Irrational Exuberance

by Robert J. Shiller

Book Overview

Why the irrational exuberance of investors hasn't disappeared since the financial crisis In this revised, updated, and expanded edition of his New York Times bestseller, Nobel Prize-winning economist... This description may be from another edition of this product.

• Format: Hardcover
• Language: English
• ISBN: 0691123357
• ISBN13: 9780691123356
• Release Date: March 2005
• Publisher: Princeton University Press
• Length: 304 Pages
• Weight: 1.40 lbs.
• Dimensions: 1.2" x 6.0" x 9.3"

Customer Reviews

Rational Analysis

I read the second edition of this book since it is enlarged with the study of the housing market. The phenomenon of bubbles and negative bubbles or collapses is described extremely well by means of statistical data of markets for over a century and a half. The raw data is adjusted to inflation to give a realistic perspective of the trends and patterns. Bubbles seem to be occurring at regular intervals typically based on the "new era" story and everyone believes at least during the heady days that good times are here to stay. But as shown by proven evidence of the past, no bubble has sustained itself permanently and good reason prevails sooner or later. When this happens, the bloated bubble collapses and the hangover is terrible. The story so far is quite simple. But what makes this book so interesting is the depth of research and the manner in which the phenomenon is studied and explained. The combination of mass psychology and market prices is at the core of this book. For bubbles to happen, information flow is the key. Media plays a significant role in disseminating information and bubbles seem to have originated in recorded history after the advent of the print media. In recent times electronic media particularly the television and the internet play a significant role in speeding up bubble formation and also the reversals. Media needs a storyline and this story needs to be continued to retain customers on a daily basis. Stock market is the ideal place that offers an opportunity to try one's luck if a casino is far away. Backed by on-line dedicated news channels and internet trading, well, it is not surprising that we have day traders in herds. In such situations fundamentals like industry analysis and P/E ratios take a backseat as explained by the author. Historical averages are breached and a euphoria of "once in a life time opportunity" prevails. What happens to the Efficient Markets Theory in such situations?. Since this theory says that markets are perfectly priced based on all publicly available information there cannot be a situation of either under pricing or over pricing. This book perfectly challenges the efficiency and accuracy of this theory. It is unfortunate that substantial amounts of investments meant to be otherwise risk free sources of income, pension funds for example, are getting diverted into risky markets. Here the author has come out with a list of some sound proposals to protect hard earned life long savings of innocent citizens who are exposed to the irrationality of markets. The bubble in the housing market is also discussed well. Housing seems to be isolated bubbles occurring in specific regions and not a global phenomenon. But nevertheless the damage can be the same. The party of low interest rate regime seems to be over and a spike in mortgage rates is sure to be the needle that will prick right through this big speculative bubble. What goes up has to come down ! But once you start reading this book, it is dif

