WEBVTT

00:00.640 --> 00:02.080
PROFESSOR ROBERT SHILLER: OK.

00:02.080 --> 00:05.100
Welcome to Economics 252.

00:05.100 --> 00:08.120
This is Financial Markets,
and I'm Robert Shiller.

00:10.790 --> 00:14.840
This is a course for
undergraduates.

00:14.840 --> 00:19.830
It doesn't presume any
prerequisites except the basic

00:19.830 --> 00:20.840
Intro Econ
[Introductory Economics]

00:20.840 --> 00:22.660
prerequisite.

00:22.660 --> 00:24.720
It's about --

00:24.720 --> 00:28.650
well, the title of the course
is Financial Markets.

00:31.540 --> 00:34.090
By putting "markets" in the
title of the course, I'm

00:34.090 --> 00:37.920
trying to indicate that it's
down to earth, it's about the

00:37.920 --> 00:45.520
real world, and, well, to me it
connotes that this is about

00:45.520 --> 00:47.930
what we do with our lives.

00:47.930 --> 00:49.310
It's about our society.

00:49.310 --> 00:54.730
So, you might imagine it's a
course about trading since it

00:54.730 --> 00:59.710
says "markets," but it's
more general than that.

00:59.710 --> 01:03.050
Finance, I believe, is, as
it says in the course

01:03.050 --> 01:06.610
description, a pillar of
civilized society.

01:06.610 --> 01:10.410
It's the structure through which
we do things, at least

01:10.410 --> 01:13.660
on a large scale of things.

01:13.660 --> 01:16.700
It's about allocating resources
through space and

01:16.700 --> 01:21.630
time, our limited resources
that we have in our world.

01:21.630 --> 01:24.250
It's about incentivizing
people to

01:24.250 --> 01:27.970
do productive things.

01:27.970 --> 01:31.690
It's about sponsoring ventures
that bring together a lot of

01:31.690 --> 01:35.610
people and making sure that
people are fairly treated,

01:35.610 --> 01:38.680
that they contribute
constructively and that they

01:38.680 --> 01:41.400
get a return for doing that.

01:41.400 --> 01:44.640
And it's about managing risks,
that anything that we do in

01:44.640 --> 01:46.270
life is uncertain.

01:46.270 --> 01:49.530
Anything big or important
that we do is uncertain.

01:49.530 --> 01:54.770
And to me that's what financial
markets is about.

02:00.240 --> 02:05.620
To me, this is a course that
will have a philosophical

02:05.620 --> 02:10.180
underpinning, but at the
same time will be

02:10.180 --> 02:11.970
very focused on details.

02:15.930 --> 02:19.950
I'm fascinated by the details
about how things work.

02:19.950 --> 02:23.840
It can be boring, and I hope I'm
not boring in this course,

02:23.840 --> 02:29.480
but it's in the details
that things happen.

02:29.480 --> 02:32.500
So, I want to talk about
particular institutions, and

02:32.500 --> 02:35.820
I'm interpreting finance
broadly in this course.

02:35.820 --> 02:39.000
I want to talk about
banking, insurance.

02:39.000 --> 02:42.300
Sometimes people don't include
insurance as part of finance,

02:42.300 --> 02:46.440
but I don't see why not,
so we'll include it.

02:46.440 --> 02:49.800
It's about securities, about
futures markets, about

02:49.800 --> 02:52.190
derivatives markets, and
it's going to be

02:52.190 --> 02:54.990
about financial crises.

02:54.990 --> 02:57.200
And it's also about
the future.

02:57.200 --> 02:59.240
I like to try to think about
the future, although

02:59.240 --> 03:01.830
it's hard to do so.

03:01.830 --> 03:03.800
Where are we going?

03:03.800 --> 03:07.520
This course will have a U.S.
bias since we live in the

03:07.520 --> 03:09.610
United States.

03:09.610 --> 03:12.950
I know the U.S. better than any
other country, but at the

03:12.950 --> 03:18.160
same time, I recognize that many
of you, or even most of

03:18.160 --> 03:24.510
you, will work outside the U.S.,
and so it's important

03:24.510 --> 03:27.100
that we have a world
perspective, which is

03:27.100 --> 03:32.470
something I will try my utmost
to incorporate in this course.

03:32.470 --> 03:36.140
The world perspective also
particularly matters since we

03:36.140 --> 03:39.200
have other viewers for this
course besides those

03:39.200 --> 03:41.460
people in this room.

03:41.460 --> 03:47.230
This course is one of a couple
dozen courses that Yale

03:47.230 --> 03:51.470
University is offering
free to the world as

03:51.470 --> 03:54.860
part of Open Yale.

03:54.860 --> 03:57.940
And that means there's
a cameraman back

03:57.940 --> 03:59.690
there if you've noticed.

03:59.690 --> 04:03.820
That's Dan Cody filming
the course.

04:03.820 --> 04:08.790
And it will be eventually posted
on the internet and it

04:08.790 --> 04:12.440
will be available through
Open Yale, and then by

04:12.440 --> 04:14.830
proliferation, you'll
find it on many

04:14.830 --> 04:18.730
other websites as well.

04:18.730 --> 04:21.390
This is the second time
this course has been

04:21.390 --> 04:22.740
filmed for Open Yale.

04:22.735 --> 04:28.555
The first time was in 2008,
three years ago.

04:28.560 --> 04:35.020
And I'm very pleased to report
that I have a lot of people in

04:35.020 --> 04:40.150
every imaginable country who
have watched these lectures.

04:40.150 --> 04:44.440
And I get emails from them, so I
know that they're out there.

04:48.230 --> 04:51.240
But I thought that this course
needs updating, probably more

04:51.240 --> 04:53.820
than any course on Open Yale.

04:53.820 --> 04:57.170
You know, a course in physics
only has to be updated for the

04:57.170 --> 04:59.990
last three years of research in
physics, and it's probably

04:59.990 --> 05:03.500
not a big thing for an
undergraduate course.

05:03.495 --> 05:09.065
But finance really has to be
updated, I think, because it's

05:09.070 --> 05:12.260
going through such turmoil
and change right now.

05:12.260 --> 05:15.620
We've had the worst financial
crisis since the Great

05:15.620 --> 05:19.150
Depression, and it's been
a worldwide crisis.

05:19.150 --> 05:23.100
And governments around the world
are working on changing

05:23.100 --> 05:25.760
our financial institutions.

05:25.760 --> 05:30.320
We have organizations of
governments, notably the G-20,

05:30.320 --> 05:32.080
which is very involved
in finance.

05:32.080 --> 05:35.500
It's one of the top items on
their agenda for international

05:35.500 --> 05:39.290
cooperation, it's changing
our financial markets.

05:39.290 --> 05:42.180
So, I think that that's another
reason why I want to

05:42.180 --> 05:49.280
try to keep as international a
focus as I'm good at doing in

05:49.280 --> 05:51.590
this course.

05:51.590 --> 05:55.300
But I hope that those of you who
are in this room are not

05:55.300 --> 06:02.470
disturbed by the camera and feel
you can ask questions.

06:02.470 --> 06:04.510
You don't have to
be on camera.

06:04.510 --> 06:05.840
I think I'm just being filmed.

06:09.350 --> 06:13.270
So, that's where we are.

06:13.270 --> 06:18.220
Now, I wanted to put this in a
little bit broader context.

06:18.220 --> 06:23.280
The other major finance course
that we have here at Yale is

06:23.280 --> 06:30.010
Economics 251 and it's taught by
Professor John Geanakoplos,

06:30.010 --> 06:33.080
who is a mathematical
economist and also a

06:33.080 --> 06:34.330
practitioner.

06:38.520 --> 06:42.130
He's research director for
Ellington Capital.

06:42.130 --> 06:45.070
So, he's somewhat like me in
that he's interested both in

06:45.070 --> 06:48.340
theory and practice.

06:48.340 --> 06:55.650
But his course is definitely
more theoretical and

06:55.650 --> 06:57.510
mathematical than mine.

06:57.510 --> 07:02.240
His is entitled "Financial
Theory." And I can read some

07:02.240 --> 07:03.790
of the topics that --

07:03.790 --> 07:08.640
and his course also will appear
on Open Yale shortly.

07:08.640 --> 07:09.670
You can take the whole course.

07:09.670 --> 07:12.410
But I don't know -- it's
not up at this moment.

07:12.410 --> 07:15.640
It will be up in a
matter of months.

07:15.640 --> 07:18.100
So, I encourage you, if
you want to, to take

07:18.100 --> 07:21.390
Open Yale Econ 251.

07:21.390 --> 07:24.100
But the things that he talks
about in that course, if you

07:24.100 --> 07:27.080
read the topics in this course
you'll see that they're more

07:27.080 --> 07:29.560
mathematical and technical
than mine.

07:29.560 --> 07:33.330
He talks about ''Utilities,
Endowments and How It Leads to

07:33.330 --> 07:37.480
Equilibrium,'' ''Assets and
Time,'' ''The Mathematical

07:37.480 --> 07:41.680
Theory of Bond Pricing,''
''Dynamic Present Value,''

07:41.680 --> 07:44.650
''Social Security and the
Overlapping Generations

07:44.650 --> 07:48.430
Model,'' ''Uncertainty
and Hedging.''

07:48.430 --> 07:49.980
I'm quoting his titles.

07:49.980 --> 07:52.920
''State Pricing.'' That's kind
of an abstract theory.

07:52.920 --> 07:55.320
We talk about the price
of a state of nature.

07:55.320 --> 07:57.180
I won't explain that.

07:57.180 --> 08:01.190
He talks in some length about
the ''Theory of Risk'' and the

08:01.190 --> 08:03.880
''Capital Asset Pricing
Model,'' and about the

08:03.880 --> 08:08.710
''Leverage Cycle,'' which is
relevant to our crises.

08:08.710 --> 08:13.050
So, I recommend you take
Econ 251, but I don't

08:13.050 --> 08:15.300
expect you to take it.

08:15.300 --> 08:19.020
This course is self-contained.

08:19.020 --> 08:24.990
And I'm going to keep
mathematics to the minimum in

08:24.990 --> 08:26.760
these lectures.

08:26.760 --> 08:30.150
But the idea here is that we
can't avoid it completely.

08:30.150 --> 08:34.200
I personally am mathematically
inclined, too, but I'm

08:34.200 --> 08:37.220
understanding that we have
divided our subject matter.

08:37.220 --> 08:40.870
So, John Geanakoplos is doing
the math and the theory, and

08:40.870 --> 08:43.900
I'm doing the real world.

08:43.900 --> 08:45.780
It's not a complete division
like that, but it's

08:45.780 --> 08:47.970
something like that.

08:47.970 --> 08:50.310
So, I'm going to stay to that.

08:50.310 --> 08:55.760
I'm going to talk more about
institutions and history than

08:55.760 --> 08:57.010
about mathematics.

09:00.880 --> 09:04.210
Since I know that most of you
or many of you will not take

09:04.210 --> 09:07.910
Economics 251, what we are doing
is, I'll give a little

09:07.910 --> 09:13.400
indication of the mathematical
principles, more intuitive,

09:13.400 --> 09:19.880
and we have review sessions with
our teaching assistants.

09:19.880 --> 09:21.760
We plan to have six of those.

09:21.760 --> 09:25.910
And those will be on a
Friday in this room.

09:25.910 --> 09:28.890
And they won't be
on Open Yale.

09:28.890 --> 09:32.750
Those will cover the theory,
and it will be like a short

09:32.750 --> 09:35.790
form of Geanakoplos' course.

09:35.790 --> 09:37.700
And then we'll have
problem sets.

09:37.700 --> 09:39.770
And there will be six problems
sets, one for

09:39.770 --> 09:42.040
each of those sessions.

09:42.040 --> 09:46.380
So, there will be some
math in this course.

09:46.380 --> 09:52.600
I wanted to talk about the
purpose of this course, to

09:52.600 --> 09:54.520
clarify it.

09:54.520 --> 09:57.750
One thing is, what do I imagine
you're going to do

09:57.750 --> 09:59.210
with this course?

10:02.130 --> 10:06.650
Well, first of all, I pride
myself that I think I teach --

10:06.650 --> 10:08.660
if I might boast
for a minute --

10:08.660 --> 10:11.390
I think I teach one
of the most useful

10:11.390 --> 10:13.140
courses in Yale College.

10:13.140 --> 10:15.440
At least that's the way
I think about it.

