet again from Bob Shiller so thank you very much