WEBVTT

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PROFESSOR ROBERT SHILLER:
All right.

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This is the concluding lecture
for ''Financial Markets.'' And

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in this lecture, I want --

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oh, I titled this lecture,
Finding Your Purpose in a

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World of Financial
Capitalism --

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but I just want to give a lot of
summary thoughts about the

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course and about your place
in the world of

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business and finance.

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So, we had two --

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well, the major textbook for
this course was by Fabozzi et

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al., and it gave you a lot of
detailed information about

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financial markets and
institutions.

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Did you like it?

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I'm getting approval, I guess.

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I put you through something,
because I thought you have to

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know that material.

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Finance is like a language.

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Well, it is a language.

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There's a lot of jargon, and
behind the jargon are

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concepts, and I wanted you to
immerse yourself in that.

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I also assigned my manuscripts
for my new book, which is

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tentatively entitled Finance
and the Good Society.

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I'm still not sure, that that
will be the final title.

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Some of you have been offering
me suggested titles, and I

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appreciate that.

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You can never know what the
title of a book will be,

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before you publish it, because
someone else can always grab

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the title, and then you've
got to change it.

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But that book was about --

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see, Fabozzi et al.

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is more about all of the
language of finance, and all

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of the technical details.

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I wanted to supplement it with
something about the purpose of

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all this, and how it fits
into our lives.

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So, it's not done yet,
as you may be well

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aware in reading it.

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My apologies.

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But I benefit from interacting
with you about it.

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It's a dynamic thing.

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I have a number of themes.

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They're all just kind of random
thoughts about the

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major things in this course.

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But I mean, I'm really thinking
this time about the

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kind of tools we've learned
about, tools that are

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particularly useful for people
who specialize in finance.

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But I think, this almost should
be a required course

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for everyone.

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Maybe, I'm just too enthusiastic
about it, but the

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way things get done in our
society is through financial

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arrangements.

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And too many people talk in
vague terms, not, how are we

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going to make something
happen?

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And finance is about that, so,
that's why I think this course

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should be --

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there should be more students
taking it than are.

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I also said, that I think that
finance is not a purpose in

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itself, it's a tool.

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And that you should be building
your life around some

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kind of purpose.

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There's a million different
purposes, so that's something

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for you to create in
your own mind.

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But that's, where the meaning
of life comes from.

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So, another thing I've
emphasized in this course is,

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that finance is like
engineering, so you

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have to design it.

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And once something is designed
and it works, it gets copied

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all over the world.

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You all have learned
how to drive a car.

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Is there anyone here who
hasn't driven a car?

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I won't ask for --

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no one raised their hand.

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So, you have to know
a little bit about

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mechanics to drive a car.

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Maybe not too much.

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But ultimately, what I wanted to
do in this course is, maybe

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not teach you how to build a
car, but how to drive a truck,

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something big and powerful,
and get you

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beyond the simple things.

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So, finance, what does it do?

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It does really important
things.

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It helps allocate scarce
resources, it incentivizes

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people to do good work,
and it manages risks.

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And this is, what makes for
the developed world

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that we have now.

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Another theme of this course
is about information

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technology, which is something
that's rapidly expanding.

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I don't have to tell you that.

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But I think that it will change
the world of finance.

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The last 50 years have shown
tremendous changes, the next

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50 years will show even
more dramatic changes.

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Or anyway, more specifically,
I have seven themes that I

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want to cover in today's
lecture.

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The first one is just about
the morality of finance.

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I've been talking about this
here and again, but let me say

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a little bit more about
that in concluding.

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My second theme is
hopelessness.

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There's a tendency for people to
think, that, at some level,

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because of the world's
problems, it's

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all hopeless, anyway.

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I don't think it is.

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Well, I've come to --

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I'll have to tell you
what I mean by that.

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Then thirdly, I just
want say something

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about financial theory.

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Then to come fourth, to come
back to another theme, which

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is wealth and poverty, which
I've talked about a lot.

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Then, the world of
the next century.

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And I think, one trend we'll see
is the democratization of

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finance, that finance will
become much more of an

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integral part of our
lives in a new

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information-technology-enriched
world.

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And then lastly, I'll say
something about your career,

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whether it's in finance or in

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something completely different.

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But I'm thinking, that there
is a good chance it has

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something to do with finance.

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Let me start, though, with
the first thing,

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which is about morality.

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I have -- actually, the two
optional readings I have on

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this part of the reading list
are both about morality.

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And one is the book by
Unger called Living

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High and Letting Die.

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I think, it's a dramatically
well-written book, but on the

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first page of the book, he
refers you to UNICEF, which --

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actually, his book was written
before the web got popular.

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The book is 1994, I think.

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1996.

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He could have referred to the
web, but he gave the address.

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UNICEF is the United
Nations --

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what does the I stand for?

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Children Educational Fund,
but what's the I?

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Can someone tell me?

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They don't actually emphasize,
what it's spelled out.

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It's the United Nations fund for
children of the world, and

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that's their website.

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So, he opens the book by saying,
why don't you get out

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your checkbook right now and
mail in $100 to unicef.org,

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because the estimate, as of
1996, is, that UNICEF can save

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a child's life for $3.

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So, you will save the
lives of 33 children

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for your $100 check.

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How can they do that?

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How can they save a life?

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I think, maybe he's referring
to things like vaccination

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programs, things that are
really cheap, that some

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children are not getting.

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And so, statistically, you can
save a child's life for $3.

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So, he says, write out a check,
but of course, I can

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tell you what to do, and that
is, just log on to that and

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get out your credit card.

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And I don't know, if you can
save 33 lives with $100, but

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maybe you can.

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So, when I first read the book,
I thought about that,

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and then I turned the page --

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because most of us do --

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and I realized later, a month
later, that I never had

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written out $100 check.

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So, I finally did.

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I went on to unicef.org and
I gave exactly $100, as he

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called for.

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Then, I started --

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that was thought-provoking to
think about that, because why

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did I stop at $100?

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Why is it that most of
us don't do that?

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There are intellectual defenses
we have -- we think

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of ourselves as good people --

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but if you were to see a dying
child, you would emotionally

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be driven to do something,
if there was

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something you could do.

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But somehow, when they're not
visible to us, we don't take

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action to make them visible.

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What the book consists of,
Unger's book consists of is an

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analysis of all the excuses we
give for not doing it, for not

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doing that sort of thing.

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So, living our comfortable
lives and letting

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other people die.

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And I think, it's really an
interesting book, because it

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is referring to a paradox
of human behavior.

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I think of this as at the
juncture of philosophy and

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psychology.

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And now, those two departments
are starting to --

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I understand, I'm not in
either one of them --

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they are starting to come
together, because they're

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realizing that philosophical
issues are related to

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psychological issues.

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So somehow, the human spirit
is very empathetic and

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sympathetic in certain
dimensions,

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but not so in others.

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When you read his book, you get
a sense of meaninglessness

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or loss of purpose.

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It's not entirely comfortable
to read it.

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He has a lot of examples
of moral dilemmas.

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I don't mean to find fault
with his book, but when I

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think further about it, it
seems, that maybe the book is

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a bit circumscribed by
the kind of moral

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dilemmas that he poses.

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In some sense, moral
dilemmas are --

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it's almost like there's a moral
imperative for us to

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take action to do things.

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That's sort of what
he's getting at.

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But there's almost a moral
imperative to be

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entrepreneurial to do things.

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I mentioned before, Paul Allen,
who was one of the top

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people in Microsoft, who made
so much money and squandered

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some of it, apparently, on
conspicuous consumption, but

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on the other hand, gives a
billion dollars to charity.

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So, it seems to me that --

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let's not conclude that people
who don't write the $100 check

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are evil, and let's think
of the many, many

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dimensionalities of morality.

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The other book I had on this
part of the course was by

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William Graham Sumner, and
it was written over 100

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years earlier --

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1883 --

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called What the Social Classes
Owe Each Other.

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And Sumner was actually Yale's
first real economist.

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Interesting person.

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He graduated Yale College in
1863, and he was hired by Yale

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as a tutor in mathematics in
1866, and became interested in

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economics and sociology.

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He has the distinction of
being the first American

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professor to teach a course
called Sociology, and in those

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days, there wasn't the
distinction between the social

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sciences that there is now.

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So, he could teach both
sociology and economics.

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So, in his book, I think, he
started a Yale tradition of

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conservative economics that
lasted until the 1940s.

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And then, Yale kind of drifted
more toward the liberal end.

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But he writes, anyway,
in 1883, "Is it

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wicked to be rich?

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Is it mean to be a capitalist?"
And he says,

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first of all, it seems, if
capitalists are just richer

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than other people -- he asks,
where's the dividing line,

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when someone is rich?

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So, is it wicked to be
above that line?

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But where do you
draw the line?

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And you learn from Unger,
maybe we're all wicked,

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because anyone who doesn't write
a $100 check every day

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to UNICEF, when children
are dying around

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the world, is wicked.

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What Sumner is saying, and it
seems to be a theme that

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survives the centuries, in
favor of capitalists.

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I'll quote Sumner.

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"The great gains of a great
capitalist in a modern state

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must be put under the head of
wages of superintendents.

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Anyone who believes that any
great enterprise of an

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industrial character can be
started without labor must

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have little experience
of life.

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Let anyone try to get a railroad
built or to start a

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factory and win reputation for
its products, and he will find

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what obstacles must be overcome,
what risks must be

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taken, what perseverance and
courage are necessary."

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I don't know, that I entirely
agree with Sumner, but he has

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a point, that part of our
morality is to do good for the

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world by doing things like set
up railroads, or Microsoft.

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And the kind of activities, that
that entails, will create

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opportunities for conspicuous
consumption, but not

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necessarily make that the
defining characteristic of

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someone who does it.

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Nobody is perfect, and it's
hard to judge people

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ultimately, but it seems to me
that there's almost a moral

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imperative to entrepreneurship.

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Let me go on to the second theme
that I said I would talk

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about, and that is
hopelessness.

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A lot of people, from their
education, get the idea that

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ultimately there's nothing
we can really do.

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This is one of Unger's --

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Unger talks about
rationalizations we give for

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not being moral, and he
calls it futility as a

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rationalization.

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Ultimately, there's always going
to be starving people in

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the world, and I can try
to help this child, but

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something's going to
get him later, and

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so there's no point.

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If you have that kind sense of
futility, it can justify any

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amount of hedonism.

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But I think, that the classic
article that lends most people

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to that sense of futility, and
I assume you know about this

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already, but it's Malthus,
1798, his essay on --

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well, the title of it is Essay
on the Principle of

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Population.

