Investor Masterclass
Robert J. Shiller
The Economist Who Measured Bubbles
Quick Answer
What do Robert Shiller’s quotes teach investors?
Robert Shiller’s ideas teach investors to judge prices against long history. His CAPE ratio compares stock prices with ten years of inflation adjusted earnings; it stood at 41.13 in August 2026 against a long run average of about 17. High readings have been followed by weaker returns over the next decade, though the ratio is a poor timing tool.
Start Here: The Short Version
Difficulty: Beginner to Intermediate
Big idea: Shiller teaches that prices can drift far from fundamentals for years, so valuation says more about the next decade than about the next month.
Use this lesson to understand the investor’s core idea first. Then use the examples, vocabulary, and application prompts to turn the idea into a practical investing rule.
Robert J. Shiller is a Yale economist who shared the 2013 Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen. He helped create the CAPE ratio for the stock market and the Case Shiller indexes for home prices. This page explains what those measures can and cannot tell you, and why he argues that psychology and popular stories drive booms and busts.
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2013
Year he shared the Nobel Prize in Economic Sciences
With Eugene Fama and Lars Peter Hansen
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41.13
S&P 500 CAPE ratio, August 2026
Latest complete month, multpl.com’s monthly figure from Shiller’s data, cross checked against YCharts; long run average 17.4, as calculated on our Is the Stock Market Expensive page from a copy of Shiller’s monthly series, 1881 to September 2023
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27%
Fall in the national Case Shiller home price index
From the July 2006 peak to the February 2012 low; not seasonally adjusted, before inflation
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Figures as of September 2026.
Lesson ideas on this page are teaching lines written by our editors from Robert J. Shiller’s published work and public interviews; they are not direct quotes. Figures reflect publicly reported records.
Key Takeaways
- The CAPE ratio compares stock prices with ten years of inflation adjusted earnings.
- High CAPE readings have been followed by weaker returns over the next decade, though rarely in any predictable way over the next year.
- Stock prices can swing far more than the dividends and earnings behind them.
- Bubbles feed on rising prices, excited buyers and stories that spread from person to person.
- Home prices can fall hard: the national Case Shiller index dropped about 27% from 2006 to 2012.
- Long historical data is a better guide than recent memory or a popular story.
- Valuation warnings can come years early, so they are not a timing system.
From Michigan to Yale
Robert J. Shiller went to high school in Southfield, near Detroit, and finished college at the University of Michigan in 1967 after starting at Kalamazoo College. He went straight on to MIT and earned his PhD in economics in 1972. His dissertation adviser and first coauthor was Franco Modigliani, who later won the Nobel Prize in 1985.
He taught at the University of Minnesota from 1972 to 1974, then at the University of Pennsylvania until 1982. In his last year there he was also a Wharton finance professor. In 1982 he joined Yale as a professor of economics. There he overlapped for 20 years with James Tobin, a Nobel laureate he has described as an inspiration. Yale named him Sterling Professor of Economics in 2013, and he now holds the title Sterling Professor Emeritus.
His research asks whether markets price assets sensibly. In 1981 he published evidence that stock prices were far more volatile than later dividends could justify. With John Campbell, his former Yale graduate student, he wrote over a dozen papers, including the work behind the CAPE ratio. With his colleague Karl Case he built new home price indexes. He also asked investors directly, surveying them within days of the October 19, 1987 crash about why they had sold.
Outside academia he became known for Irrational Exuberance, published in March 2000 with stock valuations near a record. The 2005 second edition added housing, and the 2015 third edition added bonds. In 2013 he shared the Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen. He served as president of the American Economic Association for 2016.