Schiller's prophetic book offers practical investment implications

About Robert J. Schiller's book, Irrational Exuberance (2000; 2nd ed., 2005), it's hard to say enough good things. First Schiller, who is Stanley B. Resor Professor of Economics at Yale University, had uncanny timing. His warning on the excesses of the technology bubble stock market came out at its very peak, in mid-March of 2000. He wrote in an afterward to the paperback edition (2001) that as he made publicity visits to bookstores in April of 2000, a large carnage had already occurred in the market, particularly for tech stocks and e-business names. Second, he writes in a transparent style. Third, he and his team, instead of tossing out opinions about what they think investors do, carry out frequent sample surveys of both individual and institutional investors. Fourth, he undergirds his hypothesis with numerous insights from economics, psychology, game theory and history. Finally, he gives many cross-references to booms and busts around the globe. The second edition points to over-valuations in the U.S. real estate market that Schiller believes were comparable to the excesses of the dot-com era in stocks. This prediction may prove to be accurate as well, but the unraveling so far has not proceeded in so dramatic a fashion as did the technology crash. From what valuation method does Schiller proceed his analysis of stocks? Fundamentally, he bases it on price-earnings ratios. (Price-earnings ratios have been shown to be a crucial characteristic in predicting long term stock portfolio performance; see James P. O'Shaughnessy, What Works on Wall Street [1998, rev.]). More precisely, he uses as his numerator the real (inflation-adjusted) S & P (Standard & Poor's) Composite Stock Price Index. For the denominator, he uses the moving average of the past ten years of real S & P Composite Earnings. Advantages of these data series: the source is considered reliable; they go back to 1841 continuously; they are inflation-adjusted. Using the price-earnings data and ratio as defined above, a first great cyclical high can be seen in June 1901: a P/E ratio of 24.5 times. Subsequently, P/E declined, and stocks performed in a desultory fashion, until June of 1920. The second great peak, occurring at the end of the Roaring Twenties, was 32.6 times--reached during September of 1929. The Great Crash followed. A third peak occurred during the so-called "go-go" era of the 1960s: 24.1 times in January of 1966. This too came a cropper, followed by years of stock market underperformance--bottoming out in terms of P/E ratio in the early 1980s. The US stock market P/E ratio at the height of the technology boom in 2000 reached an unprecedented 44.3 by January of 2000. Then, boom-boom, out went the lights! Schiller explores from many perspectives just how markets sometimes reach such giddy highs. One "amplification mechanism" is likened to a naturally occurring Ponzi process. Charles Ponzi attracted 30,000 investors and $15,000,000 wi

A Profoundly Important Book?More Topical Then Its 1st Day!

The bearer of bad news in society, in a company, in a group is most of the time treated badly. This rule of human nature shows up in many of the previous reviews of this book. Given the decline in the equity markets since the publication of this book, the reason I am reading this book again is to consider whether the market correction is sufficient. The book originally contributed to my courage to be conservative on the market and hence was one of the most valuable books I have ever read.On December 5, 1996 Chairman Alan Greenspan used the phrase "Irrational Exuberance" when speaking of his deep concern about the high level of stock prices -- not as a forecast but as a long term threat to economic soundness. Why Greenspan weakened in resolve, is barely addressed in this book. The question of why Greenspan started his Federal Reserve board tenure speaking gravely of the need for no inflation (meaning zero inflation not 2-3% inflation) and then weakened and accommodated 2-3% inflation for the next ten years is not even addressed in this book. The book even fails to address the impact on stock price levels of ten years of excessive monetary growth. The book clearly speaks to the public policy issue that there has to be a reckoning for the excessive stock price levels.Having made my living in the stock market investment business for more than forty years, the book for me reads easily. I believe the average reader can get through the book with very few uses of a dictionary. It is well written for the average reader. It is cleanly organized. It starts out with a powerful statistical case. It follows with a review of nearly every imaginable consideration of the severity of general market volatility. The fourth chapter "The News Media" is written with such courage and clarity. It seems to me so profound-it by its self justifies the purchase of the book. It lays out the true motives of the media. Every citizen, investor or conservative saver should read it.Several bone headed media people have argued that America's savings rate is seriously understated because stock market ownership is not included in the savings. After reading this book you should be able to vividly see the difference. If not already be thinking seriously as to when does the purchase of stocks become a speculation or out right gambling. Speculation is accepting high risk because it offers a risk reward balance. Gambling in stocks is not understanding this balance. Investing is buying with a basis for believing you have fair value in your favor. The discussion on gambling habits in society and the stock market is superb. The last chapter: A Call to Action "Speculative Volatility in a Free Society" is so pathetic in insight that I suggest that you read it first or forswear never to read it. Otherwise it is such a let down ending to the book as to be seriously irritating.As the author has already been vindicated in the market place and the book is written in a scholarly manner, I can't

