Shiller and the uses of sociology in behavioural finance

December 20, 2016

By Christian Borch

It has been common for economic sociology to insist that economists tend to suffer from a rather narrow view of economic phenomena – and that sociologists (and other non-economists) consequently have much to offer in terms of advancing more empirically adequate analyses. But of course, there are certainly some economists who have produced sophisticated, empirically rich studies of economic phenomena. And there are also economists who appreciate sociological findings and try to integrate these into their work. This synergy applies especially to the field of behavioural economics as well as its subfield of behavioural finance. Both these behavioural traditions share the view of sociological critics of orthodox economics; namely, that economics falls short of providing adequate accounts of empirical economic phenomena, in large part because orthodox economic frameworks rely on unrealistic homo economicus models. Against this narrowmindedness, behavioural approaches present themselves as an important analytical improvement that – by mobilizing inspiration from psychology and sociology – provides more accurate analyses of economic behaviour, including of real actors’ actual modes of action.

All of this is well known. What has received considerably less attention is how psychological and sociological insights are utilized in the hands of e.g. behavioural finance scholars. How precisely do psychological and sociological findings find their way into behavioural finance and how do these findings improve behavioural finance studies? What claims about finance are made on the basis of particular psychological or sociological insights? In our article entitled ‘Market Sociality: Mirowski, Shiller and the Tension between Mimetic and Anti-mimetic Market Features’, recently published in Cambridge Journal of Economics, Ann-Christina Lange and I seek answers to these questions. We do so by examining the socio-psychological and sociological elements that lie behind Robert J. Shiller’s behavioural finance theory.

Shiller, a Yale economist, is a leading scholar within behavioural finance. In 2013, he was awarded the Nobel Prize in Economic Sciences for his central contributions to the field. In particular, Shiller has spent years critiquing the notion of efficient markets as advanced by e.g. Eugene Fama, a co-recipient of the 2013 Nobel Prize. Shiller’s alternative to Fama has two dimensions. One is empirical, in that Shiller has argued that stock prices, to take one example, do not conform to efficient market expectations. Another dimension of Shiller’s work is theoretical: he has drawn considerably on particular psychological and sociological traditions when developing a behavioural alternative to the efficient market hypothesis. Indeed, in Shiller’s view, behavioural finance may be defined as ‘finance from a broader social science perspective, including psychology and sociology’ (2003: 83), and explicit inspiration from scholars such as Emile Durkheim, Robert K. Merton, and Max Weber can be identified in many of his writings.

The use of psychological and sociological findings is particularly visible in Shiller’s seminal article from 1984: ‘Stock Prices and Social Dynamics’ (Shiller, 1984), which is that part of his work which has received the most attention from the Committee of the Royal Swedish Academy of Sciences in their motivation for the 2013 prize. In the 1984 article, Shiller puts forward his theoretical programme in its most elaborate form. Specifically, he argues that financial markets should be seen as deeply embedded in mass-psychological dynamics: ‘mass psychology may well be the prominent cause of movements in the price of the aggregate stock market’, he asserts (1984: 459). In our discussion of Shiller, we focus particularly on the ways in which he substantiates this assertion. We demonstrate, firstly, that Shiller is inspired by the sociological tradition of crowd and mass psychology, including an interest in the notion of suggestion (prominent in late-nineteenth-century sociology and psychology). Moreover, we also show that Shiller harks back to particular experiments from social psychology that, seemingly unwittingly, create tensions vis-à-vis the crowd and mass sociological inspirations he evokes.

A word on Shiller’s use of social-psychology experiments is pertinent here. Much of the behavioural finance literature, and especially Shiller, deploys very particular sociological and psychological findings to make rather grand statements. In our article, we discuss this point with reference to famous experiments carried out by Solomon Asch and utilized by Shiller. Here allow me to make the same point through another experimental grounding to which Shiller refers, namely the work of Muzafer Sherif.

The particular experiment Shiller references is a study by Sherif on autokinetic movement (Sherif, 1937). Placed in a dark room, a group of people are asked to measure the distance that a point of light moves, when in fact it remains stationary. The subjects are placed in the room in groups of two. One of the pair is the experimental subject. The other is, without the experimental subject’s knowledge, an experiment confederate. The objective of the experiment is to assess the degree to which the experimental subject’s estimate of the movement of light is influenced by the confederate’s judgments, i.e. whether some form of group pressure can be detected. The study concludes that experimental subjects are prone to conform to (experimentally induced) group norms, i.e. they are inclined to adjust their own judgments to the views of others (the confederate), without really acknowledging this afterwards.

Sherif’s experiment, which is reported in a nine-page article (Sherif, 1937), is used by Shiller to substantiate his claim that ‘mass psychology may well be the prominent cause of movements in the price of the aggregate stock market’. What Sherif shows, according to Shiller, is that people are subject to what he calls ‘social movements’: they are suggestible and can be influenced through group pressure; and they are also victim to fads and fashions of all sorts. Put differently, people are essentially mimetically constituted, and this characteristic, argues Shiller, also applies to financial markets, in which investors could mimic the behaviours and assessments of others.

From a sociology of knowledge perspective the interesting point here is not so much whether Shiller is correct about according mass psychology a prominent role in financial markets, including the fads and fashions that allegedly characterize these (although I think his intuition is largely right). The more important point is to note that Shiller is making such claims on the basis of studies like that of Sherif, although it is not at all clear how a study of autokinetic effect and possible group pressure in an experiment with just two persons can reasonably justify a sweeping claim about the very nature of financial markets as constituted by mass psychology and fads and fashions. Yet this is precisely how the social-psychological experiments function in the work of Shiller.

The Shiller case demonstrates a more general point: as sociologists, we should certainly welcome economists’ attempts to make productive use of sociological insights. However, we should also critically assess whether sociological (and psychological) findings are appropriately mobilized by economists, not least because such findings may often be evoked in a pick-and-choose fashion with little or no attention to any of the limitations they might have.


Sherif, M. (1937) ‘An Experimental Approach to the Study of Attitudes’, Sociometry 1(1/2): 90–98.

Shiller, R. J. (1984) ‘Stock Prices and Social Dynamics’, Brookings Papers on Economic Activity 2: 457–510.

Shiller, R. J. (2003) ‘From Efficient Markets Theory to Behavioral Finance’, Journal of Economic Perspectives 17(1): 83–104.

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