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So, Thomas Malthus wrote about
the population problem.

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It was such a celebrated essay,
that he went through

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six editions of it, but I'm
going to quote from the first

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edition, just to remind you.

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He said, in 1798, "Population,
when unchecked, increased in a

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geometrical ratio and
subsistence for man in an

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arithmetical ratio."

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So, the population
growth follows an

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exponential growth curve.

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He says geometric, but
it goes like that.

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Whereas he said, at best, the
increase of our ability to

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produce is linear.

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He calls that arithmetical.

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And so, the population
will run off

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with all of our resources.

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There's nothing we can do,
population will continue to

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put pressure on our resources.

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He says and I'm quoting again
from his 1798 essay,

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"Population, when unchecked,
goes on doubling

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itself every 25 years.

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If you go through two 25 periods
where there was no

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check on population growth,
it is impossible'' --

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I'm quoting him -- "to suppose
that the produce could be

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quadrupled.

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It would be contrary to all our
knowledge of the qualities

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of land."

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And he comes now to his dismal
law of economics.

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He didn't call it that,
but I will quote him.

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"No possible form of society
could prevent the almost

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constant action of misery upon
a great part of mankind if in

19:14.180 --> 19:21.900
a state of inequality and upon
all if all were equal." So,

19:21.900 --> 19:25.250
the natural state of humankind
is bordering on

19:25.250 --> 19:28.380
starvation and dying.

19:28.380 --> 19:32.700
The force of his argument was
quite profound, because it was

19:32.700 --> 19:34.710
hard to argue against him, that
there's nothing you can

19:34.710 --> 19:35.500
do about it.

19:35.500 --> 19:38.310
That's just it.

19:38.310 --> 19:42.090
And all the theorizing of people
can only result in a

19:42.090 --> 19:47.150
world, where more people are
suffering and dying.

19:47.150 --> 19:50.500
If you want to think more about
this, I suggest you

19:50.500 --> 19:58.740
might go to Robert Wyman, who is
a professor here at Yale on

19:58.740 --> 20:05.810
Open Yale, which means it's
another of these courses open

20:05.810 --> 20:08.350
on the internet.

20:08.350 --> 20:11.710
Has of course called ''Global
Problems of Population

20:11.710 --> 20:15.640
Growth,'' where he spends a
whole semester thinking about

20:15.640 --> 20:16.890
the Malthusian problem.

20:19.620 --> 20:22.790
One thing that he talks about
in that course is, that

20:22.790 --> 20:26.530
there's a popular sense that the
population problem is not

20:26.530 --> 20:30.260
so bad anymore, because many
countries have introduced

20:30.260 --> 20:32.170
birth control policies.

20:32.170 --> 20:36.760
Notably, China has a one-child
policy, supposedly.

20:36.760 --> 20:39.110
It's not really a one-child
policy --

20:39.110 --> 20:41.290
it's not enforced that well.

20:41.290 --> 20:45.450
It's more like a two-child
policy, or people have even

20:45.450 --> 20:47.130
more than that.

20:47.130 --> 20:47.730
But other countries --

20:47.730 --> 20:50.700
India, certain regions of
India have made great

20:50.700 --> 20:53.730
progress, we're told,
on birth control.

20:53.730 --> 20:58.500
But still, despite that, Wyman
estimates that the world adds

20:58.500 --> 21:02.010
a billion people every
twelve years.

21:02.010 --> 21:07.280
So, that's a problem, and our
resources are limited.

21:07.280 --> 21:11.390
So, the problem is, that people
are crowding into the

21:11.390 --> 21:14.810
cities, because there's no room
for them on the land.

21:14.810 --> 21:17.180
They're trying to get an
education to push themselves

21:17.180 --> 21:21.690
ahead, but the sheer numbers of
people make it impossible

21:21.690 --> 21:25.230
for them all to get ahead.

21:25.230 --> 21:30.150
So, I suggest that you might
take his course.

21:30.150 --> 21:32.780
It's a problem that people
don't want to face up to.

21:32.780 --> 21:35.820
So, I'm sounding very dismal
here, but actually, I think

21:35.820 --> 21:44.970
that the problem is not
as bad as it may seem.

21:44.970 --> 21:46.730
This is my take on it.

21:46.730 --> 21:49.330
I tend to be a realist
about these things.

21:49.330 --> 21:52.710
We have a population problem,
it's going to be with it us,

21:52.710 --> 21:56.270
but, hey, it's been with us
forever, going all the way

21:56.270 --> 21:58.150
back in history.

21:58.150 --> 22:03.360
So, it's a tough world that we
live in, because the human

22:03.360 --> 22:08.390
race is naturally procreating,
and naturally creating

22:08.390 --> 22:12.320
population pressures and
conflicts that lead to wars

22:12.320 --> 22:15.070
and famines.

22:15.070 --> 22:18.440
We've been going through a
good run in the last few

22:18.440 --> 22:23.050
centuries, but I don't
know when the end --

22:23.050 --> 22:24.200
it's not an end --

22:24.200 --> 22:30.400
when we're going to see more
severe problems, but that just

22:30.400 --> 22:32.670
seems to be right
and inevitable.

22:36.110 --> 22:40.530
I think, that the weakest part
of Malthus' argument is the

22:40.530 --> 22:46.000
last step, saying that it's
necessarily a dismal world

22:46.000 --> 22:47.420
that results.

22:47.420 --> 22:50.940
I wanted to put the bright side
on Malthus' dismal law,

22:50.940 --> 22:55.690
and that is, most of the time,
everyone's fine in the world.

22:55.690 --> 22:57.230
Most people --

22:57.230 --> 23:00.290
it's famines and wars are
intermittent events that

23:00.290 --> 23:01.700
reduce population.

23:01.700 --> 23:04.550
Between those big events,
pretty much everyone

23:04.550 --> 23:06.630
is doing all right.

23:06.630 --> 23:09.020
So I mean, maybe it's not
as bad as you think.

23:09.020 --> 23:12.560
You know, you might get killed
in a war someday, but you

23:12.560 --> 23:15.280
enjoy life until that happens.

23:15.280 --> 23:20.040
I mean, that's very basic,
but I think it's true.

23:20.040 --> 23:22.760
Moreover, I think that there's
a lot that we can do to make

23:22.760 --> 23:28.590
life better, even in the context
of the dismal law,

23:28.590 --> 23:30.890
even accepting the dismal law.

23:30.890 --> 23:35.700
And I think that civilization is
improving, so that life is

23:35.700 --> 23:39.870
better, even though there are
population pressures.

23:39.870 --> 23:42.060
And that's why I think
there is --

23:42.060 --> 23:44.120
maybe I'm saying the obvious
here, but I want to

23:44.120 --> 23:45.430
say it anyway --

23:45.430 --> 23:50.830
that there are plenty of
purposes and goals that people

23:50.830 --> 23:57.770
can fulfill, even taking as
given Malthus' dismal law.

23:57.770 --> 24:03.830
I talked last period about
nonprofit and charity, and

24:03.830 --> 24:06.840
government as well.

24:06.840 --> 24:11.060
There are a lot of people, who
are doing specific things to

24:11.060 --> 24:15.800
make the world respond better to
the dismal law of Malthus'.

24:18.360 --> 24:25.440
And I wanted to mention certain
examples, just to make

24:25.440 --> 24:26.810
this clear.

24:26.810 --> 24:29.500
I think, that there's work being
done by governments of

24:29.500 --> 24:33.840
the world, there's also work
being done by individuals who

24:33.840 --> 24:37.330
don't need government,
they set up their own

24:37.330 --> 24:40.120
organizations.

24:40.120 --> 24:44.190
Specifically talking about
the environment.

24:44.190 --> 24:45.910
This is what's being threatened

24:45.910 --> 24:48.400
by population growth.

24:48.400 --> 24:51.670
And so, there are many
foundations that deal with the

24:51.670 --> 24:52.920
environment.

24:55.570 --> 24:56.920
I'll just mention a few.

24:56.920 --> 25:01.430
The Nature Conservancy, the
Worldwide Wildlife Fund, the

25:01.430 --> 25:04.850
Wildlife Conservation Society.

25:04.850 --> 25:08.310
And there are specialized ones,
like African Wildlife

25:08.310 --> 25:13.090
Foundation, the Jane Goodall
Institute, the Diane Fossey

25:13.090 --> 25:15.060
Gorilla Fund.

25:15.060 --> 25:16.950
You know, you think the gorillas
out there are wild,

25:16.950 --> 25:19.010
but there's finance
and support.

25:19.010 --> 25:19.920
They've collected money.

25:19.920 --> 25:23.930
Someone is managing an endowment
for the gorillas.

25:23.930 --> 25:26.990
This is creative finance.

25:26.990 --> 25:29.480
A part of the problem with --

25:29.480 --> 25:31.890
you think about, what's
happening with the population

25:31.890 --> 25:36.320
pressures of the world,
and is it bad or not?

25:36.320 --> 25:37.980
Well, in some sense,
it's good.

25:37.980 --> 25:41.370
Having 10 billion people out in
the world would just make

25:41.370 --> 25:43.070
for a more interesting place.

25:43.070 --> 25:46.330
There'd be more arts
and sciences, and

25:46.330 --> 25:47.970
fun things to do.

25:47.970 --> 25:50.850
Eventually, we're going to
colonize the Moon and Mars,

25:50.850 --> 25:53.640
and there's going to be fun
trips to do, so, I don't know,

25:53.640 --> 25:56.580
if it's a bad world we're
coming into, even

25:56.580 --> 25:59.860
if there are conflicts.

25:59.860 --> 26:03.850
But I think there are specific
problems with that world, and

26:03.850 --> 26:06.610
one of them is the extinction
of species.

26:06.610 --> 26:09.990
You think about that, we're
destroying habitat for

26:09.990 --> 26:11.850
species, and they're going
to be gone forever.

26:15.600 --> 26:18.470
But the thing is, that those
kinds of problems are problems

26:18.470 --> 26:21.170
that have sort of business
solutions.

26:21.170 --> 26:26.090
I wanted to talk about one
particular foundation.

26:26.090 --> 26:27.310
It's a nonprofit.

26:27.310 --> 26:31.130
I'll just give this as an
example, the Nature

26:31.130 --> 26:33.450
Conservancy.

26:33.450 --> 26:40.450
It was founded in 1951 in the
United States, but it now

26:40.450 --> 26:43.670
operates in 30 countries.

