From: Robin Hanson (rhanson@gmu.edu)
Date: Mon Sep 27 1999 - 13:07:19 MDT
At 09:46 PM 9/26/1999 -0700, Hal F. wrote:
>A very interesting article is available online from Atlantic Monthly
>at http://www.theAtlantic.com/atlantic/issues/current/9909dow.htm.
>...
>The authors analyze stock market prices using basic techniques of
>expected income stream and also risk premiums, and conclude that
>stocks are actually extremely UNDERvalued today (and always have been).
>By their model the Dow ought to be running at 36,000 or even more.
>...
>I'd like to hear what our more economically sophisticated members think
>of this argument.
Their argument isn't silly or wrong. But they could easily be wrong
nonetheless about where the Dow will be anytime soon.
This is one of those cases where you have to choose to adjust your
data to the model, or to predict that the data will adjust to your model.
Standard models have trouble explaining current large risk premia. So
either it is due to something we don't understand, or it is irrational
and will eventually go away. If you want to bet it will go away soon,
why go buy stocks. If you want to bet that it won't go away soon,
go sell them.
Robin Hanson rhanson@gmu.edu http://hanson.gmu.edu
Asst. Prof. Economics, George Mason University
MSN 1D3, Carow Hall, Fairfax VA 22030
703-993-2326 FAX: 703-993-2323
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