Semi-Rational Exuberance

In 1996, Yale economist Robert Shiller looked around, considered the historical record, and concluded that the American stock market was overvalued. In the past, whenever price-earnings ratios were high, future long-run stock returns were low. But now prices on the broad index of the S&P 500 stood at 29 times the average of the past decade's earnings.

On the basis of econometric regression analyses carried out by Shiller and Harvard’s John Campbell, Shiller predicted in 1996 that the S&P 500 would be a bad investment over the next decade. In the decade up to January 2006, he argued, the real value of the S&P 500 would fall. Even including dividends, his estimate of the likely inflation-adjusted returns to investors holding the S&P 500 was zero – far below the roughly 6% annual real return that we have come to think of as typical for the American stock market.

Shiller’s arguments were compelling. They persuaded Alan Greenspan to give his famous “irrational exuberance” speech at the American Enterprise Institute in December 1996. They certainly convinced me, too.

To continue reading, please log in or enter your email address.

To read this article from our archive, please log in or register now. After entering your email, you'll have access to two free articles from our archive every month. For unlimited access to Project Syndicate, subscribe now.


By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.