By contrast, Mr. Glassman and Mr. Hassett believe that investors overestimate the risks of stocks and therefore undervalue them. Using techniques from such fields as psychology and sociology, he and other researchers have found that many investors don't base actions on careful, rational analysis. Instead they often behave like, well, humans. Mr. Shiller says that stock prices today are far higher than justified by earnings or other fundamentals. If you ask me for a forecast of the Dow in 2020, I'd say as good a guess as any is 10,000.
People today have an exaggerated impression of past growth rates.
These factors are amplified in a kind of feedback mechanism. Investors see all the positive factors and assume they'll continue. The perception of risk has dropped dramatically, expectations for returns are high, and price increases are themselves seen as proof that prices will keep going up. It's a self-fulfilling prophecy. During a long bull market, we tend to think we have a special talent and that our friends are really smart, too.