Shiller front

cial theory, information technology, and the science of psychology al-
low us to design new inventions for managing the technological and
economic risks inherent in capitalism—inventions that could not have
been envisioned by past thinkers. Karl Marx, the instigator of the com-
munist movement, had no command of such risk management ideas
when he published Das Kapital in 1867. Nor did John Maynard Keynes,
the principal expositor of modern liberal economic policy, when he
published the General Theory of Employment, Interest and Money in
1936
. Nor did Milton Friedman, the chief expositor of economic liber-
tarianism, when he published Capitalism and Freedom in 1962.
Ultimately,  The New Financial Order is about applying risk man-
agement technology to the major problems of our lives. That is, it de-
picts an electronically integrated risk management culture designed to
work in tandem with the already existing economic institutions of cap-
italism to promote wealth. The book does not promise utopia, nor is it
a solution to all of our problems. It is not motivated by any political
ideology, nor by sympathies with one or another social class. It does of-
fer steps we can realistically take to make our lives much better. By pre-
senting new ideas about basic risk management technology, this book
does not propose a finished blueprint for the future. Instead, it de-
scribes a new direction that will inevitably be improved by future ex-
perimentation, innovation, and new advances in financial theory, in the
manipulation of relevant risk-related information, and in the ability of
social scientists to draw on psychology to design user-friendly tech-
niques to help people manage income-related risks.
I began working on this book in 1997 as a culmination of years of think-
ing and writing about how to improve institutions for dealing with
risks, both to individuals and to society. In 1993 I published a technical
monograph, Macro Markets: Creating Institutions for Managing Soci-
ety’s Largest Economic Risks, accompanied by a series of scholarly arti-
cles on the general topic of risk management with Allan Weiss, Karl
Case, Stefano Athanasoulis, and others. But these pieces neither drew
the big picture nor addressed the big issues that I thought needed to
be stressed to a broad audience.
At that time I had planned to use this book to integrate my think-
ing about risk management into a broader picture of our society and
economy. I had hoped to correct the egregious public misunderstand-
ing of technological and economic risks, and convey a clearer, more ac-
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curate picture of the actual risks people face. Also, I had hoped to ex-
plain how the presence of various forms of risk, many hidden in plain
sight, prevent us from achieving our highest potential.
But I was interrupted in 1999 by the increasingly impressive evidence
of an enormous boom in the stock market, a boom that proved of his-
toric proportions. On the advice of my fellow economist and life-long
friend Jeremy Siegel, I decided to set aside the work on this book to
write a book about the stock market boom—a classic example of the
very kind of misperception and mismanagement of long-term risks that
I had written about in the scholarly literature. With the help of Prince-
ton University Press, I managed to get Irrational Exuberance into
bookstores in mid-March 2000, precisely at the peak of the market and
of the tech bubble.
Irrational Exuberance concluded by saying that not only was the
level of the stock market exaggerated but society’s attention to the
stock market, and the importance we attach to it, were also exagger-
ated. The stock market will not make us all rich, nor will it solve our
economic problems. It is foolhardy for citizens to pay attention to the
world of business only for the purpose of picking stocks, and even more
foolhardy to think stock prices will go nowhere but up.
The New Financial Order picks up where my earlier research and
Irrational Exuberance together leave off. By showing how we mis-
construe risk and by bringing significant new ideas to bear on this prob-
lem, I hope to explain how we can fundamentally resolve the economic
risk predicament. We are indeed entering a new economic era, robust
stock market or not, and we need to think about the implications of
emerging technologies—the real drivers of global economic change—
not just on individual companies and their stock prices but on all of us.
We need to understand how the technology of the past has shaped our
institutions. And we need to change our thinking in a vigorous, cre-
ative way to navigate this new environment. The New Financial Order
outlines critical means of making this ideal a reality.
As an aid to critical readers of this book, I have also assembled a
number of technical and background papers as well as news clips re-
lating to the themes of this book. They are on the web site http://www.
newfinancialorder.com.
preface
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Acknowledgments
My style of writing has changed over the years. I now make use of as
many minds as I can to filter existing ideas, to suggest new ones, to
search out the facts, and to discover what I really need to know. Some-
times it seems I spend more time talking to others than writing, but I
feel that it has been time well spent. And so for this book I owe an un-
usual debt to others.
Of all the people who have collaborated with me on this book, 
Allan Weiss, my former student at Yale and president of the firm we
founded in 1991, Case Shiller Weiss, Inc. (now a subsidiary of Fiserv,
Inc.), stands out. He has been a brilliant originator of ideas. Allan and
I worked together to develop our concepts of regional real estate fu-
tures markets, home equity insurance, and a macro-market instrument
we call macro securities.
My editor at Princeton University Press, Peter Dougherty, has helped
form my thinking in fundamental ways, and I owe a deep debt to him.
His genius stands behind this book, and I never would have done it
without his help and ideas. I have also developed a close intellectual re-
lationship with Henning Gutmann, until recently an editor at Yale Uni-
versity Press, and have spent many hours talking with him about the
ideas in this book.
Stefano Athanasoulis, a former student of mine at Yale, is another
close collaborator. For five years now we have worked to develop a
mathematical theory of optimal market definition that has helped re-
fine some of the ideas in this book, particularly that of a market for
claims on the combined national incomes of the world, an idea that we
first published together.
Many of the ideas in this book ultimately derive from a tradition here
at Yale, where I have now been immersed for twenty years. The late
James Tobin was a formative influence. His fundamental development
of the mathematical theory of diversification, his innovations in practi-
cal risk management, such as the Yale tuition postponement option
that he created, and his sincere concern for the unlucky in our society,
have all been inspirations. Work that he and William Nordhaus have
done on accurately measuring economic welfare has also encouraged
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