The 9 Things People Don’t Understand About Money According to a Nobel Laureate

Toni Koraza

After eight weeks of following Robert Schiller’s class, it’s evident that people don’t understand finance

Wall Street is not a bunch of lunatics throwing dwarfs into dart targets. Corporate toilet prostitutes are not on speed dial. Investors are not lizards either, contrary to popular belief. Hostesses don’t serve Cocaine at the entrance, and everybody is not filthy rich sipping on martinis in the privacy of their yachts.

People love to focus on bizarre and unique stories of sociopaths that fail spectacularly. In reality, financial sectors are effective in weeding out destructive individuals. Jordan Belford and Bernie Madoff both ended behind bars, together with countless other financial criminals. Madoff will probably die in prison, serving a 150-year sentence.

I’m just about to finish Robert Schiller’s course at the University of Yale. A Sterling Professor, best-selling author, and Nobel prize winner has an idea about what people don’t understand about the modern world of finance. The industry has its shortcomings, but it’s not what you might think.

Jordan Belfords and Bernie Madoffs

The outrageous events are a story, and that’s why you hear about the most extravagant individuals. A classic day in a financial officer is not a bungee-jumping rollercoaster. The finance reality is usually not entertaining. Investors speculate about adjusting the price of stuff according to the available information. Yawn.

The regular Wall Street chap is probably an overweight accountant, that’s slightly socially anxious. Think Michael Burry from The Big Short when you think of professional finance wizards.

You hear about criminals more often, and it creates a distorted perception. Wall Street looks like a filthy gambler’s paradise where privileged men plays with your money. Truth is different, according to Robert Schiller. The industry might be attractive to sociopaths and criminals, but they eventually end up in prison or lose their licenses.

Effective markets

In the ideal world, the price should effectively adjust to global events. But we don’t live in the perfect world, and this is what people often don’t understand about money, banks, and all that Wall Street magic.

People run the financial system, and people make mistakes. Most financial misfortunes comes from incompetence and human error.

Investors don’t trade all the time

Investors don’t execute one trade after another. The game is not to sell and buy the most you can. Warren Buffett spends most of his time reading financial reports and books. He’s famous for digesting over 500 pages every day.

Most investors act in the same fashion. The tactics and strategies differ, but investors don’t trade around the clock. Real traders research, and execute when they’re confident the markets did something wrong. Taking a position against the price fallacy is a noble, brave, and sometimes a lucrative opportunity.

The regulatory agencies are insanely effective

You’d be surprised at the reliability of financial agencies. But hollow parts in the system exist. You can point at Credit rating agencies before 2008, and the corrupt practice of issuing subprime loans.

But if you have insider information — something that will suggest a massive shift in the market, but it’s not public yet like finalized mergers and acquisitions — you better not trade on it, according to Schiller. Martha Steward spent five months behind bars for executing an illegal trade.

Nobody wants to cheat

Schiller believes people are not reluctant to risk more than they have to already. Financial workers would appreciate having fair working conditions. Most investors dislike loopholes that might land them in jail or taint their reputation.

Regulatory flaws might pressure investors into exploiting immoral trade practices. If the competition acts first, you might end up being a dead fish in fast waters. Investors don’t prefer to work in a corrupt environment. Enron is a prime example of a failed company that tried to bank on loopholes.

Investing is not gambling

Casinos and stock markets are not the same, according to Schiller. Speculators and gamblers differ in more than one way. First, Casinos are entertainment, while stock markets are real jobs where people use their hard-earned knowledge to fuel the idea of financial markets, funding, and developing companies.

Investors are trying to solve real-life problems by collectively adjusting the price and funding of prominent companies. Gamblers are having fun.

We usually know about a financial bubble, but don’t know when will it burst

Why we’re going gaga over real estate,” was on the cover of Times magazine on June 13, 2005. Forbes and other mass media ran the story about the housing market bubble the same year.

Investors and regulatory agencies were suspicious, but a series of criminal activities, missteps, and human condition drove us into the Great Recession two years later. We know when stuff is overvalued, but we don’t really know when will the market collapse, according to Schiller.

Diversify and invest

Robert Schiller advises against buying a house. Real estate is an expensive and unpractical investment. High mortgages, tax, and swinging markets might leave you bankrupt.

The Nobel Laureate talks about diversifying your investments. Don’t put all eggs in one basket. He thinks that a diversified stock portfolio is a better investment than a house.

Money is an idea we all entertain

Humanity agrees on only one god: Money. You can be a Zionist and trade something with your Muslim neighbors even though you’d hardly ever socialize. You’ll use money to finalize the trade.

The collective belief makes the world go round. You can argue about the good and bad, but money is one of the most developed social beliefs.

The Takeaway

Rober Schiller — a Sterling Professor at Yale, best-selling author, and a Nobel prize winner — believes that the financial industry is misunderstood in the eyes of the public.

  • Finance is not a synonym for wild orgies and gambling.
  • Markets strive to be effective, but often fail due to human error
  • Financial Wizards don’t trade around the clock
  • Financial policing is more effective than you might realize
  • Nobody is crazy about exploiting loopholes
  • Wall Street is not a casino
  • Bubbles form naturally, and we often know about them
  • Real Estate is not the best investment
  • Money is a fictive idea

Take the regular conspiracies with a grain of salt. Financial workers are usually nothing more spectacular than lawyers or doctors.

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