Shiller Shortfall

Shiller shortfall is its strength. The shortfall relates to the results for 2003 from using the stock market index methodology employed by Professor Robert J. Shiller of Yale University (author of Irrational Exuberance), and many other sophisticated experts. The “index value” of the S&P 500 for each year is based upon the average daily index throughout the entire year rather than on only one point at year-end. The strength of the methodology is that it mitigates the “single-point risks” of using one arbitrary value for each year (i.e. year-end). As a result, the average of all days across the year can better reflect the stock market’s level for that year as a whole. Nonetheless, the results using this methodology can vary significantly from actual reported results. Using 2003 as an example, the average index reflects a decline for 2003 rather than the gains reflected in the year-end values. Even though the index increased by +26% from December 2002 to December 2003, the average index for 2003 was -6% lower than 2002.