Career Milestones
1981 | Publishes his paper asking whether stock prices move too much to be justified by later dividends. |
1987 | Publishes new home price indexes for four cities with Karl Case. |
1988 | Publishes Stock Prices, Earnings and Expected Dividends with John Campbell in the Journal of Finance. |
2000 | Publishes Irrational Exuberance in March, with stock valuations near a record. |
2005 | Releases the second edition of the book, which adds the housing market. |
2013 | Shares the Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen. |
Three Influences
Graham and Dodd’s Security Analysis In their 1934 textbook, Benjamin Graham and David Dodd advised judging stocks against earnings averaged over at least five years, ideally seven or ten. Campbell and Shiller cited that advice when they smoothed earnings over ten years for their valuation ratio. The logic still holds for beginners: one year of profits can flatter or punish a price, while a decade gives a steadier base.
James Tobin Tobin, who received the 1981 Nobel Prize in economics, overlapped with Shiller at Yale for 20 years. Shiller has named Tobin as an inspiration, pointing to the respect they shared for economics built on facts and to Tobin’s moral convictions. That respect for facts runs through Shiller’s work: gather long data, measure it carefully, and only then argue about what it means.
Karl Case Shiller’s colleague Karl Case shaped his work on housing. Together they published new home price indexes for four US cities in 1987 and surveyed home buyers from 1988. In 1991 they launched Case Shiller Weiss with Allan Weiss, a former Yale student of Shiller’s. The pair also studied the run up in home prices before the 2008 financial crisis.
Shiller’s career rests on one habit worth copying: before deciding what counts as normal, look at the longest record you can find.
The lesson in one line
Yale and the Long Data
Shiller’s platform is Yale and the data he shares from it. His monthly stock market file starts in January 1871. It pairs prices with dividends, earnings and consumer prices, so every figure can be adjusted for inflation. Earnings come from S&P four quarter totals from 1926 and from older index work by Cowles and his associates before that. The file is the public source for the CAPE ratio. In September 2018 he added a total return version, because more companies now pay out cash through buybacks instead of dividends.
Housing got the same long view. His annual home price series runs from 1890 to the present, and the indexes he built with Karl Case are still published. Standard & Poor’s licensed them in 2006, and home price futures on them launched at the Chicago Mercantile Exchange that year. Today they carry the S&P Cotality Case Shiller name.
He also measures beliefs. From 1988 he and Case surveyed home buyers. Starting in 1989, later with help from the Yale School of Management, he also surveyed stock market investors. This fits his central claim, as his publisher sums it up: swings driven by psychology are part of every asset market.
The Framework
Shiller’s approach rests on a small number of principles. These four do most of the work.
Valuation sets the long run odds
The CAPE ratio divides the market’s inflation adjusted price by its average inflation adjusted earnings over the past ten years. In Campbell and Shiller’s research, high valuation ratios were followed by weaker price growth over the next decade. Over a single year they forecast little. By the calculation on our Is the Stock Market Expensive page, built from a copy of Shiller’s monthly series, the 57 months from 1881 to September 2013 that began with a CAPE of 30 or more were followed by a median real total return of negative 1.1% a year over the next decade, and 60% ended the decade lower after inflation. Read the ratio as a guide to long run returns rather than as a clock for the next move.
Prices can outrun fundamentals
Shiller’s 1981 paper tested a simple idea: rational prices should swing less than the value of the dividends that actually followed. Instead they swung far more. His evidence of excess volatility challenged the efficient markets theory widely attributed to Eugene Fama. For investors, the point is practical: a big move in price does not always mean the business changed. Optimism and fear can push prices away from value, sometimes for years.
Booms feed on feedback and stories
In Shiller’s account, rising prices draw attention, attention draws new buyers, and their buying lifts prices again. He described the housing boom that peaked in 2006 as a feedback loop, or social epidemic, that made homes look like a great investment. His later work on narrative economics extends the idea: popular stories spread from person to person and can drive major economic swings.
Measure against the longest record
Short experience can make unusual conditions feel normal, so Shiller builds long series: stock data from 1871 and home prices from 1890. By his count, real home prices rose 86% from late 1996 to early 2006. Rents and construction costs, he found, could not explain the jump. A long record shows when a market has broken from its own history and raises a harder question: what changed?