10:15.440 --> 10:19.470
Because this course really
prepares you to do

10:19.470 --> 10:20.910
things in the world.

10:23.770 --> 10:27.360
By the way, I've been teaching
this course now for 25 years.

10:27.360 --> 10:30.570
I first taught it in
the fall of 1985.

10:30.570 --> 10:32.540
Now I don't know if that's
depressing or not.

10:32.540 --> 10:34.090
To me, it's great.

10:34.090 --> 10:36.650
I like to be able to
keep moving ahead.

10:36.650 --> 10:39.390
I wonder what my 1985
course looked like?

10:39.390 --> 10:42.600
Unfortunately, they didn't do
Open Yale and I can't go back

10:42.600 --> 10:44.220
and look at it.

10:44.220 --> 10:48.330
But I think I've gotten more
philosophical and maybe more

10:48.330 --> 10:51.690
real world oriented as
time has gone by.

10:51.690 --> 10:53.930
But the excitement I have
is when I go up --

10:53.930 --> 10:57.750
I give a lot of public talks,
and it's often on Wall Street.

10:57.750 --> 11:01.080
And when I do one on Wall
Street, I like to ask people

11:01.080 --> 11:02.630
for a show of hands.

11:02.630 --> 11:07.120
How many of you were in my
Economics 252 class?

11:07.120 --> 11:11.610
And I typically get one or two
at least who raise their hand.

11:11.610 --> 11:19.410
So, that's a source of pride to
me, that I was involved in

11:19.410 --> 11:21.920
the beginning of
their careers.

11:21.920 --> 11:24.820
And I hope I instilled some
kind of moral sense

11:24.820 --> 11:26.070
to what they do.

11:32.680 --> 11:35.970
But I should say I don't think
that most of you will go into

11:35.970 --> 11:40.140
finance, because I think
that most of

11:40.140 --> 11:42.580
you have other purposes.

11:42.580 --> 11:44.270
What does it mean to
go into finance?

11:44.270 --> 11:47.100
Well, it sounds like that means
you would be listed as

11:47.100 --> 11:53.600
someone who is very focused
on finance.

11:53.600 --> 12:00.580
But I think everyone should
know finance.

12:00.580 --> 12:03.930
This should be a required
course, actually, at Yale

12:03.930 --> 12:08.680
College, because finance is so
fundamental to what we do and

12:08.680 --> 12:12.500
the structure of our lives that
I don't see how you can

12:12.500 --> 12:15.410
avoid doing finance
if you want to do

12:15.410 --> 12:17.410
something big and important.

12:17.410 --> 12:19.570
Maybe you don't want to do that
either, so you might want

12:19.570 --> 12:22.510
to become a hermit and then
you don't need finance.

12:22.510 --> 12:29.850
But to me I like to think that
many of you have a sense of

12:29.850 --> 12:31.610
purpose in life.

12:31.610 --> 12:33.140
I should say --

12:33.140 --> 12:34.410
that sounded funny, didn't it?

12:34.410 --> 12:38.500
But what I'm saying is your
purpose is not to make money.

12:38.500 --> 12:41.560
And this is one thing about
finance that bothers me, is

12:41.560 --> 12:44.920
that people think that it's
a field for money-grubbing

12:44.920 --> 12:49.250
people who just want to
go out and make money.

12:49.250 --> 12:50.160
And I don't think so.

12:50.160 --> 12:55.060
I think it's a technology for
doing things, and you don't

12:55.060 --> 12:57.450
want to be mystified by it.

12:57.450 --> 13:00.310
When someone talks some
financial jargon, you don't

13:00.310 --> 13:03.830
want to say, I don't have a
clue what that's about,

13:03.830 --> 13:07.370
because what that's about is
how we make things happen.

13:07.370 --> 13:23.040
And so, I hope that you have
other purposes in life besides

13:23.040 --> 13:25.340
finance, even those of you
who go into finance.

13:28.020 --> 13:34.740
But the question is whether this
is a vocational course.

13:34.740 --> 13:39.360
Here at Yale College there has
been a long tradition that we

13:39.360 --> 13:41.700
are not a vocational school --

13:41.700 --> 13:43.580
I suppose you know that --

13:43.580 --> 13:46.390
that Yale is a liberal
arts [college]

13:46.390 --> 13:47.570
--

13:47.570 --> 13:50.730
we teach you the arts
and sciences.

13:50.730 --> 13:56.090
I actually went to look at the
charter and the act of the

13:56.090 --> 14:00.730
Connecticut government in 1701
that founded this university.

14:00.730 --> 14:05.430
This university was initially
mostly a training ground for

14:05.430 --> 14:07.010
the ministry.

14:07.010 --> 14:11.490
But I actually read in the
Acts of the Governor and

14:11.490 --> 14:15.440
Company of the Colony of
Connecticut: "Yale College is

14:15.440 --> 14:19.620
founded for the educating and
instructing of youth in good

14:19.620 --> 14:22.960
literature, arts, and sciences."
I think that is the

14:22.960 --> 14:25.480
motive here for this
university.

14:25.480 --> 14:31.270
And so, I think it is in some
level vocational, but it's not

14:31.270 --> 14:32.630
vulgar vocational.

14:32.630 --> 14:35.530
I want you to think about what
we're doing and how it fits

14:35.530 --> 14:37.300
into what you do
for your life.

14:42.790 --> 14:50.010
So, I think of finance as a kind
of engineering in a way.

14:50.010 --> 14:54.970
But it's an engineering that
works not with what we call a

14:54.970 --> 14:58.890
technical apparatus,
but with people.

14:58.890 --> 15:06.950
And so, if we want to understand
how to do these

15:06.950 --> 15:08.970
things, we have to get
some technical

15:08.970 --> 15:10.840
apparatus under our belt.

15:10.840 --> 15:14.840
And that's what I'm going to
try to do in this course.

15:14.840 --> 15:20.830
The textbook that I chose for
this course is by Frank

15:20.830 --> 15:23.910
Fabozzi, who is a professor
at the Yale School

15:23.910 --> 15:24.700
of Management --

15:24.700 --> 15:27.260
well, with two co-authors.

15:27.260 --> 15:32.920
We have Franco Modigliani, for
whom I have some personal

15:32.920 --> 15:38.850
affection, because he was my
dissertation adviser at MIT,

15:38.850 --> 15:47.390
and who unfortunately died in
2003, and Frank Jones of

15:47.390 --> 15:48.890
Guardian Life Insurance
Company.

15:55.890 --> 15:58.300
I've also written joint
papers with, well, two

15:58.300 --> 15:59.140
of the three authors.

15:59.140 --> 16:03.230
I've written joint papers with
Fabozzi and with Modigliani --

16:03.230 --> 16:04.590
research papers.

16:04.590 --> 16:09.170
But they're similar to
me in many ways.

16:09.170 --> 16:12.800
They're interested
in the details.

16:12.800 --> 16:15.860
I hope you get interested
in the details.

16:15.860 --> 16:19.790
I find this textbook
fascinating for me.

16:19.790 --> 16:24.580
Well, I first read this
book when I first

16:24.580 --> 16:26.080
started assigning it.

16:26.080 --> 16:30.770
I was going on vacation with
my friend Jeremy Siegel and

16:30.770 --> 16:33.210
our families, who's a professor
at the Wharton

16:33.210 --> 16:39.440
School, and I brought this book
as my poolside reading.

16:39.444 --> 16:42.164
And I was sitting there
with this book.

16:42.160 --> 16:46.840
Other people were reading
novels and fun things.

16:46.840 --> 16:49.350
I don't know what they thought
of me reading this textbook by

16:49.350 --> 16:54.890
the pool, but I thought this is
great, because I thought I

16:54.890 --> 16:57.570
knew most of what's in here,
but there's a lot of things

16:57.570 --> 16:59.850
that I still didn't know
and it was answering

16:59.850 --> 17:01.170
all kinds of questions.

17:01.170 --> 17:04.810
Things you always wanted to
know about real estate

17:04.810 --> 17:07.710
securities, OK, but you
never found out.

17:07.710 --> 17:09.400
Well it's all answered here.

17:09.400 --> 17:11.680
So, I hope you can
take that spirit

17:11.680 --> 17:15.250
in reading the textbook.

17:15.250 --> 17:19.770
That's the only book you have
to purchase for this course.

17:19.770 --> 17:29.550
And it's the main work
that you have.

17:29.550 --> 17:35.320
So, I'm going to ask you about
the details on exams. The

17:35.320 --> 17:39.190
kinds of municipal securities
we have and how the rating

17:39.190 --> 17:41.890
agencies rate them, that's
part of this course.

17:41.890 --> 17:45.830
I believe the details matter.

17:45.830 --> 17:47.550
And so, I'm not going to
just ask you broad

17:47.550 --> 17:48.890
generalities on the exam.

17:48.890 --> 17:52.560
I'm going to ask you
the details.

17:52.560 --> 17:55.680
It's a little bit like teaching
a language, right?

17:55.680 --> 17:59.280
Learning a language is really
important, and you've got to

17:59.280 --> 18:00.340
learn all the words, right?

18:00.340 --> 18:02.100
There's thousands of them.

18:02.100 --> 18:02.820
It's like that.

18:02.820 --> 18:04.650
You're going to be learning
the words of finance.

18:08.510 --> 18:15.060
So, I have another book also,
which is actually not done

18:15.060 --> 18:20.470
yet, but you can access it
through Classes*v2, and later

18:20.470 --> 18:22.970
it will come out as
a published book.

18:22.970 --> 18:26.510
But I'm working on
a book called --

18:26.510 --> 18:28.810
well, I don't know what it
will be called finally.

18:28.810 --> 18:30.570
When you're writing a book,
one thing you learn as an

18:30.570 --> 18:33.370
author is, you can never be
sure what the title of the

18:33.370 --> 18:34.520
book will be.

18:34.520 --> 18:37.540
Because if somebody else uses
the same title and you're

18:37.540 --> 18:40.960
done, somebody else gets to it
first, you've got to change

18:40.960 --> 18:42.030
your title.

18:42.030 --> 18:46.600
But at this moment the title of
my book is "Finance and the

18:46.600 --> 18:51.200
Good Society." I'm not sure
when it will be out.

18:51.200 --> 18:54.220
I was hoping next year, but now
I'm thinking it might take

18:54.220 --> 18:55.890
longer than that.

18:55.890 --> 18:58.440
So, you have something
that's imperfect.

18:58.440 --> 19:03.090
I hope you excuse me when
you look at the

19:03.090 --> 19:04.590
chapters of this book.

19:04.590 --> 19:06.890
You don't have quite all
the chapters either.

19:06.890 --> 19:09.960
But I just thought it was a
good thing to put it in

19:09.960 --> 19:12.710
process for you to --

19:12.710 --> 19:17.050
maybe if you have ideas you can
tell me and the book will

19:17.050 --> 19:19.870
change with your input.

19:19.870 --> 19:22.230
To me it's a good way to write
a book, is to be writing a

19:22.230 --> 19:24.420
book and teaching a
class at the same

19:24.420 --> 19:26.330
time on the same topic.

19:26.330 --> 19:27.420
It's more social.

19:27.420 --> 19:30.220
You know, you just sit in your
office and write and you end

19:30.220 --> 19:33.280
up feeling sterile.

19:33.280 --> 19:35.760
So, this makes it more
alive to me to do

19:35.760 --> 19:36.890
that at the same time.

19:36.890 --> 19:39.520
But I'll tell you what
my book is about.

19:39.520 --> 19:41.950
The title that I now have,
"Finance and the Good

19:41.950 --> 19:46.670
Society," may sound to some
people like an oxymoron,

19:46.670 --> 19:49.230
because they're kind
of incompatible.

19:49.230 --> 19:52.530
People are angry about
finance these days.

19:52.530 --> 19:53.360
We've had --

19:53.360 --> 19:54.880
and this is going to be
an important part

19:54.880 --> 19:55.960
of this course --

19:55.960 --> 19:59.930
we've had the worst financial
crisis since the Great

19:59.930 --> 20:02.050
Depression of the 1930s.

20:02.050 --> 20:05.950
And it's been a worldwide
financial crisis and it isn't

20:05.950 --> 20:09.010
over yet, or it's not clear
that it's over yet.

20:09.010 --> 20:11.140
And people are angry.

