Yale School of Management (SOM) has long been at the forefront of behavioral finance research, thanks in large part to the groundbreaking work of renowned economist Robert Shiller. As the school prepares to celebrate its 50th anniversary in 2026, this article explores Shiller's pivotal role in establishing Yale SOM as a global leader in this dynamic field of study.

Unlocking the Secrets of Market Volatility and Speculative Bubbles

Challenging the Efficient Market Hypothesis

Robert Shiller's research has fundamentally challenged the efficient market hypothesis, which holds that securities prices accurately reflect all available information. Shiller's work has shown that stock prices are often too volatile to be explained solely by rational forecasting of future dividends. Instead, he argues, irrational thinking, such as bias and emotion, play a significant role in driving market fluctuations.Shiller's pioneering research has helped to explain the phenomenon of speculative bubbles, where asset prices deviate significantly from their intrinsic value. His analysis of stock prices over the past century revealed that they were often too volatile to be accounted for by rational investor behavior alone. This groundbreaking insight laid the foundation for the field of behavioral finance, which explores how psychological factors influence investment decisions and market dynamics.

Predicting and Analyzing Bubbles

Shiller's work has enabled him to accurately predict the collapse of major economic bubbles, such as the dot-com bubble and the U.S. subprime housing bubble. His ability to identify and analyze these speculative bubbles has earned him widespread recognition and has had a profound impact on the field of finance.In his popular books, such as "Irrational Exuberance" and "Animal Spirits," Shiller has brought his insights to a broader audience, exploring the role of government in restoring confidence in the economy and the impact of mass misinformation and herd instinct on market volatility. These works have further cemented Shiller's reputation as a leading authority on the behavioral aspects of finance and economics.

Fostering a Culture of Behavioral Finance Research

Shiller's influence at Yale SOM extends far beyond his own research. He has been instrumental in attracting faculty members with a keen interest in behavioral finance, including Kelly Shue, James Choi, and Nicholas Barberis, who joined the school specifically to continue the tradition of Shiller's groundbreaking work.Under Shiller's guidance, the International Center for Finance at Yale SOM has been able to engage in more behavioral finance research initiatives, expand its outreach, and establish the Yale Summer School in Behavioral Finance. This intensive program, launched in 2009, has now hosted close to 400 PhD students from around the world, many of whom have gone on to become prominent researchers in their own right.

Shaping the Future of Behavioral Finance

Even after his retirement in 2022, Shiller's legacy continues to shape the research and teaching at Yale SOM. Inspired by his example, the school's faculty and graduate students have been producing remarkable behavioral finance research that has solidified Yale's position as a global leader in this dynamic field.As the school prepares to celebrate its 50th anniversary, the impact of Shiller's work and the thriving behavioral finance community he helped cultivate at Yale SOM will undoubtedly be a central focus of the celebrations. The Historian's Notebook blog series promises to offer a unique and insightful look into the school's rich history and its enduring influence on the world of finance and economics.