Hubris, Nemesis, and Analysis: “Stock Prices Appear to Have Reached a Permanently High Plateau”

Hubris, Nemesis, and Analysis: In the 1920s Irving Fisher made a fortune of ten million dollars in the stock market, of which he then lost eleven million, which in the words of John Kenneth Galbraith was “a sizeable sum, even for an economics professor.” Arguing correctly that fluctuations in the purchasing power of money meant that money was not a riskless asset, and that the mistaken perception that government bonds were thus riskless assets unlike stocks would lead to underpricing of stocks relative to bonds, Fisher fervently, memorably and quotably advocated investment in stocks: he famously said that “Stock prices appeared to have reached a permanently high plateau” in October 1929, at the start of an 85% decline in stock prices over three years. Edward Prescott and Ellen McGrattan have controversially argued that, given available statistics, Fisher was justified in his optimism about stock prices; less controversially, Kathryn Dominguez et al. (American Economic Review 78:595–612, 1988) argue that Fisher could not have predicted the policy mistakes that transformed a cyclical downturn into the Great Depression.