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Does Thaler believe that the Gordon growth Model is effective in valuing equities? Why or Why...

Does Thaler believe that the Gordon growth Model is effective in valuing equities? Why or Why not?

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Gordon growth model is used to calculate the intrinsic value of a stock based on the assumption that the stock has a stable growth rate in dividends. Thaler however, does not believe in this model and also does not consider it to be an effective way of valuing equities. The reason is that Gordon growth model believes that if the dividend grows or increases constantly then the value of the stock will also increase. But in the study conducted by Thaler, it was observed that the earnings growth rate of firms do not increase with an increase in the dividend. This is because the increase in the dividend implies that the systematic risk of the firm has reduced and it also leads to decline in profitability. Thus, Thaler does not believe that Gordon growth model is effective in valuing equities.

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