Overview
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.
Irrational Exuberance is a must-read for pension-plan sponsors and endowment managers in the United States and abroad. It will also be studied by investment advisers, policy makers, and anyone from Wall Street to Main Street who doesn't want to be caught sitting on the speculative bubble if (or when) it bursts.
Synopsis
Shiller credits an unprecedented confluence of events with driving stocks to uncharted heights. He analyzes the structural and psychological factors that explain why the Dow Jones Industrial Average tripled between 1994 and 1999, a level of growth not reflected in any other sector of the economy. In contrast to many analysts, Shiller stresses circumstances that alter investors' perceptions of the market. These include the entry of the Internet into American homes, the misimpression that the aging of the baby-boom generation builds long-term protection into the market, and herd behavior, such as day-trading. He also examines cultural factors, including sports-style media coverage of the Dow's ups and downs and "new era" thinking about the economy. He considers and challenges efforts to rationalize exuberance that are based on either efficient-markets theory, narrowly construed, or the claim that investors have only recently learned the true value of the market.
In the most controversial portion of the book, Shiller cautions that a market that is overvalued by historical standards is inherently precarious. Among his prescriptions is an urgent plea to immediately end what he argues are perilous schemes to privatize social security in favor of plans to reformit. He also argues that private pension plans that encourage many people to put their entire retirement funds in the stock market should be modified. And he calls on our savings and investment institutions to take more sensible account of emerging risk-management principles. Shiller's analysis is convincingly documented, and regardless of the market's future behavior his book will stand as an important elaboration of why stocks soared and what our investment alternatives are.
Australian Finance Review - Joanne Gray
The stockmarket's most prominent bull, Goldman Sachs analyst Ms Abby Joseph Cohen, and Professor Robert Shiller , a scholar who argues that the market's levels are based on overconfidence, agree on at least one issue: market psychology is as much a determinant of share prices as underlying fundamentals.
Editorials
From Barnes & Noble
Taking his title from Alan Greenspan's 1996 cautionary phrase, Shiller demonstrates that the uniqueness of investors today make traditional economic interpretations obsolete. With the urgency of this morning's headlines, he warns that the herd behavior that triggered the market's recent roller-coaster dips and rises will continue to distort its mechanisms, and he advises reader-investors about actions that they can take or should avoid.Diane Coyle
As the share prices of dot.coms and high-tech companies fall to earth, you have to wonder whether the bubble is finally bursting. Yet many people still find it hard to shake the gut feeling that nothing should be allowed to spoil the party, even though the rational mind insists stock markets have been wildly overvalued. Robert Shiller, a highly respected professor of economics at Yale University in the US, offers in this timely book some food for the intellect to chew on. He points out that if the general level of share prices were to fall back to their mid-1990s level - a drop in the S&P 500 from about 1,400 to about 500 - the inflation-adjusted losses would be comparable to the destruction of all the farms, or all the homes in America.— Independent London
David Warsh
Thus it is an event of some significance that Shiller has written a crystal-clear and tough-minded critique of the factors that have driven US stock markets to their current levels and called his book Irrational Exuberance. In it, he argues that Federal Reserve chairman Alan Greenspan had it exactly right when he uttered the famous phrase in a speech in 1996. The current high levels of the market don't represent a consensus judgment by a cadre of sober experts, says Shiller. Instead, today's market is sky high because of wishful thinking by millions of people, egged on by professionals in and around Wall Street whose incentives all run in the direction of the more the merrier.—Boston Globe
Robert J. Samuelson
Alan Greenspan faces long odds in trying to nudge the stock market to where he'd like it to go. The chairman of the Federal Reserve has argued that the buoyant market -- by making Americans feel so much wealthier -- has triggered a consumer spending spree that threatens inflationary wage pressures....The idea is to dampen spending and the ravenous appetite for stocks. Anyone who thinks this will be easy should read Irrational Exuberance, a new book by Yale University economist Robert J. Shiller. Beyond arguing that the present market is a "speculative bubble," Shiller contends that investor psychology is so given to herd behavior that it's almost impossible to manipulate or even influence. The market can "go through significant mispricing lasting years or even decades."— Washington Post
John Cassidy
During the past decade, he has emerged as a leader in the new field of "behavioral finance" which seeks to apply lessons learned from other academic disciplines, particularly psychology to economics. Irrational Exuberance is not just a prophecy of doom. Encompassing history, sociology, and biology, as well as psychology and economics, it is a serious attempt to explain how speculative bubbles come about and how they sustain themselves.—New Yorker
Burton G. Malkiel
Irrational Exuberance presents a message investors would be wise to heed: Make sure your portfolio is adequately diversified. Save more and don't count on the double-digit gains of the past decades continuing to bail you out during retirement. Mr. Shiller's book offers a dose of realism and is a great read.— Wall Street Journal
Joanne Gray
The stockmarket's most prominent bull, Goldman Sachs analyst Ms Abby Joseph Cohen, and Professor Robert Shiller , a scholar who argues that the market's levels are based on overconfidence, agree on at least one issue: market psychology is as much a determinant of share prices as underlying fundamentals.— Australian Finance Review
Library Journal
Shiller (economics, Yale Univ.) has updated his landmark 2000 study of U.S. stock market psychology. In that work, he amassed research from market peaks in 1929 and 1966 to warn that the same factors were present in the 2000 market. He further explained that past bull markets fed upon themselves to go beyond what the facts justified and that the 2000 market was a speculative bubble awaiting correction. In the new edition, Shiller builds on his original research by including 2000 as a third major peak.The second edition's new component, then, is Shiller's exploration of how market psychology has responded to the ensuing five years of retrenchment. One chilling conclusion he reaches from his knowledge of past market performance is that the 2005 market may still be correcting and that a return to 2000 levels may be a decade away. He further warns that many investors are still too heavily invested in equities and that proposals to invest Social Security funds in the stock market would subject the retirement system to unacceptable risk. Shiller expands his focus to include the booming real estate market, where he sees another speculative bubble building. Shiller's lucid work is essential for all academic and public libraries.-Lawrence R. Maxted, Gannon Univ., Erie, PA Copyright 2005 Reed Business Information.Booknews
In light of Federal Reserve chairman Greenspan's famous reference to the volatile stock market's "irrational exuberance," a Yale U. economics professor challenges investors and policymakers to think beyond the market efficiency model to fathom the "new era economy." The hardcover edition (Princeton U. Press, 2000) was a bestseller. Annotation c. Book News, Inc., Portland, OR (booknews.com)Alfred H. Kingon
Shiller and his fellow doomsayers believe that the current market boom, in other words madness, has created a bubble - indeed the biggest bubble of them all - and will be followed soon by at least long-term stagnation if not outright devastation. It is not that there is no real basis for optimism, the learned sceptics agree, with technology breakthroughs fundamentally transforming our economy, but the Wall Street hype has transformed rational optimism to market lunacy, or, in polite and now overused terms, "irrational exuberance".—Financial Times