26:43.670 --> 26:51.370
Its total assets are $5.6
billion, which makes it the

26:51.370 --> 26:56.050
third largest charity in
the United States.

26:56.050 --> 27:08.880
And they have a principle of
''conservation by design.''

27:08.880 --> 27:13.720
The idea is, our purpose is to
prevent extinction of species.

27:13.720 --> 27:15.100
Because extinction is forever.

27:15.100 --> 27:17.290
You know, these species have
taken hundreds of millions of

27:17.290 --> 27:21.440
years to evolve, they get
wiped out, they're gone.

27:21.440 --> 27:24.280
As far as we know, they're
gone forever.

27:24.280 --> 27:30.660
So, what they do is, they get
scientists who specialize in

27:30.660 --> 27:34.950
environment and biology, and
they say, which species are

27:34.950 --> 27:39.580
endangered, and what can we
really do to prevent their

27:39.580 --> 27:40.990
extinction?

27:40.990 --> 27:43.810
And one thing that the
scientists have been telling

27:43.810 --> 27:47.770
them is, that you have to
preserve habitat for species,

27:47.770 --> 27:52.130
and you have to do it with
purpose and clarity.

27:52.130 --> 27:54.310
What do these animals need?

27:54.310 --> 27:57.030
Some of them are migratory, for
example, and they migrate

27:57.030 --> 28:00.040
over long distances, so you have
to preserve a migratory

28:00.040 --> 28:03.060
route and stopping places
along the way for them.

28:03.060 --> 28:05.920
So, it has to be done well.

28:05.920 --> 28:10.290
So, the Nature Conservancy
believes, also, that the way

28:10.290 --> 28:16.440
to protect habitat is to buy
land, and put up fences around

28:16.440 --> 28:20.610
that to keep people out, and
then have a forest manager run

28:20.610 --> 28:27.260
it, so that the species will
have it, will have that land.

28:27.260 --> 28:31.510
They say, that they have 500,000
square kilometers of

28:31.510 --> 28:34.640
land that they've bought
around the world.

28:34.640 --> 28:38.930
I calculated, that there's 150
million square kilometers of

28:38.930 --> 28:43.550
land on the earth, so they have
1/3 of 1% of the world's

28:43.550 --> 28:48.900
land protected by
their charity.

28:48.900 --> 28:51.890
That might seem small, but you
know, that's a big difference.

28:51.890 --> 28:55.010
Because, if it's the last
habitat, that might be enough

28:55.010 --> 28:58.070
to keep a lot of species'
diversity going.

28:58.070 --> 29:05.280
So, that's an example of what
-- this is really finance.

29:05.280 --> 29:11.600
We have portfolio managers
managing portfolios and

29:11.600 --> 29:16.230
properties of land with
a good purpose.

29:24.620 --> 29:26.850
That's, where I say, the moral
dilemmas are not so simple.

29:26.850 --> 29:29.530
You could take a job managing
a portfolio for one of these

29:29.530 --> 29:32.220
foundations.

29:32.220 --> 29:38.680
Peter Unger, in his book, is
talking always about, would

29:38.680 --> 29:40.710
you save a child who fell
in the water or

29:40.710 --> 29:42.020
something like that?

29:42.020 --> 29:47.780
But that's not the kind of moral
dilemmas that we really

29:47.780 --> 29:53.300
face, that an energetic
intellect would find.

29:53.300 --> 29:57.170
The moral dilemma is to prevent
big, bad things from

29:57.170 --> 30:01.060
happening, and that takes a sort
of entrepreneurship and

30:01.060 --> 30:05.380
big thinking to manage.

30:05.380 --> 30:08.940
Another thought I had in this
context is about wars.

30:08.940 --> 30:13.250
I was saying that population
pressures are a fact of life,

30:13.250 --> 30:20.060
and I'm skeptical that anyone
will change the basic nature

30:20.060 --> 30:22.750
of the situation.

30:22.750 --> 30:29.220
But I wanted, in this context,
to emphasize that financial

30:29.220 --> 30:36.940
arrangements are capable of
enduring and surviving wars

30:36.940 --> 30:39.720
and catastrophes.

30:39.720 --> 30:44.650
I wanted particularly to make
it clear, that there's a

30:44.650 --> 30:47.230
tendency for people to think,
that finance is something that

30:47.230 --> 30:49.060
the government runs.

30:49.056 --> 30:51.326
You can easily get that
impression, because, when you

30:51.330 --> 30:53.870
go into finance, the first thing
you have to do is get

30:53.870 --> 30:57.690
licensed, and you have to file
some papers with either the

30:57.690 --> 30:59.280
government or a
government-approved

30:59.280 --> 31:01.210
organization.

31:01.210 --> 31:03.750
And then, you will find, there's
a whole list of laws

31:03.750 --> 31:08.240
and regulations that you have
to memorize, and forms that

31:08.240 --> 31:10.420
have to be filed with government
agencies, and

31:10.420 --> 31:12.540
permissions to be granted.

31:12.540 --> 31:16.340
So, it sounds like this is
just the government.

31:16.340 --> 31:17.880
But I think, that's
the wrong view.

31:17.880 --> 31:21.290
I think that you should think
of finance as people making

31:21.290 --> 31:24.640
arrangements with other people,
and governments are

31:24.640 --> 31:30.700
helpful, and they enforce a
contract, but they don't

31:30.700 --> 31:32.680
determine them.

31:32.680 --> 31:38.380
And in particular, I wanted to
give you a few examples that

31:38.380 --> 31:39.630
clarify this.

31:44.480 --> 31:51.320
What do you think happened
after World War I with

31:51.320 --> 31:53.130
financial arrangements?

31:53.130 --> 31:57.960
Germany lost the war.

31:57.960 --> 32:00.690
People were really angry
with Germany.

32:00.690 --> 32:06.640
In the Versailles Conference
after World War I, Germany was

32:06.640 --> 32:11.020
made to pay huge reparation
payments, payments that some

32:11.020 --> 32:13.950
people thought were so heavy,
that the country will never be

32:13.950 --> 32:15.440
able to do it.

32:15.440 --> 32:19.700
So, what do you think they did
to financial contracts?

32:19.700 --> 32:24.790
Germany was at its knees, people
thought they were evil,

32:24.790 --> 32:27.070
or many people thought
they were evil.

32:27.070 --> 32:29.780
Well, there was talk about
taking away -- people who own

32:29.780 --> 32:33.660
stocks or bonds, let's just
confiscate them, and tell

32:33.660 --> 32:37.430
them, you were in the wrong
country at the wrong time --

32:37.430 --> 32:39.270
tough on you.

32:39.270 --> 32:42.000
Well, they talked about doing
it, but they didn't do it.

32:42.000 --> 32:44.890
The reparations were obligations
of the German

32:44.890 --> 32:48.960
government, and they were
paid by taxing people.

32:48.960 --> 32:50.940
And they taxed people
in an equitable --

32:50.940 --> 32:52.610
they didn't actually pay
them, by the way.

32:52.605 --> 32:54.045
The skeptics were right.

32:54.050 --> 32:57.620
Germany never was able to pay
the reparations, but it tried

32:57.620 --> 33:01.200
to pay them by taxing people,
not by confiscating.

33:01.200 --> 33:03.250
Because ultimately, when it came
down to it, they thought,

33:03.250 --> 33:05.750
well, Germans are all different,
and some of them

33:05.750 --> 33:08.630
supported the war, and some of
them didn't, and some of them

33:08.630 --> 33:11.510
saved all their lives, and
they've got a big amount of

33:11.510 --> 33:15.450
money, so let's not confiscate
their shares.

33:15.449 --> 33:17.129
So, they didn't.

33:17.130 --> 33:18.380
That's my first example.

33:23.880 --> 33:25.700
Second example.

33:25.699 --> 33:27.679
Iran.

33:27.679 --> 33:31.809
Remember, it was ruled by the
Shah of Iran, who was a

33:31.810 --> 33:37.220
secular ruler, hereditary
ruler of Iran.

33:37.219 --> 33:43.889
Overthrown by a people's Islamic
revolution, and the

33:43.889 --> 33:49.049
Ayatollah Khomeini became the
spiritual authority for the

33:49.050 --> 33:52.220
new country, it became
much more Islamic.

33:52.219 --> 33:52.479
All right.

33:52.480 --> 33:54.750
So, what do you think happened
to financial

33:54.750 --> 33:56.350
contracts in Iran?

33:56.350 --> 34:00.840
In particular, the Iranian
government under the Shah had

34:00.840 --> 34:04.520
a social security system, and
they were paying to government

34:04.520 --> 34:06.280
employees' pensions.

34:06.280 --> 34:08.580
So, what do you think
the Ayatollah did?

34:08.580 --> 34:12.110
A guy is working all his life
for the Shah, we've overthrown

34:12.110 --> 34:13.070
the Shah --

34:13.070 --> 34:14.290
do you still get your pension?

34:14.290 --> 34:15.780
What do you think?

34:15.780 --> 34:16.500
They did.

34:16.500 --> 34:18.270
They didn't cancel.

34:18.270 --> 34:19.960
I think, it's like
common sense.

34:19.960 --> 34:23.490
You come in, you are a totally
different government, now

34:23.490 --> 34:26.540
you're a radical Islamic
government.

34:26.540 --> 34:28.760
Now, I don't say, that they
won't do some things that you

34:28.760 --> 34:35.110
don't like, but they see the
basic financial contracts and

34:35.110 --> 34:36.770
they preserve them.

34:36.770 --> 34:39.500
The other example I'll
give is South Africa.

34:43.180 --> 34:49.200
And that is, in 1994, the white
apartheid government was

34:49.200 --> 34:53.450
replaced by a government that
was elected by the black

34:53.450 --> 34:55.160
majority in South Africa.

34:57.840 --> 34:59.640
So, what do you think
happened to their

34:59.640 --> 35:03.090
pensions or their insurance?

35:03.090 --> 35:04.440
Where they confiscated?

35:04.440 --> 35:05.670
No.

35:05.670 --> 35:07.580
So, I think that this is
a principle in history.

35:07.580 --> 35:10.360
Now, I can give other examples,
of course, where

35:10.360 --> 35:12.660
things went badly.

35:12.660 --> 35:17.410
Vladimir Lenin wasn't so kind
to stockholders in Russia

35:17.410 --> 35:19.910
after this Russian Revolution.

35:19.910 --> 35:25.560
Lazaro Cardenas in Mexico
nationalized the oil industry.

