I’ve posted Entry #241 to my weekly Valuation-Informed Indexing column at the Value Walk site. It’s called Research on Bubbles Should Be Encouraged Despite the Limited Amount of Historical Data Available to Us.
Juicy Excerpt: My concern is that Shiller’s comment can fairly be read as suggesting more than the need to state a caveat when presenting research-based findings. His words can be interpreted as saying that we cannot build on his “revolutionary” (this is Shiller’s word) finding of 1981 that valuations affect long-term returns until more data is available. I strongly disagree with any such suggestion. In fact, I think that it would be exceedingly irresponsible to fail to do so.
In an ideal world, researchers would not make any claims until they had so much support for them that they could state them with 100 percent confidence. That’s not the world we live in. We once thought that the market was efficient (that is, that valuations didn’t matter). We now know that it is not. I think it is a terrible tragedy that in the 34 years since we achieved this critical advance in understanding of how markets work, researchers have hung back from exploring the many far reaching implications of the breakthrough findings. We very much need to be studying bubbles, how they form, how to stop them from forming, and what damage they do to us both as individual investors and as a society.