Irrational Exuberance

As Robert Shiller’s new 2009 preface to his prescient classic on behavioral economics and market volatility asserts, the irrational exuberance of the stock and housing markets “has been ended by an economic crisis of a magnitude not seen since the Great Depression of the 1930s.” As we all, ordinary Americans and professional investors alike, crawl from the wreckage of our heedless bubble economy, the shrewd insights and sober warnings, and hard facts that Shiller marshals in this book are more invaluable than ever.

The original and bestselling 2000 edition of Irrational Exuberance evoked Alan Greenspan’s infamous 1996 use of that phrase to explain the alternately soaring and declining stock market. It predicted the collapse of the tech stock bubble through an analysis of the structural, cultural, and psychological factors behind levels of price growth not reflected in any other sector of the economy. In the second edition (2005), Shiller folded real estate into his analysis of market volatility, marshalling evidence that housing prices were dangerously inflated as well, a bubble that could soon burst, leading to a “string of bankruptcies” and a “worldwide recession.” That indeed came to pass, with consequences that the 2009 preface to this edition deals with.

Irrational Exuberance is more than ever a cogent, chilling, and astonishingly far-seeing analytical work that no one with any money in any market anywhere can afford not to read–and heed.

CNBC, day trading, the Motley Fool, Silicon Investor--not since the 1920s has there been such an intense fascination with the U.S. stock market. For an increasing number of Americans, logging on to Yahoo! Finance is a habit more precious than that morning cup of joe (as thousands of SBUX and YHOO shareholders know too well). Yet while the market continues to go higher, many of us can't get Alan Greenspan's famous line out of our heads. In Irrational Exuberance, Yale economics professor Robert J. Shiller examines this public fascination with stocks and sees a combination of factors that have driven stocks higher, including the rise of the Internet, 401(k) plans, increased coverage by the popular media of financial news, overly optimistic cheerleading by analysts and other pundits, the decline of inflation, and the rise of the mutual fund industry. He writes: "Perceived long-term risk is down.... Emotions and heightened attention to the market create a desire to get into the game. Such is irrational exuberance today in the United States."

By history's yardstick, Shiller believes this market is grossly overvalued, and the factors that have conspired to create and amplify this event--the baby-boom effect, the public infatuation with the Internet, and media interest--will most certainly abate. He fears that too many individuals and institutions have come to view stocks as their only investment vehicle, and that investors should consider looking beyond stocks as a way to diversify and hedge against the inevitable downturn. This is a serious and well-researched book that should read like a Stephen King novel to anyone who has staked his or her future on the market's continued success. --Harry C. Edwards

I've always enjoyed articles by Yale economist Robert Shiller, so I had high hopes for "Irrational Exuberance", not least because it has been talked up in every financial journal, web site, or newsletter that I read. I was disappointed. "Irrational Exuberance", borrowing a phrase from then-Fed Chairman Alan Greenspan, attempts to explain the psychological bases of speculative bubbles. The first edition addressed the millennium tech stock bubble and was published just months before it burst in 2000. This second edition has added a chapter on the housing bubble of the mid-2000s and incorporates commentary on residential real estate bubbles in some other chapters as well. It was published in 2005, also shortly before that bubble burst.

Shiller begins with brief chapters on historical stock market and real estate bubbles, to give the reader some perspective and demonstrate why these were, indeed, bubbles. He then names 12 factors that he believes precipitated the stock boom of the 1990s that culminated in a bubble: global capitalist explosion and the "ownership society", cultural and political change favoring business success, new information technology, supportive monetary policy and the Greenspan Put, Baby Boom and Baby Bust, expansion in reporting of business news, analysts' optimistic forecasts, expansion of defined contribution pension plans, growth of mutual funds, decline of inflation, expansion of the volume of trade, rise of gambling opportunities.

