[MUSIC] Hello.

I'm Robert Shiller, a professor at Yale University, and this is Financial Market
s,
a course for Coursera Online. Right now, I am at Davenport College,
which is one of the colleges of Yale University. This course derives from an ear
lier course
that I had in 2011 on what we called Open Yale. It had the same title, Financial
Markets,
but it was a longer course. We've decided to condense it somewhat and
get the key points this time, but expand it in
another direction. That is to add problem sets and exams, so
that the experience of someone taking the course
online is much more solid and more similar to the experience that my
students here at Yale have had. But I think that there is a problem that
in excerpting it down, we sometimes found it, that some terms might not have bee
n
defined as well as I'd like. For example, in the sections that we'll
follow this week, I, spoke of the, VOC, or Dutch East India Company, and it wasn
't defined. Well I can tell you now, to help that,
that the Dutch East India Company was the first, company in the world, that was
traded regularly on stock market. VOC stands for Vereenigde Oost-Indische
Compagnie. That's Dutch, and I'm sure I didn't
pronounce that right, but it was just an example that I used to illustrate
what finance does and how wonderful an invention our
financial institutions are. When people in Holland in 1602, when that
company was first launched, when they discovered
that they could trade the stock every day and watch its price go up and down, it
developed a sense of
excitement and possibility in their lives, and it led to
the financing of many more corporations. When I gave these lectures, we were in
a
period of economic crisis.
It's been called the Great Recession. It was the biggest world recession since
the Great Depression of the 1930s. Among the events which triggered the Great Re
cession was
the 2007 sub-prime crisis in the United States, the 2008 Lehman Brothers crisis,
the failure
of an investment bank, Lehman Brothers. And then in 2009 and into 2010 and beyon
d,
the European sovereign debt crisis which originated in
Greece and rapidly spread to Spain, Portugal, Italy, and other places. These wer
e the crises that launched the
Great Recession. And these crises caused great
consternation because the, the Great Recession caused millions of
people to lose their jobs, or lose their homes, and, and, and find that their
career prospects were derailed. And fingers were pointed at the financial commun
ity.
That's the problem. It seemed like the financial community was the cause of our
most serious problems,
but I found myself thinking, yes, this is a
problem, and I don't mean to minimize it. But what about all of the strength tha
t
has developed prec, preceding this crisis. The strength of our economies. The wo
rld is going through an amazing
revolution. Ever since Deng Xiaoping in China or Boris
Yeltsin in Russia, we saw the development of
financial capitalism all over the world. That development is real and important,
and it has its ups and downs, it has crises, but
those crises are manageable if one understands finance.
So, I, I wanted to start with the first week.

My impulse was to plunge into some of the technology at the beginning, and then
leave some of the more philosophical eh, forays into it later.
So the very first week [COUGH], I wanted to, get right into, what I think is the
core model underlying finance.
It's something that's called the capital asset pricing model.
And this model is the model that helps us understand how risk is spread and dive
rsified and managed, and it helps us
understand the really important concept of leverage, which tells us how
ri, risk can be magnified or reduced in very simple
terms. It also helps us understand our own
individual investing decisions. What does it mean to invest well? How important
is diversification? And what does it mean really to diversify
anyway? I wanted to start with the capital asset pricing model.
Maybe that sounds formidable. But maybe it should be because it is real
and important technology. And that's what we're going to do at the
beginning. Then I'm going to talk about, in, also in this first week, I'm going
to talk about
insurance. Insurance is sometimes considered a
separate field outside of finance, but I, I think it has to be
integrated in with finance because it deals with the
same issues. It's a somewhat different tradition, and a
somewhat different jargon, but it deals with the
same issues of managing risks and allowing
people and organizations to get on with their goals
effectively. Now in, we have an outside speaker in the
first week. That is Hank Maurice Greenberg, who was
for better part of a half century the leader, or CEO, of the
biggest insurance company in the world, AIG,
American International Group.
This company, unfortunately, took a hit, in the recent financial crisis after 20
08. And that was after Hank Greenberg had
left. The company was a spectacular success
before the financial crisis and on until
Greenberg left. After the crisis, it rapidly fell apart,
and in fact, the United States government decided to bail out the
company to keep it going with bailouts that set a record. The government committ
ed $182 billion to
bail out AIG. I felt a little diffident about inviting
Hank Greenberg to come and talk to my class of undergraduates because I thought,
i, it's a difficult time for him. The company that he'd spent a lifetime buildin
g up had gone through a terrible
turmoil. But he agreed to do this, and he spoke quite candidly
about what happened in, in his life.
It's a little bit technical. Some of you again, you might find that he uses jarg
ony terms, from finance that are
not explained. But I think that you'll get the general
picture, from Hank Greenberg, and it's a picture of
both institutions and technology and people.
And it highlights, for me, the really essential drama that underlies
finance. Hank Greenburg was a man with big and
important vision. He was driving a company that was setting
new standards for its breadth of risk management, of risks
that impinge on people's lives. But du, driving such a big company is
like, like a ship. It could be either the Titanic or it could
be a successful voyage. Nobody knows in advance. And so, it, it left him with so
me life's
adventure. I think you'll detect a little bit of
sadness in his voice because he'd built such a great enterprise, which went thro
ugh such
terrible problems. It's reemerging, and that's the hopeful

sign. But I, but I, I just want to conclude this little introduction to this wee
k with the
thought that maybe I'm repeating myself a bit, but
finance is a very important technology. It has a mathematical basis. It has a in
tellectual underpinning that
makes it a infrastructure for our, our whole
economy. And I want this course to help people understand this technology so tha
t they,
they are not buffeted by it, so they can react to
the technology and its opportunities constructively in whatever
walk of life they choose. [MUSIC]