The Shiller Vocabulary
A small set of terms runs through Shiller’s work. Learn these six and the rest of this page is easier to follow.
CAPE ratio
The cyclically adjusted price to earnings ratio, also called the Shiller P/E or P/E 10. It divides the stock market’s inflation adjusted price by the average of the last ten years of inflation adjusted earnings. Averaging over a decade keeps one boom year or one recession from distorting the reading.
Excess volatility
Shiller’s term for his 1981 finding that stock prices swing much more than later changes in dividends can justify. If prices were purely rational forecasts of future payouts, they should move more calmly than they do. It is the finding behind his argument that psychology, and not only news about fundamentals, moves prices.
Speculative bubble
A price rise sustained by psychology rather than fundamentals. In Shiller’s account, gains make news, news draws in new buyers, and stories spring up to explain why the rise makes sense. Because the buying depends on prices continuing to climb, the process can reverse sharply.
Irrational exuberance
Federal Reserve Chairman Alan Greenspan used the phrase in a December 5, 1996 speech. He asked how anyone could tell when it had pushed asset values too high. Shiller named his 2000 book after the remark. The book argues that psychology can carry markets into speculative bubbles.
Repeat sales index
A home price index built from houses that have sold at least twice. Case and Shiller compared each home’s sale price with its own earlier sale. That keeps the index from being skewed by which homes happen to sell in a given month.
Narrative economics
The study of popular stories about the economy and how their spread changes behavior. It was the theme of his presidential address to the American Economic Association, published in 2017. His 2019 book’s subtitle says such stories go viral and drive major economic events.
Notable Ideas
These six ideas explain why Shiller’s work still matters to investors, along with the debates it started.
Excess volatility, 1981
In a June 1981 American Economic Review paper, Shiller asked whether stock prices move too much to be justified by later changes in dividends. If prices were rational forecasts of those dividends, they should have moved more calmly than they did. His evidence of excess volatility challenged the efficient markets theory widely attributed to Eugene Fama. In 2013 the two shared the Nobel Prize in Economic Sciences with Lars Peter Hansen.
Repeat sales home price indexes, 1987
Home prices are hard to measure because different houses sell each month. Karl Case and Shiller built indexes that compare each existing home with its own earlier sale. In 1987 they published new indexes for four cities. They launched Case Shiller Weiss in 1991, and Standard & Poor’s licensed the indexes in 2006. Today the national index, set at 100 for January 2000, carries the S&P Cotality Case Shiller name.
The CAPE ratio, 1988
In July 1988, Shiller and John Campbell, his former Yale graduate student, published a paper in the Journal of Finance. Using US data from 1871 to 1986, they found that a long average of real earnings forecast the value of future dividends well. Their later work used a ten year average, following Graham and Dodd’s advice to smooth earnings. In their research, such ratios forecast ten year price changes far better than one year changes.
Warning the Federal Reserve, 1996
On December 3, 1996, Campbell and Shiller testified to the Federal Reserve Board. Short run returns are hard to forecast, they said, but high valuation ratios tend to fall back, which pointed to weak long run returns. Two days later, Chairman Alan Greenspan asked in a speech how anyone could tell when irrational exuberance had pushed asset values too high. The warning came early: by their 2001 update, the inflation adjusted S&P Composite stood 80% above its level on the day they testified.
The housing bubble warning, 2005
The 2005 second edition of Irrational Exuberance added the housing market, including a US home price series reaching back to 1890. His publisher later described him as having warned of both the tech and housing bubbles. By Shiller’s count, real home prices had risen 86% from late 1996 to early 2006. The national Case Shiller index peaked in July 2006 and fell about 27% by February 2012, before adjusting for inflation.
Narrative Economics, 2019
Popular economic stories were the theme of Shiller’s presidential address to the American Economic Association, published in 2017. He expanded the idea in his 2019 book Narrative Economics: How Stories Go Viral and Drive Major Economic Events. The subtitle states his thesis. His 2007 housing study had already described the home price boom as a kind of social epidemic.
