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  • PROFESSOR ROBERT SHILLER: OK.

  • Welcome to Economics 252.

  • This is Financial Markets, and I'm Robert Shiller.

  • This is a course for undergraduates.

  • It doesn't presume any prerequisites except the basic

  • Intro Econ [Introductory Economics]

  • prerequisite.

  • It's about --

  • well, the title of the course is Financial Markets.

  • By putting "markets" in the title of the course, I'm

  • trying to indicate that it's down to earth, it's about the

  • real world, and, well, to me it connotes that this is about

  • what we do with our lives.

  • It's about our society.

  • So, you might imagine it's a course about trading since it

  • says "markets," but it's more general than that.

  • Finance, I believe, is, as it says in the course

  • description, a pillar of civilized society.

  • It's the structure through which we do things, at least

  • on a large scale of things.

  • It's about allocating resources through space and

  • time, our limited resources that we have in our world.

  • It's about incentivizing people to

  • do productive things.

  • It's about sponsoring ventures that bring together a lot of

  • people and making sure that people are fairly treated,

  • that they contribute constructively and that they

  • get a return for doing that.

  • And it's about managing risks, that anything that we do in

  • life is uncertain.

  • Anything big or important that we do is uncertain.

  • And to me that's what financial markets is about.

  • To me, this is a course that will have a philosophical

  • underpinning, but at the same time will be

  • very focused on details.

  • I'm fascinated by the details about how things work.

  • It can be boring, and I hope I'm not boring in this course,

  • but it's in the details that things happen.

  • So, I want to talk about particular institutions, and

  • I'm interpreting finance broadly in this course.

  • I want to talk about banking, insurance.

  • Sometimes people don't include insurance as part of finance,

  • but I don't see why not, so we'll include it.

  • It's about securities, about futures markets, about

  • derivatives markets, and it's going to be

  • about financial crises.

  • And it's also about the future.

  • I like to try to think about the future, although

  • it's hard to do so.

  • Where are we going?

  • This course will have a U.S. bias since we live in the

  • United States.

  • I know the U.S. better than any other country, but at the

  • same time, I recognize that many of you, or even most of

  • you, will work outside the U.S., and so it's important

  • that we have a world perspective, which is

  • something I will try my utmost to incorporate in this course.

  • The world perspective also particularly matters since we

  • have other viewers for this course besides those

  • people in this room.

  • This course is one of a couple dozen courses that Yale

  • University is offering free to the world as

  • part of Open Yale.

  • And that means there's a cameraman back

  • there if you've noticed.

  • That's Dan Cody filming the course.

  • And it will be eventually posted on the internet and it

  • will be available through Open Yale, and then by

  • proliferation, you'll find it on many

  • other websites as well.

  • This is the second time this course has been

  • filmed for Open Yale.

  • The first time was in 2008, three years ago.

  • And I'm very pleased to report that I have a lot of people in

  • every imaginable country who have watched these lectures.

  • And I get emails from them, so I know that they're out there.

  • But I thought that this course needs updating, probably more

  • than any course on Open Yale.

  • You know, a course in physics only has to be updated for the

  • last three years of research in physics, and it's probably

  • not a big thing for an undergraduate course.

  • But finance really has to be updated, I think, because it's

  • going through such turmoil and change right now.

  • We've had the worst financial crisis since the Great

  • Depression, and it's been a worldwide crisis.

  • And governments around the world are working on changing

  • our financial institutions.

  • We have organizations of governments, notably the G-20,

  • which is very involved in finance.

  • It's one of the top items on their agenda for international

  • cooperation, it's changing our financial markets.

  • So, I think that that's another reason why I want to

  • try to keep as international a focus as I'm good at doing in

  • this course.

  • But I hope that those of you who are in this room are not

  • disturbed by the camera and feel you can ask questions.

  • You don't have to be on camera.

  • I think I'm just being filmed.

  • So, that's where we are.

  • Now, I wanted to put this in a little bit broader context.

  • The other major finance course that we have here at Yale is

  • Economics 251 and it's taught by Professor John Geanakoplos,

  • who is a mathematical economist and also a

  • practitioner.

  • He's research director for Ellington Capital.

  • So, he's somewhat like me in that he's interested both in

  • theory and practice.

  • But his course is definitely more theoretical and

  • mathematical than mine.

  • His is entitled "Financial Theory." And I can read some

  • of the topics that --

  • and his course also will appear on Open Yale shortly.

  • You can take the whole course.

  • But I don't know -- it's not up at this moment.

  • It will be up in a matter of months.

  • So, I encourage you, if you want to, to take

  • Open Yale Econ 251.

  • But the things that he talks about in that course, if you

  • read the topics in this course you'll see that they're more

  • mathematical and technical than mine.

  • He talks about ''Utilities, Endowments and How It Leads to

  • Equilibrium,'' ''Assets and Time,'' ''The Mathematical

  • Theory of Bond Pricing,'' ''Dynamic Present Value,''

  • ''Social Security and the Overlapping Generations

  • Model,'' ''Uncertainty and Hedging.''

  • I'm quoting his titles.

  • ''State Pricing.'' That's kind of an abstract theory.

  • We talk about the price of a state of nature.

  • I won't explain that.

  • He talks in some length about the ''Theory of Risk'' and the

  • ''Capital Asset Pricing Model,'' and about the

  • ''Leverage Cycle,'' which is relevant to our crises.

  • So, I recommend you take Econ 251, but I don't

  • expect you to take it.

  • This course is self-contained.

  • And I'm going to keep mathematics to the minimum in

  • these lectures.

  • But the idea here is that we can't avoid it completely.

  • I personally am mathematically inclined, too, but I'm

  • understanding that we have divided our subject matter.

  • So, John Geanakoplos is doing the math and the theory, and

  • I'm doing the real world.

  • It's not a complete division like that, but it's

  • something like that.

  • So, I'm going to stay to that.

  • I'm going to talk more about institutions and history than

  • about mathematics.

  • Since I know that most of you or many of you will not take

  • Economics 251, what we are doing is, I'll give a little

  • indication of the mathematical principles, more intuitive,

  • and we have review sessions with our teaching assistants.

  • We plan to have six of those.

  • And those will be on a Friday in this room.

  • And they won't be on Open Yale.

  • Those will cover the theory, and it will be like a short

  • form of Geanakoplos' course.

  • And then we'll have problem sets.

  • And there will be six problems sets, one for

  • each of those sessions.

  • So, there will be some math in this course.

  • I wanted to talk about the purpose of this course, to

  • clarify it.

  • One thing is, what do I imagine you're going to do

  • with this course?

  • Well, first of all, I pride myself that I think I teach --

  • if I might boast for a minute --

  • I think I teach one of the most useful

  • courses in Yale College.

  • At least that's the way I think about it.

  • Because this course really prepares you to do

  • things in the world.

  • By the way, I've been teaching this course now for 25 years.

  • I first taught it in the fall of 1985.

  • Now I don't know if that's depressing or not.