Shiller's piece is a masterwork of phone-it-in non sequiturs.
He start with 3 paragraphs about a guy who wrote a book "predicting" the second world war. Then comes a short paragraph that allegedly explains social psychology:
Rather than depending exclusively on quantitative analysis, this method relies on a “theory of mind” — defined by cognitive scientists as humans’ innate ability, evolved over millions of years, to judge others’ changing thinking, their understandings, their intentions, their pretenses. It is a judgment faculty, quite different from our quantitative faculties.
Got that? Good.
Then we are treated to 8 paragraphs about how Larry Summers wrote a paper in 1989 that predicted our current financial calamities.
Then comes the all important link up:
How did he write a story 20 years ago that sounds so much like what we are experiencing now? It seems that he was looking at factors of human psychology, much as Mr. Steel did.
LOL to the Z, people. Well played Bob. Except that nothing Shiller says in 8 paragraphs about Summers' paper mentions psychology. I guess Bob did notice this problem because he provides the link himself in the next paragraph:
Ultimately, the record bubbles in the stock market after 1994 and the housing market after 2000 were responsible for the crisis we are in now. And these bubbles were in turn driven by a view of the world born of complacency about crises, driven by views about the real source of economic wealth, the efficiency of markets and the importance of speculation in our lives. It was these mental processes that pushed the economy beyond its limits, and that had to be understood to see the reasons for the crisis.
Then after proving that social (or is it human?) psychology is an awesome predictive tool comes the obligatory rapid backpedaling away from your conclusion:
Of course, forecasts based on a theory of mind are subject to egregious error. They cannot accurately predict the future. But the uncomfortable truth has to be that such forecasts need to be respected alongside econometric forecasts, which cannot reliably predict the future, either.
And the take home lesson of this piece?
The greatest risk is that appropriate stimulus will be derailed by doubters who still do not appreciate the true condition of our economy.
Wow! Where did THAT come from? Kudos, sir.