Still, Mullainathan, of MIT, said the market was grossly overvalued before the attacks. A behavioral economist who thinks investors' decisions reflect emotional factors as well as rational ones, he said investors had propped up share prices with their optimism. Based on corporate profits, he said, stocks should have been much lower.
Robert Shiller, a Yale behavioral economist argued in his bleak, admonitory book, Irrational Exuberance, that the 1990s stock market boom was a bubble that would inevitably burst. The collapse of stocks last year, combined with the recent attacks, may be enough, in his view, to change investor attitudes for a generation.
"It could be the beginning of a downward spiral or a negative bubble," he said. By way of perspective, Shiller said that the price-to-earnings ratio of the S&P 500, now 28, is roughly double its historical average. If it reverted to traditional levels, prices would be cut in half.
One thing seems clear. The chaos has had a humbling effect on many market prognosticators.
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