20:11.140 --> 20:15.480
People are angry about finance,
people who seem to be

20:15.480 --> 20:19.720
getting rich often it seems
at the expense of others.

20:19.720 --> 20:22.610
Or they seem to be lobbying
their governments to give them

20:22.610 --> 20:25.720
breaks and bailouts,
and they walk home

20:25.720 --> 20:27.860
with billions of dollars.

20:27.860 --> 20:32.160
Something seems immoral
and wrong.

20:32.160 --> 20:35.960
Well, I'm sure some immoral
things are happening, but I

20:35.960 --> 20:39.330
don't think that finance
as a whole is wrong.

20:39.330 --> 20:42.660
And I think of it as
a noble profession.

20:42.660 --> 20:47.810
So, I wanted to try to put
it in perspective.

20:47.810 --> 20:51.450
And it's especially important
when talking to young people

20:51.450 --> 20:54.460
like yourselves, because you're
launching out on a

20:54.460 --> 20:59.950
career, and I want that to be a
moral and purposeful career.

20:59.950 --> 21:04.700
And I want to put finance
in the perspective.

21:04.700 --> 21:09.790
So, the theme that I want
to develop in my book

21:09.790 --> 21:12.620
is that part --

21:12.620 --> 21:16.140
you know, we live in a
capitalist world now and this

21:16.140 --> 21:22.220
world is increasingly
built on finance.

21:22.220 --> 21:25.140
Some people call it we're living
in the era of financial

21:25.140 --> 21:26.450
capitalism.

21:26.450 --> 21:30.080
We have these big multinational
institutions

21:30.080 --> 21:33.120
that are owned by huge numbers,
maybe millions, of

21:33.120 --> 21:36.030
shareholders dispersed
all over the world.

21:36.030 --> 21:38.970
And what makes the whole
thing work and click?

21:38.970 --> 21:41.110
It's the financial
arrangements.

21:44.360 --> 21:48.240
The world is discovering the
importance of finance.

21:48.240 --> 21:51.440
When I go to a foreign country
and give a talk, I

21:51.440 --> 21:53.780
find that people --

21:53.780 --> 21:55.840
it doesn't matter what country
-- they're generally very

21:55.840 --> 21:59.390
interested in finance, because
they think that our modern

21:59.390 --> 22:03.290
financial techniques are part
of what's making so many

22:03.290 --> 22:07.140
places in the world grow
at rapid rates now.

22:07.140 --> 22:11.470
We're living in a time in
history when the developing

22:11.470 --> 22:14.980
world is exploding with growth,
and these countries

22:14.980 --> 22:17.890
that are doing that are
countries that are adopting

22:17.890 --> 22:19.560
modern finance.

22:19.560 --> 22:23.340
So, I want this to go right,
and I want this to be

22:23.340 --> 22:24.620
developing a good society.

22:27.780 --> 22:31.990
By good society, I mean a just
and fair society that allows

22:31.990 --> 22:37.130
people to develop their
talents and expertise.

22:37.130 --> 22:50.300
So, another thought I had was
that the field of finance--

22:50.300 --> 22:51.550
let me give you another slide.

22:55.420 --> 22:59.640
I said I view this course as
one of the most important

22:59.640 --> 23:02.950
courses in Yale College, at
least from a standpoint of

23:02.950 --> 23:05.460
your lives and careers.

23:05.460 --> 23:09.550
I wanted to compare finance
jobs with jobs.

23:09.550 --> 23:11.560
And I don't mean to put down
other departments, but at

23:11.560 --> 23:14.700
least vocationally, let's
put this in perspective.

23:14.700 --> 23:17.580
I wanted to compare jobs
in finance with

23:17.580 --> 23:19.770
jobs in other fields.

23:19.770 --> 23:24.770
So, this is a chart that I
constructed using data from

23:24.770 --> 23:26.720
the Bureau of Labor
Statistics.

23:26.720 --> 23:30.490
And what it has is the number
of people in various

23:30.490 --> 23:34.770
occupations in 2008 and
their projections

23:34.770 --> 23:37.540
for the same in 2018.

23:37.540 --> 23:41.860
So, the red bar is for 2018,
and we'll emphasize that,

23:41.860 --> 23:43.340
because you'll be just
getting into your

23:43.340 --> 23:46.290
careers when that comes.

23:46.290 --> 23:50.230
So, it says, if you look at
financial analysts in the

23:50.230 --> 23:53.760
United States there's
almost 300,000.

23:53.760 --> 23:57.340
Financial managers, it's
over half a million.

23:57.340 --> 23:59.490
Personal financial advisers,
a quarter of a

23:59.490 --> 24:01.820
million, all right?

24:01.820 --> 24:05.000
These are people who specialize
entirely in one

24:05.000 --> 24:06.990
form of finance or another.

24:06.990 --> 24:08.680
But compare that with
economists.

24:08.680 --> 24:10.720
Look at that.

24:10.720 --> 24:11.080
What is that?

24:11.080 --> 24:12.910
About 20,000?

24:12.910 --> 24:14.600
I think they're excluding
professors.

24:14.600 --> 24:16.700
But, you know, just economists
out there --

24:16.700 --> 24:18.180
not very many.

24:18.180 --> 24:19.870
How about astronomers?

24:19.870 --> 24:20.290
OK.

24:20.290 --> 24:23.010
I can't even read that.

24:23.010 --> 24:26.700
I love astronomy by the way, but
I think I made the right

24:26.700 --> 24:27.880
choice when I decided --

24:27.880 --> 24:29.790
well, I shouldn't say that,
you never know.

24:29.790 --> 24:31.610
We all have to do something
different.

24:31.610 --> 24:36.170
And you could become an
astronomer, but there aren't

24:36.170 --> 24:39.650
many jobs in astronomy.

24:39.650 --> 24:43.090
Sociologists, political
scientists, just not many

24:43.090 --> 24:45.390
compared to -- this is just
enormously bigger.

24:45.390 --> 24:46.930
Or mathematicians.

24:46.930 --> 24:50.150
I also put one oddball
field on here:

24:50.150 --> 24:52.650
massage therapists, OK?

24:52.650 --> 24:57.130
The number of massage therapist
jobs outnumbers any

24:57.130 --> 25:01.600
of those other fields by,
what is it, 100:1.

25:01.600 --> 25:03.790
So, this is the kind of

25:03.790 --> 25:05.810
disappointment that people face.

25:05.810 --> 25:08.260
You go to the college
or university --

25:08.260 --> 25:10.760
this is very much on my mind
-- you go to the university

25:10.760 --> 25:13.340
and you develop special skills,
and you leave and then

25:13.340 --> 25:16.690
you end up driving a taxi.

25:16.690 --> 25:19.210
That doesn't mean that I want
to become vocational.

25:19.210 --> 25:21.950
I mean, I don't want to just
train you for a job, but I

25:21.950 --> 25:23.140
want to be relevant.

25:23.140 --> 25:27.080
And it seems to me that
I can be relevant in

25:27.080 --> 25:29.080
talking about finance.

25:29.080 --> 25:39.090
And so, that's the basic core
that I wanted to get.

25:53.570 --> 25:56.130
I mentioned before that people
think that finance is the

25:56.130 --> 25:58.930
field for people who want to get
rich, who want to make a

25:58.930 --> 26:02.050
lot of money.

26:02.050 --> 26:05.580
Well, I think that's
right, actually.

26:05.575 --> 26:07.545
[LAUGHTER]

26:07.550 --> 26:11.660
I don't advise you to
take that as your --

26:11.660 --> 26:14.600
but I wanted to talk about
that a little bit.

26:14.600 --> 26:19.800
So, one thing that you'll note,
Forbes Magazine has an

26:19.800 --> 26:23.630
annual list of the 400 richest
people in America.

26:26.230 --> 26:30.980
So, I looked at that list. Who
do you think they are?

26:30.980 --> 26:34.920
Most of you probably have not
read this list. You might

26:34.920 --> 26:37.650
think that, well, who makes
a lot of money?

26:37.650 --> 26:38.920
Well, it's athletes.

26:38.920 --> 26:42.270
Football players, right?

26:42.270 --> 26:45.310
Baseball players.

26:45.310 --> 26:45.740
And who else?

26:45.740 --> 26:48.020
Oh, movie stars, right?

26:48.020 --> 26:49.830
They make a lot of money.

26:49.830 --> 26:53.940
So, how many do you think of
those are on the Forbes 400 of

26:53.940 --> 26:57.080
the richest people in America?

26:57.080 --> 27:01.080
Well, as I read the list I
didn't see a single movie star

27:01.080 --> 27:02.990
or a single athlete.

27:02.990 --> 27:04.840
There is -- it depends
on how you define it.

27:04.840 --> 27:08.040
Oprah Winfrey is on
the list. OK?

27:08.040 --> 27:09.950
You've heard of her.

27:09.950 --> 27:14.080
She's in the entertainment
business.

27:14.080 --> 27:17.100
But you know, she's also
a finance person.

27:17.100 --> 27:20.020
She runs big businesses.

27:20.020 --> 27:23.410
She's into making
things happen.

27:23.410 --> 27:27.040
And I can assure you that she
knows finance, at least some

27:27.040 --> 27:30.020
basic finance.

27:30.020 --> 27:33.270
You see, finance gets you
to build organizations.

27:33.270 --> 27:34.570
That's how it's done.

27:34.570 --> 27:37.160
And it means raising capital
to make things

27:37.160 --> 27:39.190
happen on a big scale.

27:39.190 --> 27:43.060
You know, no athlete is as
powerful as one of these

27:43.060 --> 27:47.900
random guys on the
Forbes 400 list.

27:47.900 --> 27:48.580
It's interesting.

27:48.580 --> 27:52.070
I looked down the list and I
didn't spot a single Nobel

27:52.070 --> 27:54.600
Prize winner.

27:54.600 --> 27:55.980
Maybe I missed one.

27:55.980 --> 27:58.080
I looked for best
selling authors.

27:58.080 --> 28:01.280
I found one: Bill Gates,
who wrote a book

28:01.280 --> 28:04.640
called The Road Ahead.

28:04.640 --> 28:08.540
But there are not many best
selling authors either.

28:08.540 --> 28:10.280
What do they have in common?

28:10.280 --> 28:12.550
Now about a third of them just
inherited it from their

28:12.550 --> 28:16.390
parents, but most of them
did it themselves.

28:16.390 --> 28:19.900
They just made huge
sums of money.

28:19.900 --> 28:22.560
And what do they do?

28:22.560 --> 28:26.370
Well, they're typically in some
boring line of business.

28:26.370 --> 28:28.870
They make something,
but they're doing

28:28.870 --> 28:30.650
it on a vast scale.

28:30.650 --> 28:33.930
And so, that means they're
making deals, they're putting

28:33.930 --> 28:36.180
things together, they're buying
companies, they're

28:36.180 --> 28:39.760
absorbing other companies
into their's.

28:39.760 --> 28:42.990
There's something powerful about
an ability to do that.

28:42.990 --> 28:47.590
And I think that it's good
for you to understand and

28:47.590 --> 28:48.870
appreciate that.

28:54.140 --> 28:57.500
By the way, Forbes has another
list called the Forbes

28:57.500 --> 29:00.130
Celebrity 100.

29:00.130 --> 29:03.050
And to be on that list, you
have to be a celebrity.

29:03.050 --> 29:05.780
It's a completely different
list. Oprah is on both lists,

29:05.780 --> 29:09.380
but she's practically
the only one.

29:09.380 --> 29:12.400
Steven Spielberg is on
both lists, I think.

29:12.400 --> 29:16.970
He makes movies, but he has
a whole company called

29:16.970 --> 29:20.480
DreamWorks, and he finances all
kinds of movies, so he's a

29:20.480 --> 29:23.210
businessperson as well.

29:23.210 --> 29:26.300
So, I don't think of finance
as a mathematical --

29:26.300 --> 29:29.420
I mean it is mathematical, it
has a core element of that.

29:29.420 --> 29:32.840
But to me it's about making
things happen and about

29:32.840 --> 29:37.450
putting together deals and
getting people incentivized to

29:37.450 --> 29:41.080
do something, and getting
capital, getting resources in

29:41.080 --> 29:45.550
a massive scale so that
something can happen.

29:45.550 --> 29:50.160
And so, that's what this
course is about.

29:50.160 --> 29:54.090
Oh, Jerry Seinfeld is listed by
Forbes as a possibility --

29:57.800 --> 29:59.330
he's about the only one --

29:59.330 --> 30:02.650
to make the list of
the Forbes 400.

