How drastically have things changed from the high-flying stock market of the 1990s?

Judging from a recent debate on June 13 between two prominent economists at the American College in Bryn Mawr, Pa., the market has unquestionably moved from a state of fantasy to one of hard reality. But a big question is: How much more suffering will investors have to endure as a result of the wild excesses of years past?

Debating the point were Robert Shiller, a Yale University professor who authored the 1996 book, Irrational Exuberance, and Jeremy Siegel, a professor at the Wharton School of the University of Pennsylvania and author of Stocks for the Long Run. Both financial economists are longtime friends since their days as Ph.D. students at Massachusetts Institute of Technology in the early 1970s.

Shiller's bearish view rests heavily on human psychology, which he believes is a crucial yet neglected component of market mechanics. The late 1990s, he says, saw a snowballing of investor euphoria that drove equity prices so high that they inevitably had to collapse. Prices were driven so high, in fact, that Shiller feels the backlash isn't over just yet.

Siegel takes a more analytical approach, noting the valuation bubble of the late 1990s was caused exclusively by the technology and Internet sector. Take away those sectors, he says, and the valuation problem wasn't as bad as perceived.

But for anyone hoping the stock market goes back to annual double-digit returns, let alone the returns of 1998 and 1999, neither Shiller nor Siegel will provide much comfort.

Although more optimistic than Shiller, Siegel only envisions returns of 5% to 7% after inflation in coming years. Investors, he says, have to get over the feeling that they have a "God-given right to returns of 10% to 12% ever year. You have to bring down your expectations."

If you trust what Shiller says, you'd better bring down those expectations an extra few notches. Shiller says all you have to do is look at history to see that the market still has not recovered from the tumble it took in 2000. The meteoric rise and fall of the Nasdaq Index from 1998 to 2000, when plotted on a graph, represent a textbook example of a valuation bubble, he says.

And when you look at P/E values from 1881 to 2002, there are two notable periods in history when values skyrocketed to record levels only to fall off a cliff: 1929 and 2000. What these two periods have in common, Shiller says, is human behavior-something rarely talked about when analyzing financial markets.

"We do have to think about human psychology," he says. "It's not just caused by some mathematical formula or technical factor. It's people changing their minds and people getting caught up in booms and busts."

From a historical perspective, the speculative bubble created by the technology and Internet sectors was not that unusual, Schiller argues. It had many of the elements of other bubbles in market history. The common traits of these bubbles, he says, include some type of connection with a "new era" theory.

Forces outside the market that capture the imagination of investors usually start bubbles-precisely the way the World Wide Web did in the mid-1990s. "It was such a vivid technology," Shiller says. "It's something we all are using. It gave us the feeling we were in a new era."

The effect then snowballs. People make money on speculation. They tell friends and neighbors, who run out and invest themselves. The spike in demand leads to higher prices, which feeds the fire more. "It can go up and up and up as a feedback effect, but it can't go on forever," he says.

When a bubble lasts as long as the tech bubble did, the gigantic hangover also can linger for years. The effect was compounded in several ways, Schiller maintains. One of them was the "full steam ahead" mentality of capitalists after it became clear that communism was dead. The talking heads of the media, whom Shiller calls the "professional storytellers," fueled the fire by supplying rational reasoning for the "new era" theories.

And at a time when it seemed as if everyone was getting rich, accountants provided a cure for those who really weren't. "The perception was that everyone was making money, and accounting professionals allowed people to keep up this appearance," Shiller says.

As Siegel sees it, there was indeed a bubble of historic proportions, but it was centered in a narrow segment of the market. He notes that at the time of the price run-ups, technology and the Internet were responsible for inflated P/E ratios. Yet technology and the Internet comprised only about 80 companies in the S&P 500. "The bubble was almost exclusively in the sector of technology, and its offshoot, the Internet," he says. "The other 420 companies got a little higher, but there was no bubble."

The Dow Jones Industrial index, meanwhile, experienced no bubble, Siegel says. "Take out technology, and you've suffered very little," he adds. This leads Siegel to conclude that P/E ratios are not as inflated as Shiller indicates, and that there is room for further equity growth in the near future. While some economists are forecasting that P/E ratios will have to fall back to the 15 to 17 range, causing further declines in the market, Siegel feels there's reason to believe P/E ratios will find a comfort zone in the low 20s.

His conclusion rests partly on the belief that stocks have historically been undervalued due to higher incidences of inflation and recession, and less stability in labor income. Tax law changes, including a 60-year low in the capital-gains tax, also favor higher valuations, he says.

As for the psychology of the market, Siegel says, "Psychology is important for (understanding) the short-term movements." Over the long run, he says, the market is going to be "somewhere around true economic value," which will vary according to different stages of the business and market psychology cycles. "I think that as a result, today the valuations are fair," Siegel says.

Siegel and Shiller agreed on a few points. They both feel that economic globalization could heavily influence the domestic market. They also were skeptical of claims that increased productivity will keep the economy and the market afloat. Shiller notes the nation experienced productivity growth from 1950 to 1964, but it has declined ever since, except for a slight pickup in the last few years, he says. "Productivity growth has had no relationship to earnings growth," Shiller says. "We're not in a high productivity epic right now."