30 Simple Investor Lessons
This section turns Robert J. Shiller’s best known ideas into simple teaching lines. Each line is a lesson summary written by our editors, not a direct quote, so nothing is misquoted or overstated.
Quote safety note: Treat these as educational principles, not verbatim quotes. For Robert J. Shiller’s exact words, go to the primary sources listed at the end of this page.
Valuation and the CAPE Ratio
Lesson idea
Judge the market’s price against a decade of earnings rather than one year.
Means. The CAPE ratio divides price by ten years of inflation adjusted earnings, so a single boom or recession year does not distort the reading.
Apply. Look up the latest CAPE reading on our Is the Stock Market Expensive page and write it down next to its long run average of about 17, with the date you checked.
Lesson idea
Smoothing earnings matters most when profits swing hard.
Means. Profits shrink in recessions and swell in booms, so a one year P/E can look expensive at a trough and cheap at a peak.
Apply. Collect ten years of earnings per share for one company from its annual reports and compare the latest year with the ten year average.
Lesson idea
The starting price shapes the long run return you can reasonably expect.
Means. In Campbell and Shiller’s research, high valuation ratios were followed by weaker stock price growth over the next ten years.
Apply. Work out what $10,000 becomes over ten years at 4% and at 8% a year, and write down how much the starting assumption matters.
Lesson idea
Compare prices across decades only after removing inflation.
Means. Shiller’s data pairs every price and earnings figure with the consumer price index, so 1929, 2000 and the present can be compared fairly.
Apply. Before comparing an old price with a current one, convert both into current dollars with the Inflation Calculator and note the adjustment you used.
Lesson idea
A market ratio describes the index as a whole rather than each company inside it.
Means. CAPE is built from the S&P Composite as a whole, so individual stocks can be far cheaper or more expensive than the market reading.
Apply. Run one company through the P/E calculator in the Market Based Calculators, and note that it uses one year of earnings rather than ten.
What Valuation Cannot Tell You
Lesson idea
A valuation gauge speaks to the coming decade rather than the coming month.
Means. Campbell and Shiller found valuation ratios had little power to forecast the next year’s price change, though they did far better over ten years.
Apply. Before reacting to any valuation headline, write down whether it describes the next year or the next ten years.
Lesson idea
Expensive markets can stay expensive for decades.
Means. In every January from 1992 through 2026 except 2009, the ratio sat above its long run average of about 17, by multpl.com’s figures.
Apply. Using a table of yearly CAPE readings, count how many of the past 30 years it spent below its long run average.
Lesson idea
Being early can feel exactly like being wrong.
Means. After Campbell and Shiller’s December 1996 warning to the Fed, the inflation adjusted S&P Composite rose 80% by their 2001 update.
Apply. For any long term view you hold, write down how you would respond if the market moved against it for three straight years.
Lesson idea
Let valuation shape your expectations rather than your guesses about turning points.
Means. A high reading argues for planning on lower long run returns rather than for guessing when, or whether, a sharp decline will start.
Apply. Test your savings plan in the Savings Goal Calculator with a low return assumption as well as a normal one, and note whether it still reaches your goal.
Lesson idea
Judge a warning by what followed over years rather than by how it looked at the time.
Means. The ratio fell from about 44 in January 2000 to about 23 in January 2003, per multpl.com, after warnings had looked wrong for years.
Apply. Keep a dated log of valuation readings and forecasts you notice, and review it once a year against what the market actually did.
How Bubbles Form
Lesson idea
Be most careful when a rising price becomes the main reason people give for owning something.
Means. Shiller describes bubbles as feedback loops in which gains attract attention, attention attracts buyers, and new buying lifts prices again.
Apply. For any asset in the news for rising fast, write one reason to own it that would hold even if the price stopped rising.
Lesson idea
Enthusiasm spreads between people much like an infection.