30:02.650 --> 30:05.630
But he isn't there yet.

30:05.630 --> 30:13.690
I don't mean to diminish these
celebrity people, but there's

30:13.690 --> 30:16.690
something else that goes on in
finance, and it's quiet.

30:16.690 --> 30:19.090
It's behind the -- actually,
most of the Forbes 400 you've

30:19.090 --> 30:20.240
never heard of.

30:20.240 --> 30:23.130
They're kind of behind the
scenes doing things that are

30:23.130 --> 30:28.070
big and important, but they
don't get on the news so much.

30:28.070 --> 30:29.220
It's one of the ironies
of life.

30:29.220 --> 30:32.360
You might aspire to do this,
to get on the Forbes 400.

30:32.360 --> 30:36.940
You can do it and still nobody
knows who you are or cares.

30:36.940 --> 30:40.270
So that's just as well, I
think, for many people.

30:40.270 --> 30:42.720
So then, the question is:
Suppose you get on the Forbes

30:42.720 --> 30:45.690
400, what are you going
to do with it?

30:45.690 --> 30:48.130
In other words, to get on the
Forbes 400 you have to have

30:48.130 --> 30:50.110
made at least a billion
dollars.

30:50.110 --> 30:53.740
So that means, you have in your
own portfolio a thousand

30:53.740 --> 30:55.410
million dollars.

30:55.410 --> 30:58.250
That's the minimum to make the
list. So, what are you going

30:58.250 --> 30:59.770
to do with a thousand million?

30:59.770 --> 31:02.920
Any ideas what would
you do with it?

31:02.920 --> 31:05.580
You could buy cars, right?

31:05.580 --> 31:09.940
How many sports cars could
you buy for that?

31:12.930 --> 31:13.500
What could you do?

31:13.500 --> 31:15.170
You could buy 20 houses.

31:15.170 --> 31:17.210
But that doesn't begin
-- you could buy 20

31:17.210 --> 31:18.360
houses and so what?

31:18.360 --> 31:21.780
You know, you still have
900 million leftover.

31:21.780 --> 31:25.130
So, what are you going to
do with all that money?

31:25.130 --> 31:29.020
And that's a question.

31:29.020 --> 31:33.920
Now, some people who do that,
who make all this money, try

31:33.920 --> 31:39.660
to see if they can maximize
their appearance of wealth.

31:39.660 --> 31:44.370
They try to show to the world
how rich they are.

31:44.370 --> 31:47.610
So, you just build the biggest
mansion and you do something

31:47.610 --> 31:48.910
really spectacular.

31:48.910 --> 31:51.920
But when you got a billion
dollars, there isn't a house

31:51.920 --> 31:56.160
in the country you could buy
for a billion dollars.

31:56.160 --> 31:58.220
You can only stay in one
at a time, right?

31:58.220 --> 32:01.150
So, what are you going to do?

32:01.150 --> 32:04.220
But there are people who do
that, and I think that there's

32:04.220 --> 32:09.230
a history of disgust for those
people, a long history.

32:09.230 --> 32:13.370
We don't like people
who do that.

32:13.370 --> 32:15.550
It's almost like it's
a big mistake.

32:15.550 --> 32:18.260
Why would you do that when
people don't like people who

32:18.260 --> 32:21.390
show off their wealth?

32:21.390 --> 32:24.030
There's evidence that people
feel that way in many

32:24.030 --> 32:26.920
different countries and
cultures, because lots of

32:26.920 --> 32:30.870
countries in history have what
are called sumptuary laws.

32:30.870 --> 32:35.240
It goes back at least to 700 BC
in Ancient Greece with the

32:35.240 --> 32:36.890
Locrian code.

32:36.890 --> 32:39.840
These are laws prohibiting
people from conspicuous

32:39.840 --> 32:40.950
consumption.

32:40.950 --> 32:43.240
And they've been in so many
different countries that I

32:43.240 --> 32:49.150
think it's evidence that
something is amiss with making

32:49.150 --> 32:54.930
wealth as the objective
of your life.

32:58.170 --> 33:01.820
So, one of the themes in
the beginning of our

33:01.820 --> 33:03.660
reading list is --

33:03.660 --> 33:10.440
I think there's a movement afoot
today around the world

33:10.440 --> 33:13.360
of thinking about this problem,
that you can get so

33:13.360 --> 33:18.690
big and powerful if you build
a business and you use the

33:18.690 --> 33:25.000
financial techniques that are
successful for other people,

33:25.000 --> 33:31.460
but it's meaningless unless
you give it away.

33:31.460 --> 33:35.680
And so, what else can you do
with all this wealth but plan

33:35.680 --> 33:36.930
to give it away.

33:39.410 --> 33:41.470
So, one thing I have on the
reading list right at the

33:41.470 --> 33:45.910
beginning is a chapter from a
book -- well, the title of the

33:45.910 --> 33:50.560
book is The Gospel of Wealth
and Other Essays and it was

33:50.560 --> 33:52.910
written by Andrew Carnegie.

33:52.910 --> 33:57.290
Actually, he wrote a short
article in a magazine called

33:57.290 --> 33:59.100
"Wealth" in 1889.

33:59.100 --> 34:02.560
And in the final paragraph he
used the term "gospel of

34:02.560 --> 34:10.010
wealth" and it was picked up
all over the world as just

34:10.010 --> 34:11.390
outrageous.

34:11.390 --> 34:14.390
And so, it became named
The Gospel of Wealth.

34:14.390 --> 34:16.770
So, later in the early 20th
century he came out with a

34:16.770 --> 34:19.450
book entitled The Gospel
of Wealth.

34:19.450 --> 34:21.330
And that's what I
have assigned.

34:21.330 --> 34:24.590
You can click on it on the
reading list. And Andrew

34:24.590 --> 34:26.780
Carnegie was one of these --

34:26.780 --> 34:29.530
they didn't have Forbes 400, but
he was one of the richest

34:29.530 --> 34:35.690
men in America through his
Carnegie Steel Company, very

34:35.690 --> 34:37.770
much steeped in finance.

34:37.770 --> 34:42.590
But he decided when he wrote
his essay, The Gospel of

34:42.590 --> 34:50.360
Wealth, in 1889 that once a
person reaches middle age,

34:50.360 --> 34:55.120
like 50 or 55, and has made a
lot of money, they really have

34:55.120 --> 34:57.550
to go into philanthropy.

34:57.550 --> 34:59.270
There's a moral imperative.

34:59.270 --> 35:03.520
So, the theme of The Gospel of
Wealth was some people are

35:03.520 --> 35:07.360
just better at what he called
affairs than other people.

35:07.360 --> 35:08.460
That means business.

35:08.460 --> 35:11.780
Some people have a sense of
how to make things happen.

35:11.780 --> 35:15.310
These people have a moral
obligation to make this work

35:15.310 --> 35:18.550
for the benefit of humankind.

35:18.550 --> 35:25.690
And that means, while they're
still young, they have to take

35:25.690 --> 35:29.980
their fortune and give it all
away before they die.

35:29.980 --> 35:33.200
Because if they don't give it
all away, it's nonsense.

35:33.200 --> 35:36.390
If you make a billion dollars
and you leave it to your

35:36.390 --> 35:40.310
children, chances are they're
not like you.

35:40.310 --> 35:43.300
They're not going to be
interested in working hard and

35:43.295 --> 35:44.995
making things happen.

35:45.000 --> 35:46.880
They're just going
to squander it.

35:46.880 --> 35:51.360
And so, that's what the
moral obligation is.

35:51.360 --> 35:54.890
You have to stop at age,
let's say 55 --

35:54.890 --> 35:56.850
OK, you still got time left --

35:56.850 --> 35:58.900
and then use your
same talents.

35:58.900 --> 36:01.760
So, it was almost a theory of
capitalism -- it is a theory

36:01.760 --> 36:02.800
of capitalism.

36:02.800 --> 36:07.370
It is a theory that some people
are just more practical

36:07.370 --> 36:11.370
and hardworking and
business-oriented, and these

36:11.370 --> 36:16.060
people can find things to do
that benefit mankind, and they

36:16.060 --> 36:17.040
should do it.

36:17.040 --> 36:19.650
So, there's a natural
selection.

36:19.650 --> 36:20.410
This is Carnegie.

36:20.410 --> 36:22.490
I'm not endorsing
this entirely.

36:22.490 --> 36:25.470
I think there's an element of
truth to The Gospel of Wealth,

36:25.470 --> 36:31.060
but it's not exactly true.

36:31.060 --> 36:33.310
But the element of truth is
right, that people like

36:33.310 --> 36:35.660
Carnegie who was a very
gifted person -- you

36:35.660 --> 36:36.240
know what he did?

36:36.240 --> 36:39.420
He set up the Carnegie Institute
of Technology, now

36:39.420 --> 36:41.850
called Carnegie Mellon
University.

36:41.850 --> 36:46.370
He set up the Carnegie Endowment
for World Peace,

36:46.370 --> 36:48.880
Carnegie Hall in New York.

36:48.880 --> 36:50.210
He probably gave something
to Yale, too.

36:50.210 --> 36:51.180
Anyone know?

36:51.180 --> 36:52.540
Is there a Carnegie?

36:52.540 --> 36:54.900
He gave to like every imaginable
university.

36:54.900 --> 36:58.870
I know at Princeton they
have a Lake Carnegie.

36:58.870 --> 37:03.290
He was visiting Princeton and
someone pointed out this kind

37:03.290 --> 37:08.030
of swampy land and said we'd
like to really create a lake.

37:08.030 --> 37:09.800
So, he said, fine.

37:09.800 --> 37:12.080
He gave them money to create
Lake Carnegie.

37:12.080 --> 37:17.240
And he also gave the money for
the prize for the first true

37:17.240 --> 37:19.280
competition on Lake Carnegie.

37:19.280 --> 37:22.620
So, he just had all kinds
of gifts he gave away.

37:26.150 --> 37:27.330
I also have -- it's
interesting, I

37:27.330 --> 37:29.280
found this on the web.

37:29.280 --> 37:33.300
Thomas Edison, the inventor,
was so impressed with

37:33.300 --> 37:36.680
Carnegie's The Gospel of
Wealth that Edison was

37:36.680 --> 37:42.290
developing the sound movie, I
think it was 1914, but he

37:42.290 --> 37:43.450
didn't perfect it.

37:43.450 --> 37:46.550
But he said the first sound
movie should involve geniuses

37:46.550 --> 37:47.590
of our time.

37:47.590 --> 37:52.270
So, he made a sound movie of
Carnegie reading from his The

37:52.270 --> 37:53.440
Gospel of Wealth.

37:53.440 --> 37:57.210
Unfortunately, the visual side
of it somehow got lost. Maybe

37:57.210 --> 37:58.610
it didn't work.

37:58.610 --> 38:01.300
We only have the soundtrack
from the movie.

38:01.300 --> 38:05.290
So, you can listen to Carnegie
reading from this book in

38:05.290 --> 38:10.270
1914, and it's the only
recording of Carnegie's voice

38:10.270 --> 38:11.520
that survived.

38:13.710 --> 38:17.520
Since then, Bill Gates and
Warren Buffett and others of

38:17.520 --> 38:25.540
the Forbes 400 have done a
campaign to get billionaires

38:25.540 --> 38:28.130
around the world to commit to
give most of their wealth

38:28.130 --> 38:31.230
away, while they're
still alive.

38:31.230 --> 38:35.940
And I'm trying to get one of
these people to speak to our

38:35.940 --> 38:38.290
class, but I haven't
yet arranged that.

38:43.210 --> 38:48.570
I also have on the website a
review from 1890 of Carnegie's

38:48.570 --> 38:53.350
original essay from a California
newspaper, and they

38:53.350 --> 38:56.090
were so negative about it.

38:56.090 --> 38:59.600
They said, Carnegie thinks that
making wealth and giving

38:59.600 --> 39:04.270
it away is a noble cause.

39:04.270 --> 39:06.590
That cannot possibly be right.

39:06.590 --> 39:10.290
These people who make money are
not the most enlightened

39:10.290 --> 39:13.640
and smart people in our world.

39:13.640 --> 39:15.780
I think that the truth lies
somewhere in between.