Rational Expectations

'Irrational Exuberance' will no doubt consolidate Robert Shiller's position within his chosen field, but the book is also of considerable value to the intelligent lay person. Other writers have drawn attention to the market's overpriced level. Other writers have also done the numbers and concluded that stock returns are not likely to out pace bond returns, for example, over the next decade. But no other writer provides such a detailed and convincing analysis of the factors that have stoked our mania for stocks and brought us to the top of a speculative bubble. Shiller's account of what academics such as Prof. Irving Fisher thought of stock market valuations in the 1920s is a useful reminder that even the experts can get it wrong. More importantly, his analysis of past decades suggests a cyclical movement in the all too human desire to believe in a new economic age. Among the truths which Americans evidently have not learned is that new economic eras do not result in permanent stock market booms. That technology enables more efficient production which in turn helps keep inflation low has been acknowledged publicly by Alan Greenspan. But the market's reaction extends way beyond what this fundamental change might warrant, for all of the reasons Shiller cites.While Prof. Shiller's analysis is highly credible, his suggestions for the individual investor are, in places, difficult to understand. Indeed his discussion of diversification may only be deciphered by his fellow economists. Lay men and women can hardly be expected to know what "...taking short term positions in claims on income aggregates," means. Nor can they regard his advice to invest in markets that do not yet exist as practical guidance. These, however, are minor quibbles. Unlike many market commentators these days, Shiller's underlying social conscience puts him on the side of the little guy. Yet even so, this books is aimed primarily at policymakers who have the power to influence public behavior for the good. The prospect of thousands of retirees living on the margins because they invested too much of their 401(k) money in the stock market is surely one which will compel their attention.Jim Sanders Annandale, Virginia

An Act of Courage

Robert Shiller argues that the stock market has experienced a bubble. He makes his case on the basis of a sober statistical judgement. However, in layman's terms, what he says boils down to, "If it walks like a duck, it is a duck." Demonstrating the absurdity of today's stock prices does not require clever statistical modeling.This begs the question of why a bubble emerged in the late 1990's. Shiller discusses several cultural factors such as the ever-higher profile of the stock market in the media, including the Internet.This begs the question of how it is possible for so many people wrongly to be optimistic about stocks. Shiller cites many findings in psychology, such as Asch Conformity, to explain how people can listen to others against their own best judgement.This begs the question of whether it could be Shiller who is irrational. Shiller examines and refutes the arguments that pundits have made to rationalize exuberance.There are three audiences for this book, all of whom will find it threatening.1. Ordinary investors. You will not want to read this book, because it asks you to confront an issue that you would be more comfortable avoiding. However, once you do dive into it, you will be rewarded with sober facts and analysis that you can use to resist the siren calls of pundits, brokers, and friends to buy into the bubble.I can assure you that Robert Shiller did not write this book to make his own fortune. The book jacket says nothing like "five strategies to survive the bubble," although he does mention some conservative investment alternatives. There certainly is no endorsement from Suze Orman or any of the other best-selling gurus that he swiftly skewers. This is just an honest book from a scholar with the highest integrity: an act of courage.2. Economists. I can see a lot of squirming, particularly as Shiller discusses psychological studies that undermine the cherished rationality assumptions of our profession. Shiller is generous with those who disagree with him. He won't say it, but I will.Shame on us.Those of us who know better have been too silent. Paul Krugman wastes his bully pulpit in the New York Times discussing IMF esoterica, and only when Shiller's book came out did he mention the bubble.Then there are those of us who don't know better. The hundreds of finance professor hacks whose tenure rests on mindless justifications and interpretations of irrational stock price movements. ("Events of type X create, on average, $Y of value." Oh, please.) 3. Policy analystsThis book certainly will not appeal to those who think that the biggest problem we are going to face in the next ten years is what to do with budget surpluses. Shiller correctly points out that the social security debate needs to be conducted, at a fundamental level, about what exactly we are promising ourselves. The trade-off between compassion and freedom must be faced. I wish he had illustrated this with a