Means. In his Nobel lecture, Shiller described enthusiasm passing between investors like a contagion, with stories explaining the rise growing louder along the way.
Apply. When friends, coworkers or social media start talking about an investment, record the date and the price in your journal.
Lesson idea
When the fundamentals cannot explain a price rise, look at what people believe.
Means. Shiller found that rents and building costs could not explain the boom that peaked in 2006, but a psychological feedback story could.
Apply. For an asset that has risen sharply, compare its price growth with growth in the income it produces, such as rent or earnings.
Lesson idea
The story behind a boom often sounds sensible at the time.
Means. In the 2000s many buyers came to treat a home as a great investment, a belief Shiller argues spread like a social epidemic.
Apply. Write the popular story behind one hot investment in a single sentence, then list the facts you would need to check it.
Lesson idea
Popularity is not evidence.
Means. A story shared by millions can feel safer, but agreement does not change what an asset earns or what it is worth.
Apply. Before adding a popular stock to your simulator portfolio, list three facts about its earnings that support the price.
Stories and Market Psychology
Lesson idea
Economic stories can go viral, and viral stories can move economies.
Means. Shiller’s 2019 book Narrative Economics studies how popular stories spread and help drive major economic events.
Apply. Pick one market story you heard this month and trace where it started: a company, a journalist, an influencer or a friend.
Lesson idea
What investors expect is data, and it can be measured.
Means. Shiller began surveying stock investors in 1989 and, with Karl Case, home buyers in 1988, to track expectations directly.
Apply. Each quarter, write down the market return you expect over one year and over ten years, then compare with what happened.
Lesson idea
Know why you sold as well as that you sold.
Means. Within days of the October 19, 1987 crash, Shiller surveyed investors to ask why they had sold that day.
Apply. Each time you close a position in the simulator, write one sentence on why, and review those notes after a month.
Lesson idea
Psychology moves every asset market, including the ones that feel safe.
Means. Across three editions, Irrational Exuberance extended Shiller’s argument about psychology driven swings from stocks to homes and then to bonds.
Apply. For each asset you own or plan to own, write one way crowd psychology could push its price too high or too low.
Lesson idea
Your own excitement is a warning light worth tracking.
Means. If a rising price makes you eager to join in, you are feeling the pull that Shiller argues powers a bubble.
Apply. Before each investing decision, rate your excitement from 1 to 5 in a journal, then check later whether high scores went with worse choices.
Home Prices
Lesson idea
Home prices can fall across the whole country as well as in one town.
Means. The national Case Shiller index fell about 27% from its July 2006 peak to its February 2012 low, before adjusting for inflation.
Apply. Work out what a 25% drop in a home’s value would do to the owner’s equity after the mortgage, and write the number down.
Lesson idea
Measure the same thing over time, or the mix of sales can fool you.
Means. Case and Shiller’s repeat sales method compares each home with its own earlier sale, instead of averaging whatever happened to sell that month.
Apply. When a headline quotes a median home price, check whether a shift in the kinds of homes sold could explain part of the change.
Lesson idea
A long record shows how unusual a boom really is.
Means. Shiller’s US home price series reaches back to 1890, and by his count real prices rose 86% from late 1996 to early 2006.
Apply. Compare how much home prices in your area have risen over ten years with how much local rents and incomes have risen.
Lesson idea
A new price record does not erase old risks.
Means. By June 2026 the national index stood about 82% above its 2006 peak in dollar terms, despite a 27% fall along the way.
Apply. When home prices hit a record, look up the national index for the past 20 years and note its largest drop.
Lesson idea
An index lets you track a market that is otherwise hard to see.
Means. Standard & Poor’s licensed the Case Shiller indexes in 2006, and home price futures based on them launched in Chicago the same year.
Apply. Find the latest national home price index release, note the month it covers, and count how far that month runs behind the present.
Evidence and Humility
Lesson idea
Careful researchers can study the same markets and reach different conclusions.