39:15.780 --> 39:19.740
But we do have a society
now where people --

39:19.740 --> 39:25.440
we have an increasing
concentration of wealth at the

39:25.440 --> 39:28.620
top, and I don't know what we're
going to do about this.

39:28.620 --> 39:33.210
This is a trend that
may continue.

39:33.210 --> 39:35.080
And so, this is the thing
I want to think

39:35.080 --> 39:36.050
about in this course.

39:36.050 --> 39:38.580
I don't think finance
necessarily does this.

39:38.580 --> 39:41.860
It may be a bubble, that there
is currently a bubble in

39:41.860 --> 39:46.420
financial careers and that you
are going to be disappointed,

39:46.420 --> 39:50.310
because 20 or 30 years from
now if you go into a

39:50.310 --> 39:55.210
finance-related field, you'll
find that it's not as

39:55.210 --> 39:58.430
lucrative as you hoped.

39:58.430 --> 40:00.130
That kind of happens, right?

40:00.130 --> 40:03.730
When a field becomes known for
having a lot of successful

40:03.730 --> 40:05.640
people, then more young
people go into it and

40:05.640 --> 40:07.720
they swamp the field.

40:07.720 --> 40:10.570
On the other hand, I think that
it will always be true

40:10.570 --> 40:14.280
that just because of the power
of the technology the top

40:14.280 --> 40:18.420
wealthiest people in the world
will be finance-related.

40:18.420 --> 40:22.710
And I think that they will have
a moral obligation to

40:22.710 --> 40:27.490
give their wealth away
in a productive way.

40:30.680 --> 40:40.140
So, I have several outside
speakers, and I tried to bring

40:40.140 --> 40:44.230
in people that are connected
to the world

40:44.230 --> 40:45.230
in a positive way.

40:45.230 --> 40:48.560
I'm trying to bring in
inspirations for you as

40:48.560 --> 40:50.550
outside speakers.

40:50.550 --> 40:53.060
And they're people who
are in finance

40:53.060 --> 40:54.990
but who are not selfish.

40:54.990 --> 41:00.410
They may be rich but they
are good people.

41:00.410 --> 41:03.380
So, the first person that I'm
going to bring in, as I've

41:03.380 --> 41:10.270
done in previous years, is David
Swensen, who is Chief

41:10.270 --> 41:13.370
Investment Officer for
Yale University.

41:13.370 --> 41:18.300
Swensen also teaches a course,
Economics 450, with Dean

41:18.300 --> 41:22.400
Takahashi, which you
might want to take.

41:22.400 --> 41:26.300
But I have him here just
for one lecture.

41:26.300 --> 41:32.260
And what Swensen has done is
turn the Yale endowment into a

41:32.260 --> 41:34.290
huge number.

41:34.290 --> 41:38.840
He came to Yale in 1985, and
at that time, Yale had less

41:38.840 --> 41:42.260
than $1 billion in
its endowment.

41:42.260 --> 41:48.380
Swensen is the most successful
university endowment manager

41:48.380 --> 41:50.280
of the United States.

41:50.280 --> 41:58.500
He turned less than $1 billion
into $22.9 in 2008.

41:58.500 --> 42:03.140
The financial crisis hit and the
endowment fell, but as of

42:03.140 --> 42:08.070
June of 2010, it was
still 16.7 billion.

42:08.070 --> 42:13.210
So, he has done so much to
make Yale a success.

42:13.210 --> 42:14.680
But it matters.

42:14.680 --> 42:16.660
That's a lot of money.

42:16.660 --> 42:18.890
And it's all for a good cause.

42:18.890 --> 42:23.610
Now I say, I believe Swensen
is a good person.

42:23.610 --> 42:26.570
I think he turned down
opportunities to make much

42:26.570 --> 42:29.990
more on Wall Street, because
he is known -- and he's

42:29.990 --> 42:32.150
continually turning
them down --

42:32.150 --> 42:34.400
as an investment genius.

42:34.400 --> 42:39.140
He can command huge salaries and
bonuses if he wanted to,

42:39.140 --> 42:41.790
but he stays here with Yale.

42:41.790 --> 42:44.450
I don't think that people in
finance are money-grubbers,

42:44.450 --> 42:48.180
and this is an example
of someone who's not.

42:48.180 --> 42:55.520
The second speaker I have is
Maurice "Hank" Greenberg, who

42:55.520 --> 42:58.540
founded AIG.

42:58.540 --> 43:04.880
It started out in 1962.

43:04.880 --> 43:10.240
In 1962, he was put in charge
of North American operations

43:10.240 --> 43:13.410
of the American International
Group, an insurance company,

43:13.410 --> 43:15.240
which was then failing.

43:15.240 --> 43:20.540
The head of the company, C.V.
Starr, put him in this to try

43:20.540 --> 43:23.100
to turn the company around.

43:23.100 --> 43:27.600
He turned it, over many years
as CEO of AIG, into the

43:27.600 --> 43:32.100
biggest insurance company
in the world, and he

43:32.100 --> 43:35.230
ran it until 2005.

43:35.230 --> 43:37.190
The company -- have you
heard of this, AIG?

43:37.190 --> 43:38.670
You must have heard of this.

43:38.670 --> 43:41.710
In the recent financial crisis
it has encountered some

43:41.710 --> 43:46.230
problems. And, in fact, it was
the biggest bailout of all.

43:46.230 --> 43:48.210
It was bailed out by the
U.S. government.

43:48.210 --> 43:50.870
And there's a scandal about
that because the

43:50.870 --> 43:52.750
bailout was so huge.

43:52.750 --> 43:54.940
It was in the hundreds
of billions.

43:54.940 --> 43:57.280
Record-setting bailout.

43:57.280 --> 44:00.780
And some people are angry
with Greenberg.

44:00.780 --> 44:03.820
But I think that's completely
unfair, because it all

44:03.820 --> 44:05.800
happened after he left AIG.

44:05.800 --> 44:09.670
And the problems were in a
particular unit within AIG

44:09.670 --> 44:12.990
that he was not really
responsible for.

44:12.990 --> 44:19.150
But Greenberg is a person who
has, I think, a moral purpose

44:19.150 --> 44:22.170
that I want to illustrate
for you.

44:22.170 --> 44:24.040
He's been criticized.

44:24.040 --> 44:26.750
Anyone who does business on
that scale is going to be

44:26.750 --> 44:32.320
criticized for being too tough
or too aggressive at times.

44:32.320 --> 44:38.250
But he's a very involved
person.

44:38.250 --> 44:42.970
He's the Vice Chairman for the
Council on Foreign Relations,

44:42.970 --> 44:46.370
which is a think tank that
thinks about the United States

44:46.370 --> 44:47.730
and its place in the world.

44:47.730 --> 44:50.520
It's a very important
think tank.

44:50.520 --> 44:53.400
He's also a major philanthropist
and

44:53.400 --> 44:54.720
he's given to Yale.

44:54.720 --> 44:58.420
Notably, he gave the Greenberg
Center, which is right next to

44:58.420 --> 45:01.830
the Center for Globalization.

45:01.830 --> 45:05.430
A beautiful new building.

45:05.430 --> 45:07.260
So, he has agreed to come.

45:07.260 --> 45:09.540
I'm very pleased to have him.

45:09.540 --> 45:17.690
The third outside speaker that
I have now is Laura Cha,

45:17.690 --> 45:19.860
although she won't be
here in person.

45:19.860 --> 45:25.010
We're going to have her image
up on the screen because she

45:25.010 --> 45:26.350
is in Hong Kong.

45:26.350 --> 45:29.830
And she is a non-official
member of the Executive

45:29.830 --> 45:31.740
Council of Hong Kong.

45:31.740 --> 45:35.640
She's a member of the government
of the People's

45:35.640 --> 45:39.800
Republic of China at the
vice ministerial rank.

45:39.800 --> 45:43.580
She's the first non-Chinese
delegate to the National

45:43.580 --> 45:48.250
People's Congress representing
Hong Kong, and has been vice

45:48.250 --> 45:51.940
chair of the China Securities
Regulatory Commission.

45:51.940 --> 45:55.330
So, she is very involved
in finance.

45:55.330 --> 45:59.290
She's also been affiliated with
Yale and helped some of

45:59.290 --> 46:02.120
our initiatives.

46:02.120 --> 46:04.950
She'll have to get up very late
at night, I think, to be

46:04.950 --> 46:08.030
on for 9:00 in the morning
for us from Hong Kong.

46:08.030 --> 46:11.700
I might get one or two other
speakers, but that's where it

46:11.700 --> 46:16.530
stands right now.

46:16.530 --> 46:19.330
So, I wanted also to tell you
about our teaching assistants.

46:25.120 --> 46:26.710
We have four teaching
assistants now.

46:26.710 --> 46:30.080
We might get another,
but at this point.

46:30.080 --> 46:34.980
The first is Oliver Bunn who is
from Germany, University of

46:34.980 --> 46:40.800
Bonn, and is a PhD student
in economics.

46:40.800 --> 46:43.120
He's also our head TA who

46:43.120 --> 46:48.590
coordinates the whole operation.

46:48.590 --> 46:56.030
And then we have -- the second
one is Elan Fuld from the

46:56.030 --> 46:58.110
United States.

46:58.110 --> 47:01.790
And he's doing an interesting
study of the

47:01.790 --> 47:03.840
pizza delivery industry.

47:03.840 --> 47:08.480
It sounds funny, but it's an
interesting application of

47:08.480 --> 47:12.990
economic theory to very
much the real world.

47:12.990 --> 47:18.140
Bige Kahraman is from Bilkent
University in Turkey, and

47:18.140 --> 47:20.940
she's interested in Behavioral
Finance.

47:20.940 --> 47:21.660
That means --

47:21.660 --> 47:22.870
I should have said this.

47:22.870 --> 47:24.770
It's also an interest
of this course.

47:24.770 --> 47:26.790
I've skipped by it
in my notes.

47:26.790 --> 47:30.390
Behavioral Finance is the
application of psychology,

47:30.390 --> 47:33.800
sociology, and other social
sciences to finance.

47:33.800 --> 47:36.760
I don't know how I omitted
mentioning that.

47:36.760 --> 47:39.870
It's about people in finance
-- well, I didn't really

47:39.870 --> 47:41.090
completely omit mentioning it.

47:41.090 --> 47:43.640
You've got the sense that I'm
interested in people.

47:43.640 --> 47:46.080
But there's been a revolution
in finance

47:46.080 --> 47:48.320
over the last 20 years.

47:48.320 --> 47:52.140
Twenty years ago, finance was
thought of in academia as an

47:52.140 --> 47:54.600
essentially mathematical
discipline,

47:54.600 --> 47:56.220
that and nothing more.

47:56.220 --> 47:58.100
Well, maybe I'm exaggerating
a little bit.

47:58.100 --> 48:01.830
But what's happened since then
is people think of finance as

48:01.830 --> 48:03.700
involving psychology.

48:03.700 --> 48:09.300
We have to bring people with
knowledge of human beings in.

48:09.300 --> 48:16.590
And so, her dissertation topic,
a major theme of it, is

48:16.590 --> 48:18.250
how mutual funds operate.

48:18.250 --> 48:21.730
Mutual funds are companies that
offer investment vehicles

48:21.730 --> 48:25.490
to the general public, and she
finds that the mutual fund

48:25.490 --> 48:29.890
companies have complicated fee
schedules and they offer

48:29.890 --> 48:31.930
different choices to people.

48:31.930 --> 48:34.950
And what sense does this make?

48:34.950 --> 48:36.820
Why are there all these
different choices?

48:36.820 --> 48:39.400
You look at the fee schedules
and you think --

48:39.400 --> 48:41.880
it's just like your cell
phone plan, right?

48:41.880 --> 48:44.400
It's got different choices and
you don't know which one I

48:44.400 --> 48:45.540
should take.

48:45.540 --> 48:47.800
Why are they doing all this?

48:47.800 --> 48:52.510
Well, she tries to analyze
what's going on and she finds

48:52.510 --> 48:57.010
that sometimes it seems like
clients are steered toward a

48:57.010 --> 49:03.490
fee schedule that's really not
in their interest and that the

49:03.490 --> 49:08.470
mutual fund managers are doing
some things that maybe we

49:08.470 --> 49:09.940
don't want them to do.

49:09.940 --> 49:11.530
Maybe it's not ideal.

49:11.530 --> 49:14.330
They're pushed by competitive
pressures into offering

49:14.330 --> 49:20.870
products that are a little bit
manipulative of people.

