Financial Markets: Yale Open Course - Introduction and What this Course Will Do for You and Your Purposes

 

Here is a summary of the provided transcript of Professor Robert Shiller's first lecture for "Economics 252: Financial Markets."

Course Overview and Philosophy

Professor Robert Shiller introduces his undergraduate course on financial markets. He emphasizes that the course is "down to earth" and focused on the real world. He views finance not as a tool for mere profit, but as a fundamental "pillar of civilized society" that allocates resources, incentivizes productivity, and manages risk. The course aims to be philosophical yet detailed, covering institutions like banking, insurance, and securities markets, all within a global context. This iteration of the course is particularly timely due to the recent financial crisis.

Course Structure and Approach

• Updated Content: The course has been significantly updated to reflect the turmoil and changes following the worst financial crisis since the Great Depression, incorporating a global perspective (e.g., the G-20).

• Comparison to Econ 251: Shiller distinguishes his course from the more theoretical and mathematical "Financial Theory" (Econ 251) taught by Professor John Geanakoplos. This course focuses on intuition, institutions, and history, with mathematical concepts covered in review sessions.

• Practical Utility: Shiller believes this is one of the most useful courses at Yale, preparing students for the real world by demystifying the language and mechanisms of finance, which he considers essential for anyone wanting to do "something big and important."

• Materials: The main textbook is by Fabozzi, Modigliani, and Jones. Students will also have access to draft chapters of Shiller's new book, "Finance and the Good Society."

Finance as a Noble Profession

A central theme of the lecture is countering the negative perception of finance as a field for "money-grubbing" people. Shiller argues it is a noble profession and a form of engineering that works with people to make things happen.

• Career Prospects: He presents data showing a high number of jobs in finance (analysts, managers, advisors) compared to fields like economics or astronomy, highlighting its relevance for students' careers.

• Wealth and Purpose: He discusses the Forbes 400, noting that the richest people are not typically athletes or movie stars, but businesspeople who build organizations. He then poses a crucial question: what is the purpose of amassing great wealth?

• The Gospel of Wealth: Shiller introduces Andrew Carnegie's essay, "The Gospel of Wealth," which argues that the wealthy have a moral obligation to give away their fortunes to benefit humankind. This idea of using financial success for a greater good is a recurring theme.

Practical Course Elements

• Guest Speakers: Shiller plans to invite practitioners who exemplify a positive and moral approach to finance:

  • David Swensen: Yale's Chief Investment Officer, who grew the endowment significantly while forgoing much larger Wall Street salaries.

  • Maurice "Hank" Greenberg: Founder of AIG, a major philanthropist and business figure.

  • Laura Cha: A key financial regulator from Hong Kong, providing a government perspective.

• Teaching Assistants: The TAs come from diverse backgrounds and have research interests in areas like behavioral finance and mutual fund practices, which will be integrated into the course.

Outline of Future Lectures

Shiller provides a brief roadmap for the course, covering 20 lectures. Key topics include:

1. Risk and Financial Crises: The core concept of diversifying independent risks and how the failure of this assumption led to the 2008 crisis, drawing parallels to the Great Depression.

2. Financial Technology and Invention: Viewing finance as an evolving technology with complex instruments.

3. Insurance: Its life-saving role, illustrated by comparing the impact of earthquakes in Haiti vs. San Francisco.

4. Efficient Markets vs. Behavioral Finance: The debate over whether markets are perfectly efficient or influenced by psychology.

5. Debt, Stock, and Real Estate Markets: The fundamental functions of these markets in enabling homeownership, business creation, and their role in the financial crisis (especially the housing bubble).

6. Banking and Regulation: Topics like the money multiplier and new international regulations (Basel III) to prevent future crises.

7. Derivatives (Forwards, Futures, Options): Explaining these complex contracts.

8. Institutional Finance: Covering investment banking, professional money management, exchanges, and public/nonprofit finance.

Final Message

Shiller concludes by reiterating that the ultimate purpose of the course is not about making money, but about finding one's purpose through finance. He encourages students to learn the details so they have the power to make things happen and, like Andrew Carnegie suggested, to use that power for the benefit of society.