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.

To me, it's great.

I like to be able to keep moving ahead.

I wonder what my 1985 course looked like?

Unfortunately, they didn't do Open Yale and I can't go back

and look at it.

But I think I've gotten more philosophical and maybe more

real world oriented as time has gone by.

But the excitement I have is when I go up --

I give a lot of public talks, and it's often on Wall Street.

And when I do one on Wall Street, I like to ask people

for a show of hands.

How many of you were in my Economics 252 class?

And I typically get one or two at least who raise their hand.

So, that's a source of pride to me, that I was involved in

the beginning of their careers.

And I hope I instilled some kind of moral sense

to what they do.

But I should say I don't think that most of you will go into

finance, because I think that most of

you have other purposes.

What does it mean to go into finance?

Well, it sounds like that means you would be listed as

someone who is very focused on finance.

But I think everyone should know finance.

This should be a required course, actually, at Yale

College, because finance is so fundamental to what we do and

the structure of our lives that I don't see how you can

avoid doing finance if you want to do

something big and important.

Maybe you don't want to do that either, so you might want

to become a hermit and then you don't need finance.

But to me I like to think that many of you have a sense of

purpose in life.

I should say --

that sounded funny, didn't it?

But what I'm saying is your purpose is not to make money.

And this is one thing about finance that bothers me, is

that people think that it's a field for money-grubbing

people who just want to go out and make money.

And I don't think so.

I think it's a technology for doing things, and you don't

want to be mystified by it.

When someone talks some financial jargon, you don't

want to say, I don't have a clue what that's about,

because what that's about is how we make things happen.

And so, I hope that you have other purposes in life besides

finance, even those of you who go into finance.

But the question is whether this is a vocational course.

Here at Yale College there has been a long tradition that we

are not a vocational school --

I suppose you know that --

that Yale is a liberal arts [college]

--

we teach you the arts and sciences.

I actually went to look at the charter and the act of the

Connecticut government in 1701 that founded this university.

This university was initially mostly a training ground for

the ministry.

But I actually read in the Acts of the Governor and

Company of the Colony of Connecticut: "Yale College is

founded for the educating and instructing of youth in good

literature, arts, and sciences." I think that is the

motive here for this university.

And so, I think it is in some level vocational, but it's not

vulgar vocational.

I want you to think about what we're doing and how it fits

into what you do for your life.

So, I think of finance as a kind of engineering in a way.

But it's an engineering that works not with what we call a

technical apparatus, but with people.