35:25.560 --> 35:26.410
Mao Zedong --

35:26.410 --> 35:27.790
you know who he is,
in China --

35:30.720 --> 35:32.950
not kind to capitalists.

35:32.950 --> 35:37.730
Mohammad Mosaddegh in Iran
nationalized the oil industry.

35:37.730 --> 35:44.490
Gamal Abdel Nasser in Egypt
nationalized a wide range of

35:44.490 --> 35:45.020
industries.

35:45.020 --> 35:49.700
Even in India, Indira Gandhi
did widespread

35:49.700 --> 35:54.530
nationalizations that were
effectively confiscations.

35:54.530 --> 35:57.330
Even the United States has in
some sense been involved in

35:57.330 --> 35:58.790
those sorts of things.

35:58.790 --> 36:02.830
After World War II, the United
States was not going to

36:02.830 --> 36:07.080
confiscate wealth of wealthy
people in general, but in

36:07.080 --> 36:11.840
Japan, there were these
wealthy families that

36:11.840 --> 36:17.460
maintained industries,
called Zaibatsu.

36:17.460 --> 36:23.230
These were the family-owned
businesses that dominated

36:23.230 --> 36:27.230
Japan before World War II.

36:27.230 --> 36:35.710
The big four, Mitsubishi,
Yasuda --

36:35.710 --> 36:37.010
who else?

36:37.010 --> 36:37.570
Mitsui --

36:37.570 --> 36:39.480
and what am I thinking of?

36:39.480 --> 36:41.330
It's not in my notes.

36:41.330 --> 36:47.560
But these big, wealthy families
were thought to have

36:47.560 --> 36:52.600
supported the war and made Japan
into more radical than

36:52.600 --> 36:53.780
it would have been.

36:53.780 --> 36:56.360
So, there was a lot of U.S.
thinking that we had to break

36:56.360 --> 36:57.800
up the Zaibatsu.

36:57.800 --> 37:00.730
So, what the United States did
was, force these families to

37:00.730 --> 37:10.250
convert their holdings of
industry in Japan into

37:10.250 --> 37:12.310
yen-denominated government
bonds.

37:12.310 --> 37:14.210
And then, the Japanese
government had a huge

37:14.210 --> 37:16.420
hyperinflation and
wiped them out.

37:16.420 --> 37:18.700
So, it wasn't actually
a confiscation.

37:18.700 --> 37:22.240
The U.S. government didn't
deliberately confiscate the

37:22.240 --> 37:29.640
wealth of the Zaibatsu, but
they effectively did that.

37:29.640 --> 37:32.880
By the way, we still have
Zaibatsu in Japan, but they're

37:32.880 --> 37:35.870
not owned by those
families anymore.

37:35.870 --> 37:39.060
The same industrial
conglomerates still survive.

37:41.880 --> 37:45.970
Third topic, I was saying
I would talk about is --

37:45.970 --> 37:48.120
maybe I'll be brief about
this -- the importance

37:48.120 --> 37:49.370
of financial theory.

37:54.130 --> 37:57.120
I'm an advocate of two seemingly
disparate things,

37:57.120 --> 37:58.820
and you know this from
this course.

37:58.820 --> 38:00.970
One of them is Mathematical
Finance.

38:00.970 --> 38:07.070
We spent some time on it, but
not very much, because there's

38:07.070 --> 38:09.140
another course -- it's
also on Open Yale --

38:09.140 --> 38:15.990
that John Geanakoplos has
on Mathematical Finance.

38:15.990 --> 38:21.950
But the other side of it is
Behavioral Finance, which is a

38:21.950 --> 38:24.930
particular passion of mine.

38:24.930 --> 38:29.530
And Behavioral Finance is the
application of psychology and

38:29.530 --> 38:32.470
other social sciences
to finance.

38:32.470 --> 38:35.620
And I think, that the two
actually work together

38:35.620 --> 38:40.060
symbiotically, and that we
should consider them together.

38:40.060 --> 38:43.120
Some people in Mathematical
Finance are very opposed to

38:43.120 --> 38:49.590
Behavioral Finance, because it
kind of muddles their world,

38:49.590 --> 38:51.780
but in fact, I think, they
should consider it their

38:51.780 --> 38:57.500
salvation, because without
Behavioral Finance, they're

38:57.500 --> 39:00.370
kind of bordering
on irrelevant.

39:00.370 --> 39:05.120
You have to consider things in a
broader context and think of

39:05.120 --> 39:08.310
the interruptions and problems
that are caused.

39:13.650 --> 39:16.630
I said, the next topic I would
talk about today is --

39:16.630 --> 39:19.100
I've already been talking about
it a bit -- is about

39:19.100 --> 39:20.430
welfare and poverty.

39:20.430 --> 39:22.670
It seems to me, it's
fundamentally connected with

39:22.670 --> 39:26.290
our thoughts about finance,
because --

39:26.290 --> 39:29.090
I've referred to this problem
before, that people think,

39:29.090 --> 39:33.070
that people who go into finance
are money grubbers.

39:33.070 --> 39:38.490
They want to make money, they
don't have human feelings or

39:38.490 --> 39:41.770
something like that.

39:41.770 --> 39:47.850
And there's also the sense, that
we're living in a world

39:47.850 --> 39:51.900
that's increasingly plutocratic,
that the wealthy

39:51.900 --> 39:57.420
people are controlling
the world.

40:00.160 --> 40:04.010
That was a theme that took a
lot of impetus in the 19th

40:04.010 --> 40:07.560
century with Karl Marx,
who said exactly that.

40:07.560 --> 40:10.440
And in some sense, it's
coming back --

40:10.440 --> 40:12.840
maybe in not such
an extreme form.

40:12.840 --> 40:16.930
So, Jacob Hacker, who's in our
political science department,

40:16.930 --> 40:23.030
and Paul Pearson, who's at
Stanford University, have a

40:23.030 --> 40:25.860
new book that just
came out called

40:25.860 --> 40:32.340
Winner-Take-All Politics.

40:32.340 --> 40:38.160
And that book is about --

40:38.160 --> 40:40.720
they have a claim in that
book, that the world is

40:40.720 --> 40:47.050
getting more polarized by the
political power of financial

40:47.050 --> 40:49.090
institutions.

40:49.090 --> 40:51.060
Basically, they have something,
they call the ''30

40:51.055 --> 40:53.645
years war.'' What's
the 30 years war?

40:53.650 --> 40:55.050
You might think, it's something
that happened in the

40:55.050 --> 40:56.420
17th century.

40:56.420 --> 40:57.450
Not for them.

40:57.450 --> 41:00.990
The 30 years war is the war
against the people of the

41:00.990 --> 41:05.290
world, fought by the financial
community in the halls of

41:05.290 --> 41:08.480
Congress and Parliament,
by lobbying.

41:08.480 --> 41:12.040
So, they argue that the
companies have gotten more and

41:12.040 --> 41:17.980
more sophisticated in lobbying
governments to fulfill their

41:17.980 --> 41:23.610
ambitions, and so, the income
inequality that we're seeing

41:23.610 --> 41:26.630
increasing, particularly in the
United States, but also

41:26.630 --> 41:30.680
elsewhere in the world, is
a consequence of this.

41:30.680 --> 41:33.640
So, Hacker and Pearson say --

41:33.640 --> 41:37.300
much of the literature on income
inequality says, it has

41:37.300 --> 41:40.130
something to do with the
information revolution, which

41:40.130 --> 41:45.970
is eliminating jobs for low
income people, and the

41:45.970 --> 41:49.350
increasing importance of
education, which rewards

41:49.350 --> 41:51.370
college graduates at
the expense of

41:51.370 --> 41:53.520
uneducated people --

41:53.520 --> 41:57.380
but they say, that the real
increase in inequality has not

41:57.380 --> 42:01.760
been between high school
graduates and college

42:01.760 --> 42:06.150
graduates, it's between the
whole population and the top

42:06.150 --> 42:07.940
tenth of a percent.

42:07.940 --> 42:12.270
There is this small community of
super rich people, that is

42:12.270 --> 42:16.940
developing, who are very adept
at lobbying governments.

42:16.940 --> 42:19.080
This is a trend that's
developing.

42:22.810 --> 42:26.630
Well, I think to some extent,
they are probably right.

42:26.630 --> 42:29.830
I think, maybe they overstate
that, but I think, it's a

42:29.830 --> 42:32.890
concern, but I think, that
we do have democratic

42:32.890 --> 42:39.110
institutions, and we can
respond to that.

42:39.110 --> 42:42.690
So that I think, maybe, they
overstate it, because

42:42.690 --> 42:45.130
I think that --

42:45.130 --> 42:47.510
I've met billionaires
in my life --

42:47.510 --> 42:49.440
I have a sense, that
they are not --

42:53.960 --> 42:56.560
I haven't met enough of them
to make generalities about

42:56.560 --> 42:57.140
billionaires --

42:57.140 --> 43:00.070
but maybe, they have a little
bit of a self-serving

43:00.070 --> 43:03.440
mentality, but in some sense
they seem not to care.

43:06.430 --> 43:10.050
They don't want to be viewed
as evil, they want to be --

43:10.050 --> 43:12.610
a lot of what drove them to
become billionaires was a

43:12.610 --> 43:16.540
sense, that they would be a
benefactor of some sort, and

43:16.540 --> 43:18.630
so they're ready to
give it away.

43:18.630 --> 43:22.860
Anyway, that may be a
casual impression.

43:22.860 --> 43:25.720
But one thing that angers people
about wealth is the

43:25.720 --> 43:30.830
tendency of wealthy people to
build monuments to themselves.

43:30.830 --> 43:34.510
So, I was thinking of that, when
I was at the J.P. Morgan

43:34.510 --> 43:39.620
Library in New York, and also
there's something called the

43:39.620 --> 43:42.850
Metropolitan Club, which is
another building that he built

43:42.850 --> 43:50.220
to himself, this huge mansion
in Manhattan that he built.

43:50.220 --> 43:52.750
And I was thinking, is
J.P. Morgan evil?

43:52.750 --> 43:56.020
I mean, people are starving in
the world, and he's building a

43:56.020 --> 43:57.570
mansion for himself.

43:57.570 --> 43:59.080
But then, I reflected
further --

43:59.080 --> 44:01.360
here, I am having dinner
in his mansion.

44:01.360 --> 44:03.740
He's gone.

44:03.740 --> 44:14.150
And is it really so bad in
the scheme of things?

44:24.840 --> 44:26.910
I guess, you can view it
in different ways.

