Irrational Exuberance: Chapter 10

In the year 2000, while many market pundits expected the market to rise continuously upward, Robert Shiller warned about the stock market bubble, though not that many paid attention. While most were blinded by optimism, Shiller demonstrated using fundamental analysis that the market would generate poor returns for years to come. Learning from and understanding Shiller's rational approach to market valuation is likely to aid the investor in avoiding falling prey to the bubbles of the present and future.

There is another prevailing theory at the time of writing (the year 2000) that has been used to justify the apparent high stock prices: the public has learned about the benefits of investing in the stock market. Shiller explores this idea in this chapter.

Armed with historical statistics spanning decades and even centuries, investors of the year 2000 may have finally learned that stocks do provide strong returns over the long-term. As such, the theory would argue that stocks will no longer go down to their previous levels, as the risk premium built into stocks is now all but gone.

Shiller notes that this "learning" that has apparently taken place in the late 1990's also took place at other points in history. He cites numerous publications where these arguments have been made in previous bubbles decades earlier! Shiller points out that if the public did indeed learn that stocks provide strong returns over the long-term, they have learned it before, and they have also un-learned it during periods of deep decline.

Shiller also debunks the myth that investors have accepted that stocks outperform bonds over all lengthy periods. Furthermore, his surveys of both institutional and individual market participants demonstrate that investors have learned an awful lot of untruths that they may soon unlearn.