Economist and Nobel Prize-winner Bob Shiller attends the 2012 World Economic Forum in Davos, Switzerland. Credit: World Economic Forum / Wikimedia Commons

Guest:

• Robert J. Shiller, professor of economics at Yale University and 2013 Nobel Prize winner 

Think you know what caused the economic meltdown? Nobel Prize-winning economist Bob Shiller says part of the problem was our reliance on mathematical models.

Though conventional wisdom holds that the crisis was spurred primarily by a boom in subprime mortgages – when banks lent money to people with bad credit or high debt levels – Shiller says that’s not the whole story.

“This has looked exploitative, and it was associated with the initial problems of the crisis,” he says. “On the other hand, it’s not entirely bad to develop subprime mortgages.” He stresses that, with more regulation and oversight, they could actually be a valuable type of loan. “It allows people who previously weren’t able to buy a house to buy a house.”

Instead, Shiller points to the financial sector’s overreliance on mathematical models, which underemphasized the potential for catastrophes. “I think there was a sort of complacency, and we weren’t worried in these once-in-a-half-century risks that you can’t quantify statistically, but are very real and worrisome.”

Has the impulse toward wild speculation been chastened by the 2008 meltdown? Far from it, Shiller says. “I think our society has gotten hooked on the idea of speculating on single-family homes,” he says. “They have expectations for wild price movements, which encourages speculation.”

Want to hear more from Bob Shiller – including his take on billionaire philanthropists like Bill Gates? Tune in to our full interview, above.