Set forth below is the text of a comment that I put yesterday to the blog of Justin Fox, editorial director of the Harvard Business Review Group and author of the book The Myth of the Rational Market: A History of Risk, Reward and Delusion on Wall Street. The blog entry to which I placed the comment was titled Is Economics Ready for a New Model?
Fox noted that “economic theories based on rational behavior have been called into doubt by recent events” but argued that “if you’re looking for a revolution in economics, you’ll probably have to wait a long, long while.” Fox’s view is that we will instead see an evolution of our understanding of economics characterized by “lots of cycling back and forth between the belief that, in a market-based economy, everything will always work out for the best, and the concern that markets — especially financial markets — might have a natural tendency to self-destruct from time to time.”
Here are my words:
I am grateful to you for bringing this question to people’s attention, Justin. It is the most important public policy question of our day, in my assessment.
I strongly believe that you are wrong in your assessment that we are talking about an evolution rather than a revolution. The subtitle of Shiller’s book is “The National Bestseller that REVOLUTIONIZED the Way We Think About the Stock Market.” That’s not just sales talk. Shiller backs up the claim. You need to consider not only the words that appear on the pages, but also the IMPLICATIONS of those words (I have been doing this on a full-time basis for eight years now).
I’ll give one example. The dollar value of stock-market overvaluation in January 2000 was $12 trillion. Even John Bogle, My. Buy-and-Hold himself, acknowledges that it is an “Iron Law” of stock investing that prices revert to the mean within 10 years or so. So all paying attention to valuations knew in January 2000 that within 10 years or so our consumer economy would be losing something in the neighborhood of $12 trillion in spending power. And there are people who expressed surprise when we experienced a global economic crisis in late 2008? Huh?
People have been reluctant to accept the implications of Shiller’s work because they turn the conventional investing wisdom on its head. If we were only talking about an evolution, people could take it in. We are standing on the threshold of a true revolution, the greatest advance in our understanding of how stock investing works in history.
Don’t speak too soon for the wheel is still in spin….