Robert Shiller Is Smarter Than You Are

When Robert Shiller collects his Nobel prize for economics in Stockholm on Dec. 8, he will undoubtedly be described as the guy who doesn’t believe in efficient markets. But the man who warned presciently of bubbles in stocks and housing is a huge believer in financial engineering. “Derivative” is not a dirty word to Shiller. Neither is “hybrid security” nor “negative amortization” (paying less than the interest you owe).

Shiller says financial engineering can be used not to fatten Wall Street wallets, but to shelter ordinary people from risks to which they are overexposed. The Case-Shiller Home Price Indices, for example, are part of an ambitious plan—still unrealized—to help people guard against the risk that home prices will decline in their neighborhood.