Means. Shiller shared his Nobel Prize with Eugene Fama, whose research found stock prices hard to forecast and helped shape efficient markets theory.
Apply. Read the Eugene Fama page after this one and write down where the two economists agree and where they differ.
Lesson idea
Short term market moves are hard to forecast, even for the experts who study them.
Means. Shiller’s own work accepts that short run returns are hard to predict; his claim is that long run returns are more predictable.
Apply. Write down any one year market forecast you hear, with the date and the source, and check it twelve months later.
Lesson idea
Treat any forecast as a range, never a promise.
Means. In Campbell and Shiller’s 2001 update, the price to smoothed earnings ratio explained only about 30% of the variation in ten year price growth.
Apply. When you set a return assumption for your plan, write a low, a middle and a high case instead of one number.
Lesson idea
Use the longest data you can find, and always name its source.
Means. Shiller publishes his stock data from 1871 and his home price data from 1890, which lets anyone check the measures behind his arguments.
Apply. When you quote a market statistic, write down its source, its start date and whether it is adjusted for inflation.
Lesson idea
Update a measure when the world it describes changes.
Means. Because more companies now return cash through buybacks instead of dividends, Shiller added a total return version of CAPE in September 2018.
Apply. For one company you follow, check its cash flow statement for how much it spent on dividends and on share buybacks last year.
Final Reflections
Robert Shiller gave investors a set of measuring sticks. The CAPE ratio sets stock prices against a decade of real earnings. The Case Shiller indexes track what the same homes sell for over time. Both rest on long public data and show that prices can move far beyond what earnings, dividends or rents justify.
His record also teaches humility. A valuation warning can arrive years before prices turn, as his 1996 testimony did. A high reading says little about the next twelve months. Use his tools to set realistic expectations and to notice when a story is doing the work of numbers. Stocks and homes can both fall hard. His work offers no rule for when to get in or out of the market.
Five Commitments for the Disciplined Investor
- Compare current valuations with long run history before forming return expectations.
- Treat a high CAPE reading as a guide to the decade ahead, never as a date for a crash.
- Write down the story behind each investment and test it against earnings or rent.
- Adjust old prices and returns for inflation before comparing them.
- Plan for the chance that stocks or home prices fall by a quarter or more.
Sources Used for This Lesson
Editorial verification note. Investor quotations are risky because many popular lines online are paraphrased, shortened, or misattributed. To avoid that risk, this lesson presents teaching lines and investor lessons written by our editors, not verbatim quotes. We checked facts, dates and figures against the sources below, primary sources first.
Before using any line in ads, social posts, printed material, or legal or compliance sensitive pages, verify the exact wording against the primary sources below.
- Nobel Prize: Robert J. Shiller, Biographical
- Robert J. Shiller, Speculative Asset Prices, Nobel Prize Lecture (December 8, 2013)
- Yale School of Management: Robert J. Shiller faculty profile
- Robert James Shiller, Curriculum Vitae (Yale School of Management, 2022)
- Robert Shiller: Online Data (Yale University)
- Campbell and Shiller, Stock Prices, Earnings and Expected Dividends, NBER Working Paper 2511 (1988)
- Campbell and Shiller, Valuation Ratios and the Long Run Stock Market Outlook: An Update, NBER Working Paper 8221 (2001)
- Federal Reserve Board: Alan Greenspan, The Challenge of Central Banking in a Democratic Society (December 5, 1996)
- Robert J. Shiller, Understanding Recent Trends in House Prices and Home Ownership, NBER Working Paper 13553 (2007)
- Princeton University Press: Irrational Exuberance, Revised and Expanded Third Edition
- Federal Reserve Bank of St. Louis (FRED): S&P Cotality Case Shiller U.S. National Home Price Index (CSUSHPINSA)
- multpl.com: Shiller PE Ratio
This lesson is for general financial education only. It does not provide personal financial advice, stock recommendations, or a guarantee of investment results.