44:26.910 --> 44:34.550
You can view J.P. Morgan as a
great success, who ended up

44:34.550 --> 44:36.590
helping the world, or you
can view him as a

44:36.590 --> 44:39.760
selfish monument builder.

44:46.460 --> 44:49.790
His life overlapped with Karl
Marx, that I told you about.

44:49.790 --> 44:54.310
But one of Karl Marx's
themes was, that

44:54.310 --> 44:56.330
the system is unfair.

44:56.330 --> 44:57.850
That some people
have capital --

44:57.850 --> 45:00.750
that was a theme of his book,
Das Kapital -- some people

45:00.750 --> 45:03.940
have capital, and they are
wealthy as a result, and they

45:03.940 --> 45:05.900
will continue to be wealthy,
and they'll make their

45:05.900 --> 45:07.910
children wealthy as a result.

45:07.910 --> 45:11.460
I actually have a quote
from Karl Marx.

45:11.460 --> 45:14.370
"It is not, because he is a
leader of industry that a man

45:14.370 --> 45:18.530
in is a capitalist. On the
contrary, he is a leader of

45:18.530 --> 45:22.370
industry, because he is a
capitalist. The leadership of

45:22.370 --> 45:26.090
industry is an attribute of
capital, just as in feudal

45:26.090 --> 45:31.510
times the functions of general
and judge were attributes of

45:31.510 --> 45:37.990
landed property." That comes
from his book, Das Kapital, in

45:37.990 --> 45:41.020
the 19th century.

45:41.020 --> 45:45.730
So, Marx thought, that ownership
of capital was like

45:45.730 --> 45:52.000
a key to the good life, and
that the population was

45:52.000 --> 45:54.990
excluded from that.

45:54.990 --> 45:57.490
But I'm going to come back
to the democratization of

45:57.490 --> 46:01.770
finance, but it seems like
capitalism -- it isn't

46:01.770 --> 46:05.230
essentials to capitalism
that some social

46:05.230 --> 46:07.790
class dominates capital.

46:07.790 --> 46:14.600
We can have a capitalism that
is divided up among --

46:14.600 --> 46:18.780
that is more people's, it
belongs to people, and there's

46:18.780 --> 46:23.640
not a privileged class.

46:23.640 --> 46:28.840
So, I another thing I wanted to
talk about is my concern --

46:28.840 --> 46:29.810
Marx was impressive --

46:29.810 --> 46:31.380
I think I may have said
this before --

46:31.380 --> 46:35.870
he was impressive, because he
read emerging sociology.

46:35.870 --> 46:40.020
And the sociology of his day
was beginning to recognize,

46:40.020 --> 46:43.630
that people do form themselves
into social classes, and have

46:43.630 --> 46:47.290
a sense of loyalty to others
in their social class.

46:47.290 --> 46:50.290
But I think, that anything
he said is of limited

46:50.290 --> 46:51.930
relevance today --

46:51.930 --> 46:53.880
was always of limited
relevance.

46:53.880 --> 46:56.570
Interesting, but wrong
in many ways.

47:00.155 --> 47:08.055
I'm thinking of the works of
another important thinker,

47:08.060 --> 47:15.370
Robert K. Merton, who was a
sociologist at Columbia.

47:15.370 --> 47:21.630
He was the father of Robert
Merton, the economist, who

47:21.630 --> 47:24.460
helped develop option theory.

47:24.460 --> 47:29.500
But Robert K. Merton referred
to, what he called the

47:29.500 --> 47:35.310
''cosmopolitan class.'' He was
looking at social classes.

47:35.310 --> 47:38.570
He picked a small town in the
United States, and interviewed

47:38.570 --> 47:41.920
a lot of people, and was trying
to understand their

47:41.920 --> 47:42.670
class structure.

47:42.670 --> 47:44.250
You know, who do you
identify with?

47:44.250 --> 47:47.970
Who are you loyal with?

47:47.970 --> 47:54.330
He was a deep thinker, I think,
and looked at what

47:54.330 --> 47:57.040
really seemed to separate
people.

47:57.040 --> 48:01.300
And he decided, that, in this
little town, that there were

48:01.300 --> 48:03.220
really two classes of people.

48:03.220 --> 48:06.290
He called them cosmopolitans
and locals.

48:09.080 --> 48:14.550
So, the cosmopolitans had a
very different worldview.

48:14.550 --> 48:18.580
They tended to not care about
what's going on in their town.

48:18.580 --> 48:21.860
They would talk about national
or international things.

48:21.860 --> 48:23.670
He'd listen to what they say.

48:23.670 --> 48:26.510
They were focused outside,
they thought the town was

48:26.510 --> 48:30.700
irrelevant, and they tended
to have maybe

48:30.700 --> 48:32.930
higher-level positions.

48:32.930 --> 48:35.980
The locals were people, though,
who would talk all

48:35.980 --> 48:38.170
about their town, and
they would talk

48:38.170 --> 48:39.880
about people they know.

48:39.880 --> 48:44.740
They seemed to value their
connections within the town.

48:44.740 --> 48:50.070
And when you asked for opinions
about the local town,

48:50.070 --> 48:54.130
the locals would tend to give
almost loving expressions.

48:54.130 --> 48:57.670
This is a great town, we have
a great people here.

48:57.670 --> 49:00.900
And the cosmopolitans would act
totally indifferent, and

49:00.900 --> 49:02.280
they don't know anybody.

49:02.280 --> 49:04.940
They don't know, who's the head
of the fire department,

49:04.940 --> 49:07.190
or who holds the --

49:07.190 --> 49:10.900
maybe they know the principal
the school, because they may

49:10.900 --> 49:13.380
have their kid in the school,
but beyond that, they don't

49:13.380 --> 49:15.440
know anything about
their town.

49:15.440 --> 49:19.190
So, Merton wrote that
over 50 years ago.

49:19.190 --> 49:22.580
I have a sense, that it's
developing further, this split

49:22.580 --> 49:25.140
between cosmopolitans
and locals.

49:25.140 --> 49:27.610
And it's developing
on a world scale.

49:27.610 --> 49:32.940
There's now a world cosmopolitan
class, and with

49:32.940 --> 49:36.730
increased communications we're
kind of split that way.

49:36.730 --> 49:40.570
So, people around the world
who are learning to speak

49:40.570 --> 49:44.520
English well, that's the world
language, people who travel

49:44.520 --> 49:53.620
around the world, and people
who are finance savvy, they

49:53.620 --> 49:58.230
are developing into
a social class.

49:58.230 --> 50:01.710
And I think, that there are
animosities and conflicts, but

50:01.710 --> 50:05.800
it's a little bit harder,
because the cosmopolitans are

50:05.800 --> 50:09.160
so scattered and they're
relatives of us, so it's not

50:09.160 --> 50:14.840
as intense a social contrast.

50:14.840 --> 50:17.590
But you know, I think, that the
animosities that we are

50:17.590 --> 50:22.420
feeling now have to do with the
fact, that cosmopolitans

50:22.420 --> 50:25.190
know and understand
finance, and they

50:25.190 --> 50:28.820
have lawyers and advisors.

50:28.820 --> 50:34.540
The rest of the population
feels excluded from that.

50:34.540 --> 50:41.080
So, that brings us to what I
said was the democratization

50:41.080 --> 50:42.650
of finance.

50:42.650 --> 50:47.820
And this is a theme of my own
that I've been emphasizing.

50:47.820 --> 50:50.500
So, the democratization of
finance is sort of trying to

50:50.500 --> 50:56.040
make it move beyond the
cosmopolitan class.

50:56.040 --> 51:01.110
So, cosmopolitans know how to
get things done, how to raise

51:01.110 --> 51:08.360
capital, and they know how to
manage their risks, so they

51:08.360 --> 51:10.250
don't get into trouble.

51:10.250 --> 51:13.380
Inequality is substantially
due to a

51:13.380 --> 51:15.540
failure to manage risks.

51:21.170 --> 51:21.420
Right?

51:21.420 --> 51:25.130
I mean, some inequality is due
to fundamental things, like

51:25.130 --> 51:27.620
someone is talented and
can make more money.

51:27.620 --> 51:30.760
But it's also due to random
things that are not

51:30.760 --> 51:32.260
controlled.

51:32.260 --> 51:36.500
Notably, in the current
financial crisis, we saw a

51:36.500 --> 51:38.730
huge drop in home values.

51:38.730 --> 51:41.130
And we saw people, who bought
homes at the top of the

51:41.130 --> 51:44.620
market, and then they find, that
their mortgages are worth

51:44.620 --> 51:47.900
more than their homes are,
and so they have a

51:47.900 --> 51:49.730
negative net worth.

51:49.730 --> 51:52.560
They're in trouble, they
would be bankrupt --

51:52.560 --> 51:54.750
maybe they're not bankrupt
yet, but they're

51:54.750 --> 51:56.080
verging on that --

51:56.080 --> 51:58.170
they're very unhappy.

51:58.170 --> 52:02.850
This was a failure, I
think, of bringing

52:02.850 --> 52:04.210
finance to the people.

52:04.210 --> 52:07.270
So, it's not democratizing
finance --

52:07.270 --> 52:09.760
we haven't finished
democratizing finance.

52:12.780 --> 52:15.330
So, it's kind of chaotic,
the way things

52:15.330 --> 52:19.070
work for most people.

52:19.070 --> 52:23.020
Most people who, a, do not have
a lawyer, b, do not have

52:23.020 --> 52:27.860
a financial adviser, c, do
not have an accountant.

52:27.860 --> 52:33.090
Or maybe they go to some
storefront tax-paying service,

52:33.090 --> 52:35.940
but that's as far as they go.

52:35.940 --> 52:39.000
And these people make a
mess of their lives.

52:39.000 --> 52:43.910
So for example, we have laws
that allow people to go

52:43.910 --> 52:48.580
bankrupt and wipe
off their debts.

52:48.580 --> 52:52.420
All you have to do, if you are
in trouble, financial trouble,

52:52.420 --> 52:58.160
is go to a lawyer and say, can
you help me file for Chapter 7

52:58.160 --> 52:58.750
bankruptcy?

52:58.750 --> 53:01.990
I'd like to wipe out
all my debts.

53:01.990 --> 53:05.170
But usually, you have to have
$1,000 to pay the lawyer to

53:05.170 --> 53:08.310
help you do this, and these
people can't get it together

53:08.310 --> 53:09.620
to do that.

53:09.620 --> 53:10.460
So, what happens?

53:10.460 --> 53:14.300
What happens to this typical
person, who is uneducated, has

53:14.300 --> 53:16.190
gotten deeply in debt?

