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Irrational Exuberance [Hardcover]

Robert J. Shiller
4.7 out of 5 stars  See all reviews (9 customer reviews)

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Book Description

15 Mar 2000

In this bold and potentially urgent volume, Robert J. Shiller, a respected expert on market volatility, offers an unconventional interpretation of recent U.S. stock market highs and shows that Alan Greenspan's term "irrational exuberance" is a good description of the mood behind the market. He warns that poorer performance may be in the offing and tells us how we--as a country and individually--can respond.

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 reform it. 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.

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.

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Product details

  • Hardcover: 312 pages
  • Publisher: Princeton University Press; Dust Jacket Has Heavy Edgewear edition (15 Mar 2000)
  • Language: English
  • ISBN-10: 0691050627
  • ISBN-13: 978-0691050621
  • Product Dimensions: 24.2 x 16.3 x 2.6 cm
  • Average Customer Review: 4.7 out of 5 stars  See all reviews (9 customer reviews)
  • Amazon Bestsellers Rank: 445,616 in Books (See Top 100 in Books)
  • See Complete Table of Contents

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Product Description

Amazon Review

CNBC, day trading, The Motley Fool, Silicon Investor. Not since the 1920s has there been such an intense fascination with the US stock market. For an increasing number of people, logging onto Yahoo finance is a habit more precious than that morning cup of coffee (as thousands of SBUX and YHOO shareholders know too well). Yet while the market continues to go higher, most of us can't get Alan Greenspan's famous line out of our heads. In Irrational Exuberance, Yale economics professor Robert Shiller examines this public fascination with stocks and sees a combination of factors that have driven stocks higher, including the rise of the Internet, 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 unique millennium event--the baby boom effect, the public infatuation with the Internet, news 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 their future well-being to the market's continued success. --Harry C. Edwards,


Robert J. Shiller, Co-Winner of the 2013 Nobel Prize in Economics
Winner of the 2000 Commonfund Prize for the Best Contribution to Endowment Management Research

"Dazzling, richly textured, provocative . . . It is by far the most important book about the stock market since Jeremy J. Siegel's Stocks for the Long Run. . . ."--William Wolman, Business Week

"Irrational Exuberance should be compulsory reading for anybody interested in Wall Street or financially exposed to it; at the moment, that would be roughly everybody in the United States. . . ."--The Economist

"Robert Shiller . . . has done more than any other economist of his generation to document the less rational aspects of financial markets. . . . Mr. Shiller believes that the whole stock market, not just the Dow, is inflated by a speculative bubble."--Paul Krugman, The New York Times

"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."--John Cassidy, The New Yorker

"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'."--Robert J. Samuelson, The Washington Post

"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."--David Warsh, Boston Globe

"Irrational Exuberance is likely to cause a stir. . . . Shiller illustrates how the current market is like a naturally occurring Ponzi scheme in which investors become promoters for the game after receiving initial payments with money taken from subsequent investors."--David Henry, USA Today

"Irrational Exuberance is not just a prophecy of doom. . . . [I]t is a serious attempt to explain how speculative bubbles come about and how they sustain themselves. . . . [Shiller's] arguments should . . . give pause to anyone who has money in the stock market."--John Cassidy, The New Yorker

"Shiller has written a crystal-clear and tough-minded critique. . . ."--David Warsh, Boston Globe

"Mr. Shiller's book offers a dose of realism. . . . [I]t presents a message investors would be wise to head: Make sure your portfolio is adequately diversified. Save more and don't count on double-digit gains of the past decades continuing to bail you out during retirement."--Burton G. Malkiel, The Wall Street Journal

"A counterweight to the plethora of get-rich-quick investment guides."--Library Journal

"So why have share prices soared so high in the past five years, taking market valuations past all historical records? Professor Shiller's answer, as the title indicates, is not encouraging. His message is: diversify now as much as you can, and batten down the hatches."--Diane Coyle, The Independent

"Irrational Exuberance is not billed as a personal finance book. But it is. You can agree or disagree with it. But you owe it to yourself to read it if you're investing, or contemplating investing, in inequities."--The Washington Post

"To appreciate just how high the S&P index is, read Professor Robert Shiller's excellent new book, Irrational Exuberance."--Steve H. Hanke, Forbes

"What set off this speculation and what feeds it? Shiller ranges widely his explanations, laying them out in the first 168 pages in easy-to-read, sometimes passionate prose. . . . [T]hose first 168 pages are must reading for anyone with savings invested in stocks."--Louis Uchitelle, New York Times Book Review

"[An] excellent new book. . . . If you want to preserve capital, unload most of your stocks and invest in government bonds."--Steve H. Hanke, Forbes

"A must-read . . . refreshing, well-reasoned . . . and very readable."--Michael P. Niemira, Barron's

"Likely to be the year's most-talked-about finance book. . . . You can agree or disagree with it. But you owe it to yourself to read it if you are investing in equities or contemplating doing so."--Fred Barbash, International Herald Tribune

