Shiller is an authority on behavioral economics — which studies how our emotions drive financial decisions. His latest book " Narrative Economics: How Stories Go Viral and Drive Major Economic Events " is timely as the coronavirus outbreak rattles everyone from Wall Street to Main Street.

"This disease is contagious even before it shows obvious symptoms. So, it's going to be harder to quarantine people in this epidemic. That's the narrative, and we haven't gotten very far into it yet," the Yale University professor told CNBC's " Trading Nation " on Monday. "So, the potential for market disruption because of a scary narrative is quite high."

According to Shiller, stocks and the economy are extremely vulnerable right now because coronavirus panic has not peaked yet.

"What we have now is really two epidemics. We have an epidemic of the coronavirus, but we also have an epidemic of fear based around a narrative that is not necessarily keeping up with scientific reality. And, this narrative has been quite striking," he said. "It's a dangerous time for the stock market."

The outbreak is pushing the U.S. to the edge of a bear market.

Monday's market plunge happened on the eleventh anniversary of the longest bull market ever. The Dow, S&P 500 and Nasdaq saw their worst day since 2008. The Dow tumbled almost 8 percent, closing down 2,014 points.

"It's highly likely now that we'll have a recession," he added. "It's already disrupting business. It's already causing people to pull back. We're not going to see creative new investments blossom in this environment."

Shiller, who warned last March on "Trading Nation" that a self-fulfilling prophecy could take down the bull market, contends market anxiety will likely continue whether the outbreak worsens or not.

"We'll see how well the measures to reduce the coronavirus epidemic play out. But I wouldn't put too much hope in that," Shiller said. "It's a dangerous epidemic and the epidemic of fear that accompanies it is dangerous also."

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