49:20.870 --> 49:23.410
And her dissertation also brings
up another theme, which

49:23.410 --> 49:26.150
I thought I perhaps should have
emphasized, that all is

49:26.150 --> 49:28.790
not well in the financial
world.

49:28.790 --> 49:30.300
Lots of bad things happen.

49:30.300 --> 49:34.980
Or not necessarily awful things,
but, you know, not

49:34.980 --> 49:37.610
socially conscious things.

49:37.610 --> 49:39.570
And that's why we
need regulators.

49:39.570 --> 49:40.840
That's another reason
why I brought in

49:40.840 --> 49:42.100
Laura Cha, by the way.

49:42.100 --> 49:43.410
She's a regulator.

49:43.410 --> 49:46.840
I wanted to have a voice from
that side, because I

49:46.840 --> 49:49.350
personally admire regulators
and think that they have a

49:49.350 --> 49:53.620
very important function
in our society.

49:53.620 --> 49:56.190
So, her work fits
more into that

49:56.190 --> 50:02.110
regulatory side of finance.

50:02.110 --> 50:07.410
And then, finally, our fourth
teaching assistant is Bin Li

50:07.410 --> 50:11.040
from Beijing, although he went
to college at University

50:11.040 --> 50:13.270
College London.

50:13.270 --> 50:19.340
And he has broad interests
including Leveraged Asset

50:19.340 --> 50:22.480
Pricing and also Behavioral
Finance.

50:22.480 --> 50:26.350
So, those are the teaching
assistants.

50:26.350 --> 50:32.190
So, let me just give a brief
outline of the course.

50:32.190 --> 50:36.890
There are 20 lectures that I'm
giving in this course.

50:39.650 --> 50:46.830
This is the first. Let me just
go through what's the content

50:46.830 --> 50:48.080
of these lectures.

50:51.310 --> 50:55.040
So, Lecture 2, that would be on
Wednesday of this week, I

50:55.040 --> 51:01.870
want to talk about the core
concept of risk and also about

51:01.870 --> 51:03.720
financial crises.

51:03.720 --> 51:06.520
The one reason why I wanted to
update this course with Open

51:06.520 --> 51:09.420
Yale this year is, because I
wanted to talk about the

51:09.420 --> 51:13.720
financial crisis that we've been
through, though I thought

51:13.720 --> 51:17.130
this lecture would start with
something about the theory of

51:17.130 --> 51:20.260
probability, but I'm not going
to get into that very much.

51:20.260 --> 51:22.350
That will be more for
a TA section that

51:22.350 --> 51:23.690
will come in later.

51:23.690 --> 51:26.030
But even so, this is not
a probability course.

51:26.030 --> 51:28.320
I just want to kind of remind
you of the concepts of

51:28.320 --> 51:29.480
probability.

51:29.480 --> 51:32.570
And there's a concept of
independent risks.

51:32.570 --> 51:36.690
If risks are independent you can
diversify away them, and

51:36.690 --> 51:39.760
you can put together
a portfolio that

51:39.760 --> 51:42.340
minimizes the risks.

51:42.340 --> 51:44.660
The law of large numbers says
if you have a lot of

51:44.660 --> 51:48.120
independent risks, they'll
average out if you have a

51:48.120 --> 51:50.950
large number of these different
risks in your

51:50.950 --> 51:53.890
portfolio and there's
no risk left.

51:53.890 --> 51:55.960
That's if they're independent.

51:55.960 --> 52:00.410
But in fact, risks are not as
independent as you think, and

52:00.410 --> 52:03.580
that's one reason why we
had a financial crisis.

52:03.580 --> 52:06.560
And so, a lot of people were
making plans based on

52:06.560 --> 52:10.890
portfolio theory in finance,
but the plans assumed that

52:10.890 --> 52:13.900
there won't be a crisis, that
maybe one of our investments

52:13.900 --> 52:16.810
will go bad, but they can't all
go bad or a large number

52:16.810 --> 52:18.130
of them can't go bad.

52:18.130 --> 52:20.270
So, that was a failure
of the independence

52:20.270 --> 52:23.850
assumption in finance.

52:23.850 --> 52:29.000
That failure created the
financial crisis that we've

52:29.000 --> 52:29.900
been through.

52:29.900 --> 52:35.160
It was a near miss onto another
Great Depression.

52:35.160 --> 52:38.250
The financial crisis that
began in 1929 --

52:38.250 --> 52:40.840
I'll talk about that briefly
in that lecture --

52:40.840 --> 52:46.640
started with the stock market
crash of 1929 and the economy

52:46.640 --> 52:52.220
spiraled down until 1933.

52:52.220 --> 52:55.540
It just kept getting
worse and worse.

52:55.540 --> 52:58.690
More and more bankruptcies,
more and more layoffs.

52:58.690 --> 53:04.640
So, by 1933, 25% of the U.S.
population was unemployed.

53:04.640 --> 53:07.860
And it wasn't just the U.S.,
it was all over the world.

53:07.860 --> 53:09.890
It was a horrible crisis.

53:09.890 --> 53:15.280
And we didn't get over that
crisis until World War II.

53:15.280 --> 53:17.490
It's like we couldn't
get out of it.

53:17.490 --> 53:21.870
The crisis got so bad that
nobody in the world could

53:21.870 --> 53:23.970
figure out what to do.

53:23.970 --> 53:27.370
And I think that part of the
reason we had World War II was

53:27.370 --> 53:31.040
because of the anxieties and
animosities caused by this

53:31.040 --> 53:33.000
massive unemployment.

53:33.000 --> 53:36.750
But we got out of it because
World War II created a huge

53:36.750 --> 53:38.020
stimulus program.

53:38.020 --> 53:39.670
I mean, they drafted
all the unemployed

53:39.670 --> 53:40.910
and made them fight.

53:40.910 --> 53:44.560
What an awful outcome, but
that's what happened.

53:44.560 --> 53:46.120
It's terrible.

53:46.120 --> 53:49.940
And so, this time we
saw the beginnings

53:49.940 --> 53:51.180
of a similar crisis.

53:51.180 --> 53:54.710
We saw crashes in the stock
market and the real estate

53:54.710 --> 53:57.430
market, we saw bankruptcies
appearing,

53:57.430 --> 53:59.870
we saw runs on banks.

53:59.870 --> 54:05.210
And this time the Government
decided on a controversial

54:05.210 --> 54:06.870
bailout package.

54:06.870 --> 54:11.620
And so, Ben Bernanke and Mervyn
King and other central

54:11.620 --> 54:14.650
bankers and government
policymakers around the world

54:14.650 --> 54:17.530
had the idea that we can't
let it happen the

54:17.530 --> 54:19.150
same way this time.

54:19.150 --> 54:22.500
So, there was massive bailouts,
controversial

54:22.500 --> 54:26.160
bailouts, because they seemed
to be unfair to many people.

54:26.160 --> 54:28.360
So, it's a huge and
interesting story.

54:28.360 --> 54:31.470
I've written three books, by
the way, about this crisis.

54:31.470 --> 54:33.400
Well, two of them
with co-authors.

54:33.400 --> 54:36.760
So, it's something that
fascinates me.

54:36.760 --> 54:39.610
But I don't want to dwell on
it too much in this course,

54:39.610 --> 54:44.770
because I'm hopeful that it will
heal itself and we can

54:44.770 --> 54:46.030
put it behind us.

54:46.030 --> 54:49.000
And the financial crisis doesn't
call into question the

54:49.000 --> 54:51.020
basic principles of finance.

54:51.020 --> 54:52.940
Not in my mind.

54:52.940 --> 54:57.170
The vulnerability to a crash
that we see in financial

54:57.170 --> 55:00.780
markets is like the same thing
as the vulnerability to crash

55:00.780 --> 55:02.080
of airplanes.

55:02.080 --> 55:03.930
Airplanes crash from
time to time.

55:03.930 --> 55:06.090
You must know that when
you get on one.

55:06.090 --> 55:09.150
But that doesn't mean we
shouldn't have airplanes.

55:09.150 --> 55:14.290
And I think the financial system
is advancing in the

55:14.290 --> 55:18.960
world with such speed and such
impressiveness that this

55:18.960 --> 55:23.390
crisis is just a blip on the
screen of that, and not

55:23.390 --> 55:28.230
something I think we should
worry too much about.

55:28.230 --> 55:30.510
The third lecture is about
technology and

55:30.510 --> 55:34.190
invention in finance.

55:34.190 --> 55:39.690
Finance is a technology just
like engineering or mechanical

55:39.690 --> 55:40.630
engineering.

55:40.630 --> 55:44.590
It has principles, it has
techniques, and it involves

55:44.590 --> 55:46.740
inventing of details.

55:46.740 --> 55:50.170
That is, financial institutions
are complicated.

55:50.170 --> 55:52.930
They're complicated in the
same way automobiles or

55:52.930 --> 55:57.160
airplanes or nuclear
power reactors are.

55:57.160 --> 55:59.460
You can see this complexity,
if you read some of the

55:59.460 --> 56:03.440
documents that are associated
with the modern corporation.

56:03.440 --> 56:04.950
There's a lot there.

56:04.950 --> 56:09.530
And the way the cash flows are
divided up among different

56:09.530 --> 56:14.170
people, involving options and
derivatives and other

56:14.170 --> 56:17.130
complicated financial
instruments, are part of the

56:17.130 --> 56:18.200
technology.

56:18.200 --> 56:21.840
And this technology is
advancing, and it will advance

56:21.840 --> 56:25.040
a lot over the time
of your career.

56:25.040 --> 56:29.000
I don't have an ability to
predict the future with any

56:29.000 --> 56:32.490
accuracy, but I want to try to
think about what we can say

56:32.490 --> 56:33.570
about the future.

56:33.570 --> 56:37.710
I wrote a book in 2003 called
The New Financial Order, and

56:37.710 --> 56:39.720
it was my take on the future.

56:39.720 --> 56:41.870
But the problem is nobody
really knows

56:41.870 --> 56:43.120
the future very well.

56:47.800 --> 56:50.920
You kind of have to just invent
it or dream about what

56:50.920 --> 56:52.170
it might be like.

56:52.170 --> 56:52.850
That's what I did.

56:52.850 --> 56:56.360
I kind of thought about
principles of financial theory

56:56.360 --> 57:00.010
and where they might go with
the advance of information

57:00.010 --> 57:04.180
technology and the globalization
of the world.

57:04.180 --> 57:07.390
So, I have just a chapter
from that for that

57:07.390 --> 57:10.360
section of the course.

57:10.360 --> 57:14.820
Then, Lecture 4 is about
portfolio diversification, how

57:14.820 --> 57:16.960
risks are spread.

57:16.960 --> 57:18.960
And we'll talk briefly
about the Capital

57:18.960 --> 57:20.340
Asset Pricing Model.

57:20.340 --> 57:23.170
Now again, the Capital Asset
Pricing Model is a

57:23.170 --> 57:28.420
mathematical theory of
diversification.

57:28.420 --> 57:31.240
A very important theory, and
it's something that John

57:31.240 --> 57:36.570
Geanakoplos will cover with more
rigor in Econ 251 that I

57:36.570 --> 57:38.650
already mentioned.

57:38.650 --> 57:41.810
But for me, I will talk briefly
about the capital

57:41.810 --> 57:44.370
asset pricing model, and one
of our teaching assistants

57:44.370 --> 57:47.300
will give a section on it.

57:47.300 --> 57:49.460
But I want to also think about,
since this is a course

57:49.460 --> 57:52.000
about the real world, I want
to think about financial

57:52.000 --> 57:56.230
institutions, and so many of our
institutions are offering

57:56.230 --> 57:59.900
diversification one
way or another.

57:59.900 --> 58:02.640
And so, again, I wanted to
talk about the real world

58:02.640 --> 58:04.230
component of this.

58:04.230 --> 58:09.130
The fifth lecture is
about insurance.

58:09.130 --> 58:14.920
And the insurance industry
developed over the centuries.

58:14.920 --> 58:16.550
It goes, actually, all the
way back to Ancient

58:16.550 --> 58:19.750
Rome, but only minimally.

58:19.750 --> 58:24.200
People didn't have the concepts
until the 1600s when

58:24.200 --> 58:26.220
probability theory
was invented.

