2025 Asset Market Bubble: Asking Robert Shiller for Answers

‘Irrational Exuberance’ Era: Where Do We Stand?

In 2025, the U.S. stock market, powered by the Artificial Intelligence (AI) revolution, seems to rise endlessly. Amid heated debates about an asset market bubble, is this the dawn of a new era or just another episode of “irrational exuberance”? To answer this, we deeply analyze the current market through the behavioral economics framework of Nobel laureate Robert Shiller, who predicted the dot-com bubble and housing market crash, seeking wise investment directions.

How Are Asset Market Bubbles Formed? (Robert Shiller’s Theory)

To diagnose asset bubbles, a clear theoretical framework explaining what bubbles are, how they form, and how they persist is essential. Professor Shiller’s research highlights psychological factors overlooked by traditional economics as key variables in asset price determination.

Are Markets Always Rational?: Challenging the Efficient Market Hypothesis

Traditional financial theory is based on the “solid foundation theory,” which holds that every asset has an “intrinsic value,” and market prices eventually revert to this value. This evolved into the “Efficient Market Hypothesis (EMH),” stating that all information is instantly reflected in prices, making excess returns impossible.

However, in his 1981 paper, Shiller demonstrated “excess volatility”—actual stock price fluctuations are far greater than can be explained by future dividend changes—directly challenging this hypothesis. He argued that investors focus more on “what other investors will pay in the future” than on intrinsic value. This aligns with the “castle in the air theory,” where asset values rest on the fragile foundation of public psychology, marking the start of behavioral economic analysis.

The Engine of Irrational Exuberance: Feedback Loops and Social Contagion

In his book Irrational Exuberance, Shiller identifies the core engine of speculative bubbles as the “feedback loop” mechanism.

1. Trigger: Technological innovation (e.g., the internet) or policy changes (e.g., interest rate cuts) spark initial price increases.
2. Price Rise and Investor Inflow: News of rising prices spreads, attracting new investors expecting further gains.
3. Psychological Contagion: Hearing success stories, investors join driven by fear of missing out (FOMO) and envy.
4. Self-Reinforcing Cycle: New purchases push prices higher, reinforcing confidence and attracting more investors.

This feedback loop is amplified by cognitive biases such as confirmation bias, herd behavior, and overconfidence.

The Power of Stories Driving Markets: Narrative Economics

Shiller argues that economic events are heavily influenced by popular “narratives” that spread like viruses. During speculative bubbles, stories like “This time is different” or “New Era” emerge to justify high prices. The dot-com bubble’s “New Economy” narrative is a prime example. Media act as key amplifiers, accelerating the social contagion of bubbles.

Tools to Measure Bubbles: CAPE Ratio and Investor Confidence Indices

Shiller’s theory is strengthened by concrete measurement tools.

• Cyclically Adjusted Price-to-Earnings (CAPE) Ratio: Also known as the “Shiller P/E,” it divides current prices by the inflation-adjusted average earnings over the past 10 years. Reflecting long-term corporate profitability, it is a reliable indicator of market overvaluation. Historically, higher CAPE ratios have correlated with lower future real stock returns.

• Investor Confidence Indices: The valuation confidence index declines as more investors perceive the market as overvalued, while the crash confidence index measures the proportion of investors who see a low risk of market collapse; a low value indicates high anxiety.

Mirrors of the Past: Dot-com Bubble and 2008 Financial Crisis

Shiller’s framework can be seen in action through major historical asset bubbles.

Case 1: Dot-com Bubble (1995-2001) — The End of the “New Economy” Narrative

The late 20th-century dot-com bubble is a textbook example of Shiller’s theory. The commercial internet’s emergence was the trigger, and the dominant narrative was the “New Economy.” This story dismissed traditional valuation methods, fueling FOMO-driven retail investor inflows and a classic feedback loop. Shiller warned that the CAPE ratio had reached levels last seen before the 1929 crash. The bubble burst in March 2000, with the Nasdaq plunging nearly 80%.

Case 2: U.S. Housing Market Bubble — The Collapse of the “Real Estate Never Loses Value” Myth

After the dot-com crash, speculative mania shifted to real estate. The myth that “housing prices never fall” dominated, creating a feedback loop where rising prices generated more demand. Shiller’s Case-Shiller Home Price Index clearly showed the housing price surge, and he warned of a market collapse starting in 2005. This warning materialized in the 2008 global financial crisis.

2025 Asset Market Bubble Diagnosis: U.S. vs. South Korea

As an investor, I often feel FOMO—fear of missing out. What emotions do you feel observing today’s market? Investment decisions are influenced not only by rational analysis but also by strong psychological factors. Let’s diagnose the 2025 market through the lens of past lessons.

U.S. Market: AI Revolution or Second Dot-com Bubble?

• Valuation (Quantitative Signal): As of July 2025, the S&P 500’s CAPE ratio stands at 37.81—more than double the historical average (~17) and at levels seen only before the 1929 crash and 2000 dot-com bubble.

• Narrative Analysis (Qualitative Signal): The dominant narrative justifying the current market is the “AI Revolution.” Similar to the dot-com bubble’s “New Economy” story, but with a key difference: AI-led companies are generating substantial profits.

Nonetheless, the AI narrative likely builds a massive “castle in the air” with layers of irrational expectations atop solid fundamentals.

• Investor Psychology: The valuation confidence index is historically very low, indicating most investors see the market as expensive. Simultaneously, the crash confidence index is low, reflecting widespread anxiety about a market collapse. This suggests a state of “fearful participation,” where investors join fearing missing out on the AI revolution despite knowing the risks.

South Korean Market: Chronic Undervaluation and a New “Value-Up” Narrative

South Korea’s KOSPI market shows the opposite pattern—chronic undervaluation known as the “Korea discount.” As of June 2025, KOSPI’s CAPE ratio is estimated at 15.76, significantly lower than the U.S. and other major countries.

• Narrative Analysis: While the past narrative was the “Korea discount,” since 2024 a new government-led “corporate value-up program” narrative has emerged. This story raises expectations for structural reforms and increased shareholder value, driving recent market gains. Thus, South Korea’s current market movement is better interpreted as a “hopeful revaluation” based on improving fundamentals rather than irrational exuberance.

2025 U.S. vs. South Korea Market Comparison at a Glance

Conclusion: How to Survive in an Irrational Market

The 2025 market analysis through Robert Shiller’s framework reveals clear contrasts. Based on this diagnosis, here are some strategies for wise investors.

• Key Takeaways

  1. The U.S. market shows clear bubble signals. High CAPE ratios and the “AI Revolution” narrative resemble past bubbles, posing risks of long-term return declines.
  2. The South Korean market leans more toward opportunity than bubble. It is at an early stage of a positive narrative centered on value-up amid structural undervaluation.
  3. Markets are driven by psychology and stories. Beyond fundamentals, understanding dominant narratives and investor sentiment is crucial.

• Next Steps (CTA) It is important to maintain a long-term perspective and avoid getting swept up in irrational exuberance. Consider reviewing your portfolio to ensure it is not overly concentrated in any single narrative, using objective indicators like the CAPE ratio. Remember, prices are not just numbers—they are the product of human hopes, fears, and stories intertwined.