Hi Tom,
Yes, I'm aware of Shiller's extremely important empirical work on this topic. (He was my dissertation advisor.) But Shiller's work related asset price changes to changes in future fundamentals, not to changes in discount rates. Meanwhile, other research (which I can't find at the moment) has suggested that longer-term volatility is related to changes in cash flows (i.e., fundamentals) whereas short-term volatility is more closely related to changes in discount rates.
Basically what I'm saying is that there are two competing ways of explaining short-term volatility: one that says it reflects the arrival of new information--regarding the future course of discount rates as well as the future course of cash flows--and another that says it reflects thoughtlessness on the part of market participants. Let's not conclude too quickly that investors are stupid.
p.s. Also, let's not "agree to disagree" too quickly. The whole point of a blog is to sharpen our thinking by trading ideas. If we "agree to disagree," then basically we're agreeing not to examine our own arguments and learn from others' arguments. For me, that back-and-forth is basically the whole value of Enterprising Investor and other blogs like it. Thanks.