58:26.220 --> 58:29.060
There was an intuitive concept
that, sure, I could start an

58:29.060 --> 58:32.120
insurance company, I could put
together a lot of insurance

58:32.120 --> 58:36.920
policies and charge for them,
and probably I won't --

58:36.920 --> 58:40.060
you just have intuitive sense
about law of large number or

58:40.060 --> 58:41.170
independence of risks.

58:41.170 --> 58:44.080
Probably, I'll be OK and
I can make good on the

58:44.080 --> 58:45.400
policies that I wrote.

58:45.400 --> 58:46.790
But it was never clear until

58:46.790 --> 58:49.220
probability theory was developed.

58:49.220 --> 58:51.870
Since then, it's been growing
and it's becoming a bigger and

58:51.870 --> 58:53.490
bigger part of our lives.

58:53.490 --> 58:59.440
And I think that insurance
is actually a lifesaver.

58:59.440 --> 59:01.270
I'll give you one example.

59:01.270 --> 59:03.890
You note that in the earthquake
in Haiti --

59:06.820 --> 59:10.890
what was that, about
a year ago?

59:10.890 --> 59:15.020
There was a tremendous loss of
life, but the earthquake in

59:15.020 --> 59:20.360
San Francisco decades earlier
was of the same magnitude and

59:20.360 --> 59:23.050
had very little loss of life.

59:23.050 --> 59:27.650
Also, the loss suffered by
people in terms of destruction

59:27.650 --> 59:31.000
of their homes and their office
buildings was vastly

59:31.000 --> 59:32.190
higher in Haiti.

59:32.190 --> 59:35.410
Well, it turns out that Haiti,
a less developed country,

59:35.410 --> 59:39.790
didn't have much of the modern
insurance industry, so that

59:39.790 --> 59:42.680
people were uninsured against
risk of collapse of their

59:42.680 --> 59:46.180
structure and you didn't have
insurance industries going in

59:46.180 --> 59:48.670
and policing building codes.

59:48.670 --> 59:52.110
If the insurance company is
liable to the risk then they

59:52.110 --> 59:56.400
go in and say, we won't insure
you unless you fix this.

59:56.400 --> 59:59.920
Since it didn't happen,
so many people died.

59:59.920 --> 1:00:01.980
I think that Haiti
will come along.

1:00:01.980 --> 1:00:04.290
There is already a Caribbean
insurance

1:00:04.290 --> 1:00:06.490
initiative that was starting.

1:00:06.490 --> 1:00:11.660
We want to see the developing
world get these institutions.

1:00:11.660 --> 1:00:14.650
I want to try to give a sense
of the reality of that, that

1:00:14.650 --> 1:00:17.270
we tend to think of Haiti as
an opportunity for our

1:00:17.270 --> 1:00:21.660
charity, and a lot of us gave
money to help these people.

1:00:21.660 --> 1:00:26.620
But, you know, charity doesn't
work on a big enough scale.

1:00:26.620 --> 1:00:29.030
Going around to people on the
street and asking them to give

1:00:29.030 --> 1:00:33.100
money to help the Haitian
earthquake victims, it doesn't

1:00:33.100 --> 1:00:34.950
amount to a lot.

1:00:34.950 --> 1:00:37.970
What really becomes big and
important is the insurance

1:00:37.970 --> 1:00:40.250
industry, which is doing
the same thing

1:00:40.250 --> 1:00:42.410
as a business model.

1:00:42.410 --> 1:00:47.730
And that's the real world and
it matters enormously.

1:00:47.730 --> 1:00:51.760
The sixth lecture is about
efficient markets.

1:00:51.760 --> 1:00:57.950
This is about a theory that
developed in the 1960s, that

1:00:57.950 --> 1:01:01.480
financial markets are
wonderfully perfect.

1:01:01.480 --> 1:01:03.740
I'm saying I'm a little bit
skeptical of this theory,

1:01:03.740 --> 1:01:05.850
although I think it has
an element of truth.

1:01:05.850 --> 1:01:10.790
Efficient Markets Theory is the
idea that you really can't

1:01:10.790 --> 1:01:13.380
make money by trading in
financial markets, because the

1:01:13.380 --> 1:01:19.060
markets are so competitive that
price is always pushed to

1:01:19.060 --> 1:01:22.790
an optimal level that
incorporates all information

1:01:22.790 --> 1:01:25.510
that anyone could ever have
about the security.

1:01:25.510 --> 1:01:31.500
And the theory has been that
it's hopeless to try to invest

1:01:31.500 --> 1:01:33.680
and beat the market.

1:01:33.680 --> 1:01:36.090
Well, I think there's an element
of truth to that but

1:01:36.090 --> 1:01:39.600
it's not quite true, and people
like David Swensen are

1:01:39.600 --> 1:01:44.640
counterexamples, that it is
possible for professional

1:01:44.640 --> 1:01:47.530
money managers to
beat the market.

1:01:47.530 --> 1:01:52.740
And that's something I want to
think about and talk about in

1:01:52.735 --> 1:01:53.935
that lecture.

1:01:53.940 --> 1:01:55.920
Lecture 7 is about
debt markets.

1:01:59.360 --> 1:02:03.920
We have a lot of money
that's lent.

1:02:03.920 --> 1:02:07.430
The Federal Reserve manages
these markets.

1:02:07.430 --> 1:02:13.290
They try to coordinate the
markets through open market

1:02:13.290 --> 1:02:15.680
operations and through
what now is called

1:02:15.680 --> 1:02:18.570
Quantitative Easing.

1:02:18.570 --> 1:02:22.030
But the markets are huge
and international.

1:02:22.030 --> 1:02:25.150
They involve errors
that people make.

1:02:25.150 --> 1:02:28.650
A lot of people get overly
indebted and make mistakes

1:02:28.650 --> 1:02:30.760
over their lives.

1:02:30.760 --> 1:02:33.580
But they also offer
opportunities, that debt

1:02:33.580 --> 1:02:35.550
markets are fundamental
to the things we want

1:02:35.550 --> 1:02:36.910
to do in our lives.

1:02:36.910 --> 1:02:40.020
For example, when you are a
little bit older, many of you

1:02:40.020 --> 1:02:42.720
will want to buy
a house, right?

1:02:42.720 --> 1:02:45.120
But you won't be in that point
in the life cycle when you

1:02:45.120 --> 1:02:47.820
have the money to buy a
house, most of you,

1:02:47.820 --> 1:02:48.800
so you'll be borrowing.

1:02:48.800 --> 1:02:49.620
It's elementary.

1:02:49.620 --> 1:02:50.990
You take out a mortgage.

1:02:50.990 --> 1:02:51.970
That seems obvious.

1:02:51.970 --> 1:02:54.960
But still today in many
countries of the world, the

1:02:54.960 --> 1:02:57.250
mortgage market is not
very developed, and

1:02:57.250 --> 1:02:58.980
you can't do that.

1:02:58.980 --> 1:03:01.580
So, there's a good side
to borrowing as

1:03:01.580 --> 1:03:02.330
well as a bad side.

1:03:02.330 --> 1:03:04.990
I want to put it
in perspective.

1:03:04.990 --> 1:03:06.300
We've got our review session.

1:03:06.300 --> 1:03:08.440
We'll talk a little bit,
somewhat, with one of our

1:03:08.440 --> 1:03:12.750
teaching assistants about
the mathematics of debt.

1:03:12.750 --> 1:03:15.880
Lecture 8 will be about
the stock market.

1:03:15.880 --> 1:03:18.790
Again, I think of the stock
market not as something that

1:03:18.790 --> 1:03:19.610
we're going to beat.

1:03:19.610 --> 1:03:25.730
I think it's something that is
an invention to motivate

1:03:25.730 --> 1:03:28.170
people to get people
working together.

1:03:28.170 --> 1:03:31.730
So, the basic idea of a stock
investment: You and your

1:03:31.730 --> 1:03:34.890
friends want to set
up a company, OK?

1:03:34.890 --> 1:03:35.670
How do you do that?

1:03:35.670 --> 1:03:38.090
Well, the company needs
money to start.

1:03:38.090 --> 1:03:40.170
So, somebody's got to
contribute capital.

1:03:40.170 --> 1:03:42.670
Well, some of you have more
money to contribute than

1:03:42.670 --> 1:03:45.720
others, so you should have a
bigger share in the company.

1:03:45.720 --> 1:03:48.320
Some of you have no money at all
to contribute, but you're

1:03:48.320 --> 1:03:50.450
going to contribute your
time and energy.

1:03:50.450 --> 1:03:53.140
So, you want to give a share in
the company to these other

1:03:53.140 --> 1:03:56.690
people as well in order
to incentivize them.

1:03:56.690 --> 1:04:01.620
So, you devise a whole scheme
to set up a company that

1:04:01.620 --> 1:04:03.650
involves the creation
of stock.

1:04:03.650 --> 1:04:06.490
And then you start trading the
stock and then it gets all the

1:04:06.490 --> 1:04:07.230
more interesting.

1:04:07.230 --> 1:04:10.050
And then there are options on
these stock certificates.

1:04:10.050 --> 1:04:11.440
But it's all for a purpose.

1:04:11.440 --> 1:04:15.450
The purpose is to make some
enterprise happen.

1:04:15.450 --> 1:04:19.090
And it really is important
that we have these

1:04:19.090 --> 1:04:22.780
institutions, and if you don't
have them, your little group

1:04:22.780 --> 1:04:24.870
trying to do something is
going to fall apart.

1:04:24.870 --> 1:04:26.990
Someone's going to get angry
and leave. It's just

1:04:26.990 --> 1:04:28.240
not going to work.

1:04:28.240 --> 1:04:29.860
And so, I think of
the stock market

1:04:29.860 --> 1:04:31.550
as doing these functions.

1:04:31.550 --> 1:04:34.270
Now I know Karl Marx said he
thought it was a big casino,

1:04:34.270 --> 1:04:36.180
but we're not communists here.

1:04:36.180 --> 1:04:39.790
This is about modern finance.

1:04:39.790 --> 1:04:43.010
Lecture 9 is about
real estate.

1:04:43.010 --> 1:04:44.570
Another fascination for me.

1:04:44.570 --> 1:04:47.580
I've been working for years
about real estate.

1:04:47.580 --> 1:04:50.950
And, in fact, with my colleague
Karl Case, we have

1:04:50.950 --> 1:04:54.470
our own home price indices
called the Standard and Poor

1:04:54.470 --> 1:04:56.080
Case-Shiller Home
Price Indices.

1:04:56.080 --> 1:04:58.240
We'll talk about those.

1:04:58.240 --> 1:05:01.340
But it's really important for
this crisis that we've just

1:05:01.340 --> 1:05:05.390
seen, because the financial
crisis was caused

1:05:05.390 --> 1:05:11.160
substantially by a bubble in
home prices, I believe, a

1:05:11.160 --> 1:05:14.380
psychologically induced
excitement or euphoria about

1:05:14.380 --> 1:05:17.550
home prices in the United States
and in other countries

1:05:17.550 --> 1:05:20.210
that collapsed around 2006.

1:05:20.210 --> 1:05:23.940
These bubbles are restarting
in other parts of the world

1:05:23.940 --> 1:05:25.030
more recently.

1:05:25.030 --> 1:05:29.940
And the real estate market is
getting very speculative and

1:05:29.940 --> 1:05:32.210
psychological, I believe.

1:05:32.210 --> 1:05:35.960
And the outlook right now for
the economy hinges on how

1:05:35.960 --> 1:05:44.120
these markets behave. So, that
will be, I think, an important

1:05:44.120 --> 1:05:46.130
lecture for this course.

1:05:46.130 --> 1:05:48.950
Lecture 10 is about Behavioral
Finance.

1:05:48.950 --> 1:05:50.510
It's about psychology
in finance.

1:05:50.510 --> 1:05:51.640
I talked about that.

1:05:51.640 --> 1:05:55.930
It's another long-standing
interest of mine to try to

1:05:55.930 --> 1:06:01.370
incorporate psychology
into our theory.

1:06:01.370 --> 1:06:06.200
So, lecture 12 is about banking,
multiple expansion of

1:06:06.200 --> 1:06:11.390
credit, the money multiplier,
and bank regulation, which is

1:06:11.390 --> 1:06:14.820
something that is a fascinating
topic, because we

1:06:14.820 --> 1:06:16.620
almost lost our banking
system.

1:06:16.620 --> 1:06:19.510
We had to bail them
out massively.

1:06:19.510 --> 1:06:21.770
We have international
accords now.