"Irrational Exuberance" analyzes the psychological factors behind bubbles, those that are not rational or due to economic fundamentals. Shiller discusses feedback theories of markets, the role of the media, examines the potential role of big news stories (which he concludes are not an important factor), the concept of "new era thinking" that preceded the 4 major stock market peaks of the 20th century, and speculates on why people are deceived by bubbles, which he terms "naturally occurring Ponzi processes". He references a lot of psychological studies that demonstrate people's overconfidence in their own judgments -and others that demonstrate that people will believe the majority view or expert view even if it strikes them as wrong.

There is not a lot of economics in "Irrational Exuberance". It's about psychology. Shiller has distributed a lot of questionnaires and analyzed a lot of data over the past few decades in attempts to understand the psychology of markets. But he often cites surveys of the public at large, most of whom do not directly participate in the stock market, when talking about market behavior. And he cites a lot of psychological studies that draw dubious conclusions. He quotes a Barron's survey from April 1999 in which 72% of respondents believed that stock market was overpriced. This would indicate that the problem is not that people are fooled by bubbles, but that some flaw in management discourages them from acting on their understanding. Shiller doesn't have much to say beyond the obvious, which he stretches to 230 pages by doing things like discussing epidemic models after he has just stated that they can't be applied to the spread of ideas.

The author first mentioned the twelve precipitating factors

for a bubble. Precipitating factors like capitalism explosion

and ownership society, new information technology, supportive

governmental monetary policies and analysts' optimistic forcast.

This ultimately resulted in a feedback loop which amplified

the 'story' behind the stock or even in a painting like Mona

Lisa. If a stock or any investment had a strong credible story

behind it, the story greatly enhanced the value of the investment.

How was this possible? It was through the channels of the media

and word-of-mouth. Word-of-mouth was cited to be more potent

though less accurate. The analogy of how ants communicate and

how epidermics spread was used to desbribe how bubbles formed.

"New-era thinking' was another reason bubbles formed. The advent

of automobiles and radio in the '20s; the television in the '50s;

and the internet in the '90s.

The book is well structured and support material is sufficient

to prove its point. One gripe is the complex and cumbersome

sentence syntax used. Commas were missing where they could be

inserted to make reading easier.

this is a very good book from an economist who has a balanced view on social and behavioral economics.

He is one of the very few grounded economist that i know of.

When I obtained this book, I figured it had information about both investments and the economy. Like any other book of this type, I always ask, "How can I be a better investor or what new information can I learn about the economy". The book cover explained the book would be about bubbles such as the real estate and housing bubble.

Unfortunately, I was seriously disappointed in a book written by a Yale University professor. In the beginning and throughout the book, Mr. Shiller explains more about surveys that he did. In one case, he was very proud of the way he did his survey. Apparantly, he can ask the right question to get the right answer. I could never figure out how useful these surveys were but they seem to make good fillers for a book.

The book become briefly interesting around page 100. Yes! Page 100. At this time he introduces unlikely investors in previous bubbles such as hotel waiters, etc. This is a good point since my own experience has suggested unlikely investors in all bubbles. In the 30's it was the shoeshine boy, in the late 70's it was the priest, and the late 2000's it was the sports figures.

Again, the book becomes interesting around page 200 for a discussion about regulation. This discussion was very shallow and never really mentioned the real cause of the housing meltdown. My own analysis always suggested former President Clinton started it and then was allowed to continue unchecked my fellow democrats. In the index of the book you can find Clinton's name mention once. I would say -- not good research for a professor. However, Mr. Shiller is good at conducting surveys.

Towards the end of the book, I figured this is a second edition so he must be like a movie producer trying to profit off his first success. Later, I figure the professor is like any one else trying to make a living -- just slap something together and it might sell! In the end, was I a better investor because I read the book -- No. Did I learn anything new (and useful) regarding economics -- No. If you have to read it, borrow the book from the library.

This book does not quite work because the author gives us no algorithm to determine when the market is irrationally exuberant or merely going up.