Robert Shiller on the housing boom/bust

Robert Shiller considers causes of the recent housing boom, and possible bust.

In this paper, I will consider, from a broad perspective, the possible causes of this boom, with particular attention to speculative thinking among investors. I will argue that a significant factor in this boom was a widespread perception that houses are a great investment, and the boom psychology that helped spread such thinking. In arguing this, I will make some reliance on the emerging field of behavioral economics. This field has appeared in the last two decades as a reaction against the strong prejudice in the academic profession against those who interpret price behavior as having a psychological component. The profession had come to regard all markets as efficient, and to reject those who say otherwise. Now, however, behavioral economics is increasingly recognized, and has developed a substantial accumulation of literature that we can use to give new concreteness to ideas about psychology in economics.