Yale Professor Warns Investors to Be Cautious

New Haven, Conn.-- If your faith in a continued bull-run on Wall Street hasn't been shaken yet, you should take a sobering look at "Irrational Exuberance" by Yale Professor Robert J. Shiller.

New Haven, Conn.– If your faith in a continued bull-run on Wall Street hasn’t been shaken yet, you should take a sobering look at “Irrational Exuberance” by Yale Professor Robert J. Shiller.

A respected expert on market volatility, Shiller argues in his new book, to be published this spring by Princeton University Press, that far from presaging everlasting prosperity, the turn-of-the-century stock market boom may be a bubble about to burst – if it hasn’t already.

The Stanley B. Resor Professor of Economics at Yale, Shiller contends that Alan Greenspan’s term “irrational exuberance” to describe investor optimism is particularly apt. Day-trading frenzy; belief that an aging “boomer” generation provides a measure of long-term investment insurance; and the phenomenal expansion of the internet have fueled an unprecedented and unjustified bull market, he claims.

According to Shiller, sports-style media “hype” surrounding daily market reports and “New Era” faith in the omnipotence of the American economy also contribute to market Pollyannaism. Other fallacies he points to are the belief that traditional standards of measuring stock value no longer apply and that international competition and increased productivity will keep inflation in check.

Arguing that overvaluation of stocks is inherently and historically an alarming situation, Shiller recommends certain precautions to avert disaster. First, he strongly urges reconsidering any plans to privatize social security. Rather, he advises, efforts should be made to reform the system. He also suggests that private pension plans should not invest entire retirement funds in the stock market, and he calls on savings and investment institutions to take account of sound principles of risk management.

Shiller is the author of “Market Volatility and Macro Markets,” which won the 1996 Paul A. Samuelson Award.

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Dorie Baker: dorie.baker@yale.edu, 203-432-1345