53:16.190 --> 53:18.000
What do you think happens?

53:18.000 --> 53:19.770
Do they ever declare
bankruptcy?

53:19.770 --> 53:21.380
No.

53:21.380 --> 53:21.880
What do they do?

53:21.880 --> 53:24.920
They stop answering the phone,
because they're getting these

53:24.920 --> 53:27.880
dunning calls from creditors.

53:27.880 --> 53:29.680
And so, the creditors then --

53:29.680 --> 53:31.790
it's called informal
bankruptcy.

53:31.790 --> 53:36.810
They will go to court, and ask
the judge to allow them to

53:36.810 --> 53:39.870
garnish the wages of the person
who won't pay and won't

53:39.870 --> 53:41.750
answer the phone.

53:41.750 --> 53:43.900
So, they'll take another
deduction from the person's

53:43.900 --> 53:45.380
paycheck, eventually.

53:45.380 --> 53:46.750
The person never
figures it out.

53:46.750 --> 53:51.200
His paycheck just went down,
he is paying off his debt.

53:51.200 --> 53:52.220
What a mess.

53:52.220 --> 53:58.560
But that's because of the
failure of financial

53:58.560 --> 54:01.820
institutions to handle
things well.

54:01.820 --> 54:05.660
So, Elizabeth Warren,
who is at --

54:05.660 --> 54:07.730
I mentioned her before --

54:07.730 --> 54:11.420
at the Harvard Law School has
written a couple of books

54:11.420 --> 54:14.760
about these problems
that people face.

54:14.760 --> 54:19.020
And it's a testimony to the
success of our democratic

54:19.020 --> 54:23.450
government, that she managed to
persuade Dodd and Frank to

54:23.450 --> 54:32.740
put it in their bill, the
Consumer Financial Protection

54:32.740 --> 54:40.530
Bureau, which would create a
government agency that would

54:40.530 --> 54:47.520
try to limit the abuse
of lower income,

54:47.520 --> 54:51.410
less educated people.

54:51.410 --> 54:54.610
We were hoping, that she would
be made head of her bureau,

54:54.610 --> 54:58.970
but it turns out, that
she's only acting --

54:58.970 --> 55:00.790
I forget what her exact
title is --

55:00.790 --> 55:03.830
transitioning into finding
a head for the bureau.

55:03.830 --> 55:07.930
Because the lobbyists that I
told you about, representing

55:07.930 --> 55:12.000
credit card or the mortgage
industry, are adamantly

55:12.000 --> 55:16.810
opposed seeing her put on
as head of the bureau.

55:16.810 --> 55:19.360
So, it looks like it's
politically impossible to put

55:19.360 --> 55:22.550
her in charge of it, but she's
at least involved in helping

55:22.550 --> 55:27.220
pick the person who would
make that happen.

55:27.220 --> 55:31.930
So, I think these are nice
steps forward, but I

55:31.930 --> 55:33.790
wrote a book --

55:33.790 --> 55:40.000
let me just mention my own book
-- in 2008, called The

55:39.997 --> 55:41.247
Subprime Solution.

55:46.400 --> 55:50.370
And so, I was trying to
think of the future.

55:50.370 --> 55:55.670
Again, I'm trying to think
creatively and expansively

55:55.670 --> 56:00.770
without thinking punitively,
as Elizabeth Warren seems

56:00.770 --> 56:01.900
often to do.

56:01.900 --> 56:06.540
Her view tends to be, that there
are exploiters who need

56:06.540 --> 56:08.150
to be regulated.

56:08.150 --> 56:09.590
But I'm thinking, that maybe
there's something

56:09.590 --> 56:12.130
positive we can do.

56:12.130 --> 56:14.110
So, I have various ideas.

56:14.110 --> 56:18.470
Also, I had -- this
was 2008 --

56:18.470 --> 56:28.300
I also had another book, The New
Financial Order, in 2003.

56:28.300 --> 56:31.350
I'm getting on toward 10 books
now in my life, and I'm having

56:31.350 --> 56:33.070
trouble remembering which
one is which.

56:33.070 --> 56:35.010
I was just commenting
to my wife, it's a

56:35.010 --> 56:36.600
little bit of a problem.

56:36.600 --> 56:41.440
But somewhere in these books,
one of the ideas I had --

56:41.440 --> 56:44.080
actually, it's in The New
Financial Order --

56:44.080 --> 56:50.020
is for livelihood insurance
that would help protect --

56:50.020 --> 56:52.390
this is a financial institution
that would protect

56:52.390 --> 56:53.980
people's livelihoods.

56:53.980 --> 56:57.180
I viewed it as an expansion of
something that we've got

56:57.180 --> 56:59.360
already, called disability
insurance.

56:59.360 --> 57:01.620
In fact, it's been offered by
the government in the United

57:01.620 --> 57:05.570
States as part of the social
security system, but it

57:05.570 --> 57:09.010
handles certain insurance
against certain specific kinds

57:09.010 --> 57:11.880
of risks to livelihoods,
namely health risks.

57:11.880 --> 57:15.540
If you become paralyzed, if you
become mentally ill, any

57:15.540 --> 57:18.180
of those things that
a doctor can attest

57:18.180 --> 57:20.860
to, is insured already.

57:20.860 --> 57:24.590
Very important, because things
like that happen to people and

57:24.590 --> 57:26.990
they can't earn a living
anymore, and it happens to

57:26.990 --> 57:28.020
young people.

57:28.020 --> 57:31.760
And so, we have private
insurance, the government has

57:31.760 --> 57:35.720
taken over part of disability
insurance, but there's also

57:35.720 --> 57:37.520
private disability insurance.

57:37.520 --> 57:39.970
But none of this covers the
biggest threats to people's

57:39.970 --> 57:40.990
livelihoods.

57:40.990 --> 57:47.590
Most threats to livelihoods are
not due to medical events.

57:47.590 --> 57:50.380
It's economic events
that make you --

57:50.380 --> 57:53.980
you know, you're 40 years old,
you've trained for, let's say,

57:53.980 --> 57:59.230
nuclear engineering, and then
we have the Fukushima or the

57:59.230 --> 58:02.600
Sendai disasters, and then
suddenly no government of the

58:02.600 --> 58:05.080
world wants to build nuclear
plants anymore.

58:05.080 --> 58:07.990
So, here you are, you're 40
years old, you're reaching

58:07.990 --> 58:11.340
your prime, you would normally
be making a good, high income,

58:11.340 --> 58:13.370
but now it's useless.

58:13.370 --> 58:15.050
No fault of your own.

58:15.050 --> 58:19.020
This is a risk that you cannot
now insure, and it's part of

58:19.020 --> 58:21.350
the thing that contributes
to inequality.

58:21.350 --> 58:24.680
And so, I think that we can
insure those things, and in

58:24.680 --> 58:27.610
the future, as finance develops,
these are some of

58:27.610 --> 58:31.040
the missions that
we have to do.

58:31.040 --> 58:35.860
Another thing is home
equity insurance.

58:35.860 --> 58:40.340
I mentioned before, that the
crisis was caused by failure

58:40.340 --> 58:43.860
to insure against
home price risk.

58:43.860 --> 58:47.420
I've been working on
trying to get home

58:47.420 --> 58:48.770
equity insurance started.

58:48.770 --> 58:53.700
Some of my colleagues at Yale,
Will Goetzmann and Barry

58:53.700 --> 58:59.430
Nalebuff particularly, have
actually created an insurance

58:59.430 --> 59:03.360
policy that would insure homes
against price declines in the

59:03.360 --> 59:05.600
city of Syracuse, New York.

59:05.600 --> 59:07.780
Didn't really take off,
so this is still

59:07.780 --> 59:10.400
not happening yet.

59:10.400 --> 59:11.630
But here's the idea --

59:11.630 --> 59:15.440
you can buy insurance against
your home burning down.

59:15.440 --> 59:18.530
That goes back 300 years.

59:18.530 --> 59:20.520
But how often do homes
burn down?

59:20.520 --> 59:21.350
Not very often.

59:21.350 --> 59:23.320
What's the real risk
that you face?

59:23.320 --> 59:27.400
It's the loss of economic
value of a home.

59:27.400 --> 59:35.080
And so, that is not insured
anywhere in the world.

59:35.080 --> 59:35.990
Why not?

59:35.990 --> 59:37.400
We could insure it.

59:37.400 --> 59:40.080
I think, these are things
that would --

59:40.080 --> 59:42.850
developing home equity insurance
or livelihood

59:42.850 --> 59:45.420
insurance would be
positive steps.

59:45.420 --> 59:48.600
I have one more example from
this book The Subprime

59:48.600 --> 59:50.430
Solution, something
that I call a

59:50.430 --> 59:57.090
continuous workout mortgage.

1:00:01.180 --> 1:00:05.730
In the financial crisis today,
right now, there are 2.5

1:00:05.730 --> 1:00:08.480
million households that are on
the verge of defaulting on

1:00:08.480 --> 1:00:09.740
their mortgages --

1:00:09.740 --> 1:00:13.810
haven't yet, but they are at
risk of defaulting and being

1:00:13.810 --> 1:00:15.430
thrown out of their houses.

1:00:15.430 --> 1:00:19.120
So, that's something like close
to 10 million people.

1:00:19.120 --> 1:00:20.870
Big time event.

1:00:20.870 --> 1:00:22.810
Why is it that they're
being thrown out?

1:00:22.810 --> 1:00:25.020
Well, because their home value
has dropped, maybe they're

1:00:25.020 --> 1:00:27.910
unemployed, their income has
dropped -- we still have 8.8%

1:00:27.910 --> 1:00:29.440
unemployment --

1:00:29.440 --> 1:00:31.790
and they can't pay
their mortgage.

1:00:31.790 --> 1:00:35.710
And maybe, they think it's
futile, because they're paying

1:00:35.710 --> 1:00:38.840
a debt that is bigger
than their wealth.

1:00:38.840 --> 1:00:42.210
So maybe, they don't feel in
a very good mood about it.

1:00:42.210 --> 1:00:45.900
They go back to the mortgage
lender and ask for a workout,

1:00:45.900 --> 1:00:48.680
and the mortgage lender
typically says no.

1:00:48.680 --> 1:00:52.090
The government has done a
sequence of programs to try to

1:00:52.090 --> 1:00:57.260
encourage the servicers of
mortgages to do workouts, that

1:00:57.260 --> 1:01:01.420
means lower their payments or
somehow worth make it easier.

1:01:01.420 --> 1:01:02.900
But it's been disappointing.

