184 PART • Producers, Consumers, and Competitive Markets 50 45 Dividend Yield 40 P/E Ratio 30 25 20 15 Dividend Yield (percent) 35 10 1970 P/E Ratio 1974 1978 1982 1986 1990 1994 Year 1998 2002 2006 2010 F IGURE 5.9 DIVIDEND YIELD AND P/E RATIO FOR S&P 500 The dividend yield for the S&P 500 (the annual dividend divided by the stock price) has fallen dramatically, while the price/earnings ratio (the stock price divided by the annual earningsper-share) rose from 1980 to 2002 and then dropped 1970 to 2011 Observe that the dividend yield (the annual dividend divided by the stock price) fell from about percent in 1980 to below percent by 2000 Meanwhile, however, the price/ earnings ratio (the share price divided by annual earnings per share) increased from about in 1980 to over 40 in 2002, before falling to around 20 between 2005 and 2007 and then increasing through 2011 In retrospect, the increase in the P/E ratio could only have occurred if investors believed that corporate profits would continue to grow rapidly in the coming decade This suggests that in the late 1990s, many investors had a low degree of risk aversion, were quite optimistic about the economy, or both Alternatively, some economists have argued that the run-up of stock 19 prices during the 1990s was the result of “herd behavior,” in which investors rushed to get into the market after hearing of the successful experiences of others.19 The psychological motivations that explain herd behavior can help to explain stock market bubbles However, they go far beyond the stock market They also apply to the behavior of consumers and firm managers in a wide variety of settings Such behavior cannot always be captured by the simplified assumptions that we have made up to this point about consumer choice In the next section, we will discuss these aspects of behavior in detail, and we will see how the traditional models of Chapters and can be expanded to help us understand this behavior See, for example, Robert Shiller, Irrational Exuberance, Princeton University Press, 2000