1:06:21.770 --> 1:06:25.300
Notably, a new one just came
out called Basel III from

1:06:25.300 --> 1:06:27.850
Basel, which is the city in
Switzerland, and it was

1:06:27.850 --> 1:06:30.790
endorsed by the G-20
countries at their

1:06:30.790 --> 1:06:33.210
Korean meeting in Seoul.

1:06:33.210 --> 1:06:38.000
So, we're seeing a change in
bank regulation that will, we

1:06:38.000 --> 1:06:42.050
hope, prevent another
crisis like the one

1:06:42.050 --> 1:06:44.420
we just went through.

1:06:44.420 --> 1:06:47.220
Lecture 13 is about forwards
and futures markets.

1:06:50.380 --> 1:06:54.400
Forward markets are markets for
contracts that deliver in

1:06:54.400 --> 1:06:56.610
the future.

1:06:56.610 --> 1:07:00.290
Over-the-counter contracts,
they're called, that are done

1:07:00.290 --> 1:07:04.590
one on one between parties
with the help of

1:07:04.590 --> 1:07:06.590
an investment bank.

1:07:06.590 --> 1:07:10.010
Or futures contracts, which
are traded on organized

1:07:10.010 --> 1:07:15.700
futures exchanges, like the
Chicago Mercantile Exchange.

1:07:15.700 --> 1:07:19.420
I have some involvement with
this, because we worked with

1:07:19.420 --> 1:07:21.760
the Chicago Mercantile Exchange
to create a futures

1:07:21.760 --> 1:07:24.810
market for single-family
homes using the S&P

1:07:24.810 --> 1:07:26.160
Case-Shiller Index.

1:07:26.160 --> 1:07:28.780
So, I'm involved in this.

1:07:28.780 --> 1:07:33.930
And we have that market
functioning at a rather low

1:07:33.930 --> 1:07:35.720
level, but it is functioning
and it seems

1:07:35.720 --> 1:07:37.250
to be growing lately.

1:07:37.250 --> 1:07:39.600
I'm hopeful for that market.

1:07:39.600 --> 1:07:42.440
Lecture 14 is about
options markets.

1:07:42.440 --> 1:07:47.060
These are most typically stock
options, which are contracts

1:07:47.060 --> 1:07:51.510
that allow you to purchase a
share of a stock or to sell a

1:07:51.510 --> 1:07:54.010
share at a pre-specified
price.

1:07:54.010 --> 1:07:56.250
These are traded on
options exchanges.

1:07:56.250 --> 1:07:58.450
They have a price that
goes up and down.

1:07:58.450 --> 1:08:03.110
This is an example of a
derivative contract that

1:08:03.110 --> 1:08:07.040
injects a lot of complexity
into financial theory.

1:08:07.040 --> 1:08:10.590
Lecture 15 is about
monetary policy.

1:08:10.590 --> 1:08:12.790
It's about the central
banks of the world.

1:08:12.790 --> 1:08:16.770
For example, our central bank,
called the Federal Reserve in

1:08:16.770 --> 1:08:18.210
the United States.

1:08:18.210 --> 1:08:23.000
And it's about what they do
and how they help prevent

1:08:23.000 --> 1:08:25.920
crises like the one
we've just seen.

1:08:25.920 --> 1:08:27.020
They did help prevent it.

1:08:27.020 --> 1:08:29.590
I think they staved
off disaster.

1:08:29.590 --> 1:08:32.650
Lecture 16 is about investment
banking.

1:08:32.650 --> 1:08:34.720
I know this is of great
interest, because we place a

1:08:34.720 --> 1:08:38.740
lot of students in good jobs
in investment banking.

1:08:38.740 --> 1:08:44.240
Companies like Goldman Sachs,
the most talked about one.

1:08:44.240 --> 1:08:48.400
Investment bankers help
companies raise capital, issue

1:08:48.400 --> 1:08:51.920
securities, retire securities.

1:08:51.920 --> 1:08:54.330
And we're going to talk about
how they're regulated.

1:08:54.330 --> 1:08:56.940
And I didn't mention Dodd-Frank,
by the way, but we

1:08:56.940 --> 1:09:00.830
have a new bill that just passed
in July in the United

1:09:00.830 --> 1:09:04.980
States that changes the
regulatory structure for

1:09:04.980 --> 1:09:07.060
investment banks and a whole
array of financial

1:09:07.060 --> 1:09:08.110
institutions.

1:09:08.110 --> 1:09:09.500
And I want to talk about that.

1:09:12.380 --> 1:09:17.660
The European Parliament has
created a number of new laws

1:09:17.660 --> 1:09:20.780
and organizations that somewhat
resemble Dodd-Frank.

1:09:20.780 --> 1:09:23.660
And other countries have also
done financial regulation

1:09:23.660 --> 1:09:26.550
reform that affects investment
banking and

1:09:26.550 --> 1:09:28.350
other aspects of finance.

1:09:28.350 --> 1:09:30.480
It's extremely complicated.

1:09:30.480 --> 1:09:34.290
I don't want to give you too
many details but I want to

1:09:34.290 --> 1:09:37.510
give you some sense of the
revolution that we're seeing.

1:09:37.510 --> 1:09:40.640
Lecture 17 is about professional
money managers

1:09:40.640 --> 1:09:44.860
like David Swensen, people
who manage portfolios.

1:09:44.860 --> 1:09:47.190
You don't have to be a
billionaire to manage a

1:09:47.190 --> 1:09:48.900
billion-dollar portfolio.

1:09:48.900 --> 1:09:51.430
In fact, some of you may be
doing it sooner than you

1:09:51.430 --> 1:09:54.700
realize if you get the
right kind of job.

1:09:54.700 --> 1:09:58.070
Managing a portfolio means
managing the risks, putting

1:09:58.070 --> 1:09:59.320
them in the right places.

1:10:04.240 --> 1:10:08.360
You think of institutional
investors, big money managers,

1:10:08.360 --> 1:10:10.400
as just trying to make money.

1:10:10.400 --> 1:10:14.920
But when you get into that field
you realize that you

1:10:14.920 --> 1:10:18.350
have power as an institutional
investor.

1:10:18.350 --> 1:10:21.090
When you own a big share of some
company, you can go to

1:10:21.090 --> 1:10:24.380
the board meeting and talk
to these people, or the

1:10:24.380 --> 1:10:27.850
stockholders' meeting, and you
will get heard if you own 10%

1:10:27.850 --> 1:10:29.400
of the shares of a company.

1:10:29.400 --> 1:10:31.890
Then you suddenly realize that
you are a steward of the

1:10:31.890 --> 1:10:35.540
public interest. And I think
institutional investors are

1:10:35.540 --> 1:10:37.490
recognizing that
more and more.

1:10:37.490 --> 1:10:41.290
Lecture 18 is about exchanges,
brokers, dealers,

1:10:41.290 --> 1:10:44.420
clearinghouses, like the New
York Stock Exchange or the

1:10:44.420 --> 1:10:46.370
London Stock Exchange.

1:10:46.370 --> 1:10:48.920
They are proliferating
around the world.

1:10:48.920 --> 1:10:52.910
Whereas there were just a few 30
years ago, now almost every

1:10:52.910 --> 1:10:55.480
country has a stock
exchange and a

1:10:55.480 --> 1:10:57.390
complicated list of exchanges.

1:10:57.390 --> 1:11:00.050
They're increasingly electronic,
they have

1:11:00.050 --> 1:11:03.740
interesting new features, like
microsecond trading that's

1:11:03.740 --> 1:11:07.270
going on, computers trading
with other computers.

1:11:07.270 --> 1:11:10.110
We'll talk about where
this is going.

1:11:10.110 --> 1:11:15.070
Lecture 19 is about public
and nonprofit finance.

1:11:15.070 --> 1:11:16.650
So, I think this is
very important.

1:11:16.650 --> 1:11:19.760
Nonprofit finance would include
organizations like

1:11:19.760 --> 1:11:23.720
Yale University, or churches
and charities and

1:11:23.720 --> 1:11:25.140
other things like that.

1:11:25.140 --> 1:11:28.300
But I'm also including in this
lecture public finance.

1:11:28.300 --> 1:11:31.350
And that means governments
financing projects.

1:11:31.350 --> 1:11:34.750
So, for example, you take it for
granted that our city here

1:11:34.750 --> 1:11:39.100
of New Haven has roads,
it has schools, it has

1:11:39.100 --> 1:11:40.720
sewers, it has water.

1:11:40.720 --> 1:11:43.100
All this kind of comes without
you even asking.

1:11:43.100 --> 1:11:45.640
But all of these things
had to be financed.

1:11:45.640 --> 1:11:48.840
And the City of New Haven, like
other cities, is issuing

1:11:48.840 --> 1:11:52.080
debt and it's a complicated
business.

1:11:52.080 --> 1:11:54.940
I want to get you into some
of the details, because it

1:11:54.940 --> 1:11:57.520
matters, because this is how
you make things happen.

1:11:57.520 --> 1:12:01.710
You can go to your city
government and you can propose

1:12:01.710 --> 1:12:04.840
that they issue revenue bonds
to start some new product.

1:12:04.840 --> 1:12:05.760
You would know --

1:12:05.760 --> 1:12:08.190
that's what I want you to do,
is to know how these things

1:12:08.190 --> 1:12:11.020
are done, so that it's
not just imagination,

1:12:11.020 --> 1:12:13.330
you can make it happen.

1:12:13.330 --> 1:12:14.810
And also nonprofits.

1:12:14.810 --> 1:12:18.160
I want you to understand that
you can set up your own

1:12:18.160 --> 1:12:21.230
nonprofits, and there's a lot
of advantages to doing that.

1:12:21.230 --> 1:12:24.630
That's an organization that has
a financial structure but

1:12:24.630 --> 1:12:26.070
no shareholders.

1:12:26.070 --> 1:12:27.400
Nobody takes home the money.

1:12:27.400 --> 1:12:29.590
It all goes to some cause.

1:12:29.590 --> 1:12:34.000
And, finally, my last lecture,
Lecture 20, I'm calling it

1:12:34.000 --> 1:12:37.380
''Finding your Purpose in
Finance.'' I just want to come

1:12:37.380 --> 1:12:42.720
back in the last lecture to the
idea that this is a course

1:12:42.720 --> 1:12:44.900
not about making money.

1:12:44.900 --> 1:12:47.840
I don't want you to give a
billion dollars to your

1:12:47.840 --> 1:12:51.490
children and grandchildren,
which they will then squander

1:12:51.490 --> 1:12:53.690
in conspicuous consumption.

1:12:53.690 --> 1:12:58.030
The idea is a moral purpose.

1:12:58.030 --> 1:13:02.200
And that's one thing I wanted to
try to convey, partly with

1:13:02.200 --> 1:13:04.580
outside speakers, maybe with
other examples that I can

1:13:04.580 --> 1:13:11.100
give, that I think that many
people who are wealthy and who

1:13:11.095 --> 1:13:15.895
have succeeded in finance
really don't care about

1:13:15.900 --> 1:13:17.840
spending the money
on themselves.

1:13:17.840 --> 1:13:19.510
They really do have a purpose.

1:13:19.510 --> 1:13:22.480
And even if that's not
true of many of them.

1:13:22.480 --> 1:13:24.660
There's an interesting book by
Robert Frank, I don't have it

1:13:24.660 --> 1:13:27.490
on the reading list, called
Richistan, who talks about

1:13:27.490 --> 1:13:29.740
what wealthy people are
like these days.

1:13:29.740 --> 1:13:33.020
And if you read his book
sometimes they are

1:13:33.020 --> 1:13:36.960
disgustingly rich and spending
the money on silly things.

1:13:36.960 --> 1:13:41.610
But there is an idea among many
of them that they are

1:13:41.610 --> 1:13:45.630
going to do their good
things for the world.

1:13:48.840 --> 1:13:50.900
Because I think many of you will
do these things, I want

1:13:50.900 --> 1:13:59.470
to think about the purpose that
you'll find in finance.

1:13:59.470 --> 1:14:02.060
So, that's just the
closing thought.

1:14:02.060 --> 1:14:05.530
I'll see you again
on Wednesday.

1:14:05.530 --> 1:14:09.510
But the closing thought is that
this is about making your

1:14:09.510 --> 1:14:12.550
purposes happen.

1:14:12.550 --> 1:14:13.800
OK.