1:01:02.900 --> 1:01:05.820
They haven't succeeded in
getting cooperation on these

1:01:05.820 --> 1:01:09.090
programs. It's one of
the big tragedies of

1:01:09.090 --> 1:01:10.620
the financial crisis.

1:01:10.620 --> 1:01:14.650
So, what I proposed is, that
we should think forward.

1:01:14.650 --> 1:01:17.360
I don't know, how we can solve
this mess right now, but think

1:01:17.360 --> 1:01:20.310
about in the future, having
mortgages that have a

1:01:20.310 --> 1:01:22.510
pre-planned workout.

1:01:22.510 --> 1:01:32.590
And the workout would
lower the cost of --

1:01:32.590 --> 1:01:35.180
lower the payment
on the mortgage.

1:01:35.180 --> 1:01:37.080
Continuously, not just --

1:01:37.080 --> 1:01:39.590
the other problem with workouts
is, even when people

1:01:39.590 --> 1:01:42.760
get a workout on their mortgage,
they default anyway,

1:01:42.760 --> 1:01:44.810
because things get
even worse later.

1:01:44.810 --> 1:01:47.140
And you've got one workout, you
go back and say, I'd like

1:01:47.140 --> 1:01:48.380
another workout.

1:01:48.380 --> 1:01:50.130
They say, you have got
to be kidding.

1:01:50.130 --> 1:01:53.660
And anyway, the government, like
the HAMP program, that

1:01:53.660 --> 1:02:00.030
the Obama administration has
promoted, has only one workout

1:02:00.030 --> 1:02:01.140
for each family.

1:02:01.140 --> 1:02:05.020
So, I think they should be
continuous and automatic.

1:02:05.015 --> 1:02:13.615
And they don't require anyone
to apply for a workout.

1:02:17.630 --> 1:02:19.030
So, how much time do I have?

1:02:19.030 --> 1:02:24.970
I think I'll move to my last
subject, which is your career.

1:02:27.880 --> 1:02:32.310
Because you are young people and
you may be wondering what

1:02:32.310 --> 1:02:33.560
you want to do.

1:02:41.520 --> 1:02:43.870
I think, I maybe have reflected
on this before.

1:02:43.870 --> 1:02:46.840
You probably feel, that you
want to do something

1:02:46.840 --> 1:02:55.960
important, and you want a sort
of perfect career, something

1:02:55.960 --> 1:02:58.770
that tells a story, makes
a story of your life and

1:02:58.770 --> 1:03:01.680
ultimately serves
for good causes.

1:03:05.350 --> 1:03:13.070
But when you read Unger, you
don't get an inspiration like

1:03:13.070 --> 1:03:13.710
that, right?

1:03:13.710 --> 1:03:14.460
You get --

1:03:14.460 --> 1:03:18.020
he says, write a check
right now to UNICEF.

1:03:18.020 --> 1:03:22.550
Well, I can do that, but it
seems unrewarding just to give

1:03:22.550 --> 1:03:23.970
to charity.

1:03:23.970 --> 1:03:26.560
I can just live like
a monk, right?

1:03:26.560 --> 1:03:32.040
I could take a job at a
hamburger joint, and then give

1:03:32.040 --> 1:03:35.000
all my money away to UNICEF.

1:03:35.000 --> 1:03:37.260
Somehow that doesn't feel --

1:03:37.260 --> 1:03:40.290
I think, that you know, that
you have abilities, and you

1:03:40.290 --> 1:03:44.050
want to see them flourish,
and you want to --

1:03:44.050 --> 1:03:47.070
that's why I think, you
shouldn't be flipping

1:03:47.070 --> 1:03:48.710
hamburgers and giving
the money away.

1:03:48.710 --> 1:03:51.460
That's not what you should
be doing now.

1:03:51.460 --> 1:03:54.470
And instead, it would be
learning things that make it

1:03:54.470 --> 1:03:57.520
possible to do good works.

1:04:04.670 --> 1:04:06.680
What is the perfect career?

1:04:06.680 --> 1:04:11.310
I mentioned Paul Allen
or Bill Gates.

1:04:11.310 --> 1:04:12.680
Bill Gates --

1:04:12.680 --> 1:04:14.710
I shouldn't give you an example
of dropping out of

1:04:14.710 --> 1:04:17.600
college, but he dropped
out of college.

1:04:17.600 --> 1:04:19.980
And by the way, you should
do that, if you have a

1:04:19.980 --> 1:04:24.880
Microsoft-size idea, but I think
I've said this before.

1:04:36.260 --> 1:04:36.510
I don't know.

1:04:36.510 --> 1:04:37.580
What is the perfect career?

1:04:37.580 --> 1:04:39.070
I'll give you another example.

1:04:39.070 --> 1:04:40.650
Mohammad Yunus.

1:04:40.650 --> 1:04:41.900
You've heard of him.

1:04:46.360 --> 1:04:52.920
He went to a Ph.D. program at
Vanderbilt University, got his

1:04:52.920 --> 1:04:58.160
Ph.D. in 1969, became an
assistant professor of

1:04:58.160 --> 1:05:04.360
economics at Middle Tennessee
State University.

1:05:04.360 --> 1:05:08.190
But then, the big thing that
he did is, he went back to

1:05:08.190 --> 1:05:12.080
Bangladesh and founded
the Grameen Bank.

1:05:14.920 --> 1:05:23.070
The Grameen Bank, which
specialized in making

1:05:23.070 --> 1:05:28.020
microfinance loans
in Bangladesh,

1:05:28.020 --> 1:05:28.650
and that was in '76.

1:05:28.651 --> 1:05:28.721
[clarification: Mohammad Yunus
started making microfinance

1:05:28.717 --> 1:05:28.827
loans in Bangladesh in 1976,
but the institution of the

1:05:28.827 --> 1:05:32.407
Grameen Bank was not established
until 1983.]

1:05:32.410 --> 1:05:37.140
Grameen apparently means ''of
the village'' in Bengali.

1:05:37.140 --> 1:05:39.480
But what he did is, he conceived
of a new way of

1:05:39.480 --> 1:05:44.700
making loans to very
low-income people.

1:05:44.700 --> 1:05:50.000
Banks before Yunus didn't have
much interest in lending to

1:05:50.000 --> 1:05:53.380
low-income people, because the
costs of administering the

1:05:53.380 --> 1:05:56.520
loan seemed to be too high,
relative to what

1:05:56.520 --> 1:05:57.950
you could get back.

1:05:57.950 --> 1:06:00.310
But he had a scheme for
getting people to

1:06:00.310 --> 1:06:02.960
pay back the loans.

1:06:02.960 --> 1:06:07.450
Often, they would make loans
to women in groups --

1:06:07.450 --> 1:06:10.200
impoverished women, but he would
lend to the whole group

1:06:10.200 --> 1:06:14.110
and say, that the whole group is
jointly liable to the debt,

1:06:14.110 --> 1:06:16.160
that's the only way
we'll make it.

1:06:16.160 --> 1:06:18.740
And it's for business, for
starting a business, like

1:06:18.740 --> 1:06:20.760
getting a wheeled cart,
where you could

1:06:20.760 --> 1:06:22.440
sell food on the street.

1:06:22.440 --> 1:06:24.690
Some simple, low business
like that.

1:06:24.690 --> 1:06:27.650
You can't do it, unless you get
a little bit of capital,

1:06:27.650 --> 1:06:30.110
enough to buy the cart
and buy the first

1:06:30.110 --> 1:06:33.030
food to start selling.

1:06:33.030 --> 1:06:36.230
And these women can't get that
capital, but when he makes it

1:06:36.230 --> 1:06:40.800
available to them as a group,
they then interact with each

1:06:40.800 --> 1:06:44.040
other and enforce the good
behavior of each other.

1:06:44.040 --> 1:06:45.710
And it's a system that worked.

1:06:45.710 --> 1:06:51.020
So, he won the Nobel Peace
Prize in 2006.

1:06:51.020 --> 1:06:52.730
It was not the prize in
economics, it was

1:06:52.730 --> 1:06:54.740
the prize in peace.

1:06:54.740 --> 1:07:00.250
So, that's an example of the
kind of careers that, I think,

1:07:00.250 --> 1:07:01.990
some of you might think about.

1:07:04.700 --> 1:07:08.700
So, I think that in looking
forward to your own careers,

1:07:08.700 --> 1:07:13.530
you have to think about
the next five decades.

1:07:13.530 --> 1:07:14.630
You're going to be working --

1:07:14.630 --> 1:07:16.260
I said this before, I think --

1:07:16.260 --> 1:07:19.650
but you're going to be working
for another 50 years, right?

1:07:19.649 --> 1:07:22.549
More, if you enjoy it.

1:07:22.550 --> 1:07:26.500
With modern health care, you
might live to 100, but you

1:07:26.500 --> 1:07:28.130
won't be working at
100, probably.

1:07:28.130 --> 1:07:30.580
You'll probably retire
by then.

1:07:30.580 --> 1:07:31.750
Maybe not.

1:07:31.750 --> 1:07:34.980
Maybe, you've got a century
ahead of you.

1:07:34.979 --> 1:07:39.059
And I think, that the world will
change a lot over this

1:07:39.060 --> 1:07:40.440
interval of time.

1:07:40.439 --> 1:07:45.529
I think that, by the way,
information technology will be

1:07:45.529 --> 1:07:48.139
changing so many things
that we do in ways

1:07:48.140 --> 1:07:50.420
that we can't see.

1:07:50.420 --> 1:07:54.060
And financial markets
will be everywhere.

1:07:54.060 --> 1:07:56.880
So, I may be presumptuous to
think, that some of these

1:07:56.880 --> 1:08:03.060
ideas here are likely to come
about, but I've come to start

1:08:03.060 --> 1:08:06.220
to think, that they're all
inevitable, because we've

1:08:06.220 --> 1:08:11.080
already seen the past. We've
seen, how financial markets

1:08:11.080 --> 1:08:13.510
have captured more
and more risks.

1:08:13.510 --> 1:08:17.050
And we have such an advance in
our technology, that there

1:08:17.050 --> 1:08:20.680
really ought to be big changes
that will come.

1:08:24.830 --> 1:08:30.300
So, I guess, what you have to do
is, maintain a century-long

1:08:30.300 --> 1:08:31.680
personal outlook.

1:08:31.680 --> 1:08:32.800
I mean, just think
about how much

1:08:32.800 --> 1:08:34.870
happened in the last century.

