OPINION | Having been involved in the growing field of behavioural finance now for 30 years, and being married to a psychologist, I doubt markets are efficient and believe there is a bigger human element at play.
The field of neuroscience is just as revolutionary as the field of artificial intelligence because it’s changing our view of ourselves, and so we don’t fit the theoretical model of finance.
In order to make civil society work, it’s like an engine. It has to be tuned and managed right. Throughout history there are people with a civil society mode of thinking who propose innovations, like those in Amsterdam who set up the first public stock market in 1602, or those New Yorkers who were the first to really establish securities law in 1811.
An invention coming out of civil society, which hasn’t happened yet on any scale, is GDP-linked debt. That is something I’ve been advocating for; now others are advocating it too as a risk-sharing device between countries, investors and governments.
Ethical investing is another recent adventure and the benefit corporation, something between a company and nonprofit, is an invention of the past decade.
These innovations don’t seem to happen by the profit motive alone. They happen when there is someone in civil society advocating them. Usually with the help of lobbyists.
I think that this is a particularly risky time in history. Our risk of inequality is great because people’s sources of incomes are rapidly being challenged.
At the same time, I think we’re more understanding of the role of psychology and the functioning of our institutions. We have to think through how financial institutions can be part of civil society.
We have a celebrity society, where people are admired who are not really doing much. We’re living in a social media age where certain things go viral.
So, how to engineer around that? I mentioned the benefit corporation, which is a new thing in the United States. A benefit corporation has in its charter a profit motive, but also some other stated motive like the environment or alleviating poverty or creating opportunity.
How benefit corporations weigh conflicting objectives is not defined in the law, you just have to pay attention to both of them. But the idea that your company has a moral purpose may change their whole environment.
Making money might be described as a moral purpose but it’s kind of tainted in some people’s eyes. There should be some other moral purpose.
To the extent that their clients allow them to, asset managers and asset owners should incorporate environment, social and governance risks. I would. I think in the long run, the question is, “how big a hit does it take on your profits?”
You might not want to invest in certain companies that are morally challenged. And I can live with that. I’d expect maybe a somewhat lower return. On the other hand, I’m not even sure it will have a lower return. Because it puts you in a different space and it puts you into a different mode of thought. You attract a different kind of people in your enterprise.
I’m working on an address I have to give in January as president of the American Economic Association. The tentative title for it is Narrative Economics. And what I’m talking about is how social science economics, and also finance, differs from other social sciences in that we almost never use the word ‘narrative’.
Journalists are the people who use it the most. You read the newspaper and they’ll say, ‘the narrative from Donald Trump is this’, or ‘the narrative about Hilary Clinton is this’. But economists don’t do that.
The human mind is very impressed by stories and they tend to be human-interest stories. And these stories inform people’s feelings and emotions.
If we’re trying to understand business fluctuations, we have to try to understand their animal spirits. Why sometimes they’re excited and willing to work very hard, and other times they’re despairing, trying to hoard cash and not do anything. What determines those things? It is, I think, a story. What I’m interested in looking at is the stories behind big economic events.
Professor Robert Shiller won the 2013 Nobel Prize in Economics, alongside Eugene Fama and Lars Pete Hansen of the University of Chicago. He is the author of Irrational Exuberance. This column is based on an extract of a speech delivered to the Conexus Financial Fiduciary Investors Symposium at the Yale School of Management, October 23 – 25, 2016. It first appeared in the December print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.