'Public Thinking is Inscrutable'

Robert Shiller:

Yes, We’re Confident, but Who Knows Why, by Robert Shiller: The recovery in housing, the stock market and the overall economy has finally gained sustainable momentum — or so it is said. ... These vital signs make many people believe that we’ve turned the corner on the economy... Hope is a wonderful thing. ...

For years, I’ve been troubled by the problem of understanding the social psychology and economic impact of confidence. There hasn’t been much research into the emotional factors and the shifts in worldview that drive major turning points. The much-quoted consumer sentiment and confidence indexes don’t yet seem able to offer insight into what’s behind the changes they quantify. It also isn’t clear which factors of confidence drive the separate parts of the economy. ...

Clearly, confidence can change awfully fast, and people can suddenly start worrying about a stock market crash, just as they did after 2007. ...

For example, why is a record high in the United States stock market a reason for optimism? Nothing is remarkable about reaching a market record... The important fact is that we haven’t set a nominal stock-market record in six years. And we haven’t set one in 13 years if we use the inflation-corrected S.& P. Composite total-return index. That this index may be about to set a record means only that we haven’t made any real money in the stock market in 13 years, which hardly seems a reason for confidence.

But public thinking is inscrutable. We can keep trying to understand it, but we’ll be puzzled again the next time the markets or the economy make major moves.