1:08:34.870 --> 1:08:37.230
We had two world wars,
we had the whole

1:08:37.229 --> 1:08:39.029
communism came and --

1:08:39.029 --> 1:08:42.929
extreme communism came
and disappeared.

1:08:42.930 --> 1:08:47.120
Things like that are going to
happen in the next century,

1:08:47.120 --> 1:08:55.930
and so, I think you have to
reflect on your role as an

1:08:55.930 --> 1:08:59.410
agent, not to think of it as
something that a remote

1:08:59.410 --> 1:09:00.820
government is handling.

1:09:00.820 --> 1:09:03.640
This is something that you
have responsibility for

1:09:03.640 --> 1:09:07.230
helping develop, how
the world will turn

1:09:07.230 --> 1:09:10.320
out in the next century.

1:09:10.320 --> 1:09:14.280
I was just saying that
governments come and go, but

1:09:14.280 --> 1:09:17.570
financial contracts and
institutions and the people

1:09:17.570 --> 1:09:21.840
who manage them continue.

1:09:21.840 --> 1:09:25.210
I think, that you face great
career risks in this new

1:09:25.210 --> 1:09:26.460
environment.

1:09:28.170 --> 1:09:30.860
I mentioned before, the 40
year-old, who finds that his

1:09:30.860 --> 1:09:36.830
career is suddenly eliminated
because of some random change.

1:09:36.830 --> 1:09:40.660
There's evidence that, what
happens to you in life,

1:09:40.660 --> 1:09:43.830
depends on random events.

1:09:43.830 --> 1:09:46.400
It's really so much
unforecastable.

1:09:46.400 --> 1:09:48.830
I'm thinking of myself,
for example.

1:09:48.830 --> 1:09:50.580
What did I think I
would be doing?

1:09:50.580 --> 1:09:51.300
I'm still --

1:09:51.300 --> 1:09:52.510
I just stayed in
the same place.

1:09:52.510 --> 1:09:54.960
I've lived in New Haven for
almost 30 years and I've been

1:09:54.960 --> 1:09:56.590
a college professor.

1:09:56.590 --> 1:09:59.670
But when I was your age, I never
thought that I would be

1:09:59.670 --> 1:10:03.040
doing public speaking
the way I have been.

1:10:03.040 --> 1:10:03.640
I get --

1:10:03.640 --> 1:10:04.970
I'm all over the --

1:10:04.965 --> 1:10:07.585
I don't mean to exaggerate,
but I didn't have the

1:10:07.590 --> 1:10:08.800
confidence.

1:10:08.800 --> 1:10:11.340
You know, I was on my high
school debate team, and I

1:10:11.340 --> 1:10:14.080
didn't particularly do well.

1:10:14.080 --> 1:10:15.580
I think you just develop --

1:10:15.580 --> 1:10:17.900
careers develop and random
things happen, and you

1:10:17.900 --> 1:10:20.920
discover things about
yourself.

1:10:20.920 --> 1:10:23.430
I was going to point out
studies, that show how random

1:10:23.430 --> 1:10:26.810
events affect where you go.

1:10:26.810 --> 1:10:36.750
So Joshua Angrist, who's an
economist, did a study of the

1:10:36.750 --> 1:10:42.610
effect of the draft lottery on
success of people in life.

1:10:42.610 --> 1:10:47.540
In 1969, during the Vietnam
War, the U.S. government

1:10:47.540 --> 1:10:51.730
decided to use a lottery,
based on birthdates, to

1:10:51.730 --> 1:10:54.410
decide, who gets drafted
into the U.S.

1:10:54.410 --> 1:10:56.890
Army and sent to Vietnam.

1:10:56.890 --> 1:11:01.850
And so, Angrist thought, that
was a good controlled

1:11:01.850 --> 1:11:02.450
experiment.

1:11:02.450 --> 1:11:05.670
Let's compare the lifetime
income of people who -- they

1:11:05.670 --> 1:11:08.960
way they did it is, they drew
out of an urn all birthdays --

1:11:08.960 --> 1:11:12.240
there's 366 days, birthdays --

1:11:12.240 --> 1:11:14.810
they drew them out of an urn,
and the first one who was

1:11:14.805 --> 1:11:18.245
drawn was the first one
to go to Vietnam.

1:11:18.250 --> 1:11:24.220
And then, as it went down, the
higher the number, the less

1:11:24.220 --> 1:11:28.540
likely it is that you would
ever be asked to go.

1:11:28.540 --> 1:11:30.070
And so Angrist --

1:11:30.070 --> 1:11:33.330
by the way, I got 362.

1:11:33.330 --> 1:11:34.450
I couldn't believe it.

1:11:34.450 --> 1:11:37.670
What great luck.

1:11:37.670 --> 1:11:38.880
We were listening
on the radio --

1:11:38.880 --> 1:11:42.520
I was a graduate student -- we
were listening on the radio

1:11:42.520 --> 1:11:47.000
for the lottery numbers, and
we were drinking beer, and

1:11:47.000 --> 1:11:50.220
people were all excited,
wondering who was

1:11:50.220 --> 1:11:51.860
going to get drafted.

1:11:51.860 --> 1:11:55.210
And I thought, you know, when
it got into the 350s, 350,

1:11:55.210 --> 1:12:00.200
351, 352, I thought, I must
have missed my birthday.

1:12:00.200 --> 1:12:03.700
I can't be this far down,
but I got 362.

1:12:03.700 --> 1:12:06.030
And that's part of my success
story, because according to

1:12:06.030 --> 1:12:09.620
Angrist, people who were
drafted, who got the low

1:12:09.620 --> 1:12:13.260
number on the lottery,
ended up with

1:12:13.260 --> 1:12:16.340
lower lifetime earnings.

1:12:16.340 --> 1:12:20.550
That kind of random event
affects your whole life.

1:12:20.550 --> 1:12:24.100
You know, the word career goes
back to the sense, that there

1:12:24.100 --> 1:12:28.800
are random things that happen,
opportunities that come, and

1:12:28.800 --> 1:12:33.040
lack of opportunities
that hurt your life.

1:12:36.680 --> 1:12:41.510
So, I think that you have to
accept the fact, that it's a

1:12:41.510 --> 1:12:47.680
risky world, that you have to
try to position yourself,

1:12:47.680 --> 1:12:48.490
maintain --

1:12:48.490 --> 1:12:51.220
I think -- one important piece
of advice I like to think of

1:12:51.220 --> 1:12:55.610
is, maintain an orientation
toward history in the making.

1:12:55.610 --> 1:12:59.220
That there's a tendency for
people to orient themselves in

1:12:59.220 --> 1:13:01.710
terms of their own life cycle.

1:13:01.710 --> 1:13:03.000
They think, what's
going on now?

1:13:03.000 --> 1:13:05.900
Well, I'm a junior at Yale, and
I'm going to be applying

1:13:05.900 --> 1:13:08.730
to graduate school next year.

1:13:08.730 --> 1:13:11.810
You should be thinking, well,
this is a time in history,

1:13:11.810 --> 1:13:23.040
when the Middle East is changing
rapidly, that the

1:13:23.035 --> 1:13:27.475
emerging countries are
developing new technologies,

1:13:27.480 --> 1:13:30.110
and thinking about the
opportunities that are

1:13:30.110 --> 1:13:31.520
happening in the world.

1:13:31.520 --> 1:13:32.950
That's kind of what
we got from Hank

1:13:32.950 --> 1:13:34.110
Greenberg in his lecture.

1:13:34.110 --> 1:13:38.020
Remember, that he said, that
the founder of his company

1:13:38.020 --> 1:13:41.960
decided to move to China at
the beginning of the 20th

1:13:41.960 --> 1:13:45.730
century, and founded a business
because of what he

1:13:45.730 --> 1:13:48.600
saw was happening in Shanghai,
which was an international

1:13:48.600 --> 1:13:49.850
city at the time.

1:13:49.850 --> 1:13:53.720
So, I'm going to go there, and
I'm going to make a business.

1:13:53.720 --> 1:13:55.880
That's kind of positioning
yourself with history.

1:13:55.880 --> 1:13:59.160
And then, he moved out of China
before Mao Zedong took

1:13:59.160 --> 1:14:01.350
over, and then moved back in.

1:14:01.350 --> 1:14:04.490
I mean, this is history
awareness, and I think that it

1:14:04.490 --> 1:14:05.090
matters enormously.

1:14:05.090 --> 1:14:08.090
But you still can't completely
eliminate the role of chance

1:14:08.090 --> 1:14:10.490
in your life, this is a
time-honored principle.

1:14:10.490 --> 1:14:12.890
I was actually going
to quote the Bible.

1:14:12.890 --> 1:14:15.890
Ecclesiastes was a book of the
Bible written in--when was

1:14:15.890 --> 1:14:17.990
that written--around
500 BC or 600 BC.

1:14:17.990 --> 1:14:20.690
And this is, you probably
already heard this, "I

1:14:20.690 --> 1:14:24.590
returned and saw under the sun
that the race is not to the

1:14:24.590 --> 1:14:27.890
swift, nor the battle of the
strong, neither yet bread to

1:14:27.890 --> 1:14:31.190
the wise, nor yet riches to men
of understanding, nor yet

1:14:31.190 --> 1:14:34.490
favor to men of skill, but time
and chance happeneth to

1:14:34.490 --> 1:14:36.890
them all." So, that's a
time-honored truth, that

1:14:36.890 --> 1:14:37.190
randomness--

1:14:37.190 --> 1:14:40.490
I actually had this "time and
chance happeneth to them all,"

1:14:40.490 --> 1:14:43.190
I actually had that inscribed
in Latin when I

1:14:43.190 --> 1:14:44.390
had my office redone.

1:14:44.390 --> 1:14:47.990
It's over my desk in my office
at home, "tempus casumque in

1:14:47.990 --> 1:14:51.290
omnibus." Chance plays a huge
role in our lives and this

1:14:51.290 --> 1:14:54.290
risky world plays a sequence of
events over your lifetime

1:14:54.290 --> 1:14:56.390
that we have to try to manage.

1:14:56.390 --> 1:14:59.090
So, what I hoped to
do in this course.

1:14:59.090 --> 1:15:02.390
This was really a course about
managing risks as well as

1:15:02.390 --> 1:15:04.190
enterprise and creating
a cooperative spirit.

1:15:04.190 --> 1:15:08.090
I wanted to try to convey to you
that we have a technology

1:15:08.090 --> 1:15:11.090
for that, that should be
a part of your life.

1:15:11.090 --> 1:15:12.290
All right, thank you.

1:15:12.290 --> 1:15:13.540
[APPLAUSE]