"Shiller has provided an accessible guide to the usually impenetrable literature on financial markets, especially the American stock market."--Foreign Affairs

"Although its message may be unwelcome to many, this important book should be read by anyone interested in economics or the stock markets."--Rene M. Stulz, Science

"Informative and well-argued . . . A calm and reasonable antidote to today's euphoria."--Jeff Madrick, The New York Review of Books

"A modern classic of "serious" economics that demands to be read, and can be enjoyed, by the interested non specialist."--The Economist

"No one else has examined the behavior of the American investor in the 1990s with more authority or better timing."--Library Journal

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Customer Reviews

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Most Helpful Customer Reviews
11 of 11 people found the following review helpful
It was on 5 December 1996 that Alan Greenspan described the behaviour of investors who had driven the value of shares on the New York Stock Exchange to record levels as "Irrational Exuberance". Robert J. Shiller has used this remark as the title of his book and the starting point for an examination of stock market and investor behaviour which is both accessible to the general reader and adds to the existing stock of serious work on the subject.
Robert Shiller begins his look at irrational exuberance in financial markets by outlining the evidence, which he finds convincing, that the current level of stock markets (even allowing for the poor performance during the year 2000) is far above that which is reasonable or rational.
He argues that this behaviour can be explained by 12 factors which are examined in the subsequent chapters. These are a mixture of common perceptions which drive markets higher than the underlying facts justify (role of internet, baby boom, expansion of defined contribution pension schemes, decline of economic rivals, cultural change favouring business, Republican congress, growth of mutual funds), cultural and psychological factors which have affected investor behaviour (expanded media reporting, optimistic forecasts of analysts, rise of gambling opportunities) and feedback mechanisms. The detailed analysis which follows explains convincingly how bubbles emerge through feedback effects (feeding upon themselves driving markets upwards or down).
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11 of 11 people found the following review helpful
By A Customer
Not so long ago, the rise of the NASDAQ to a a peak of over 5,000 was seen as a clear sign that we had entered a new economic era. Economic cycles were a thing of the past, new technology and the belief that the all-powerful US Fed would ride to our rescue encouraged investors to bid up share prices to levels that now in hindsight looked certainly unrealistic. Academic studies on stock markets teach us that prices of stocks eventually return to their long-trend line. However, as Shiller in this elegantly simple book demonstrates, financial markets periodically detach themselves from economic fundamentals. The trending or herd influence of investors pulls markets to over-optimistic and over-pestimistic levels. Stock market psychology as Shiller shows is simply the use of rules of thumb by investors that distorts the efficient market over the short term. What Shiller unfortunately does not investigate is how style factors could become even more confusing as more and more investors (primarily institutional fund managers) become more conscious of the potential of style investing. However, the insight that the herd is probably made up of a bunch of headless chickens (who use feeling and not disciplined analysis) can be enjoyed by both active and disillusioned investors.
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5 of 5 people found the following review helpful
5.0 out of 5 stars Packed with Knowledge! 7 Sep 2005
By Rolf Dobelli TOP 500 REVIEWER
Shortly after a 1996 briefing by author Robert J. Shiller, Alan Greenspan, chairman of the U.S. Federal Reserve Board, warned the country about the mood of "irrational exuberance" that was pushing up stock prices. In hindsight, it's clear that the bull was just beginning. Anyone who heeded that warning would have missed nearly unprecedented gains. But Shiller proved prophetic when the market peaked and crashed in 2000, the year he published this book's first edition. Shiller isn't teaching market timing; he's debunking cherished investing axioms, such as the belief that stocks or real estate are necessarily great long-term investments. He discredits financial reporting, notes the psychological and emotional factors that make investors behave irrationally, and sounds a note of caution as timely now as it was at the turn of the millennium. This book vaccinates you against the virus of credulity. We suggest a copy for every investor - dog-eared from frequent rereading. It's a wise investment.
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12 of 13 people found the following review helpful
4.0 out of 5 stars bubble bubble 26 Aug 2003
By tomsk77
Shiller stands as one of the few people to come out of the experience of the recent bubble with his reputation enhanced. His book came out at pretty much the peak since when the market had dropped an incredible amount.
I can see why people didn't like hearing what he was saying at the time but in retrospect it is hard to challenge much of what he says. P/E ratios were wildly out of line with historical precedent with no clear reason why (seemingly sometimes just because the companies had websites!). I never really bought the US productivity miracle story anyhow but it seems increasingly clear that the reason for higher productivity in US firms is predominantly that employees work significantly more hours than European equivalents, not because of a techological revolution.
It makes interesting reading that there was very similar talk of "new eras" during previous bubbles, and of small investors only just realising that equities were a better investment over the long-run (how many times will this one be trotted out I wonder). Also having spoken to quite a few people who made and then lost a few grand in TMT stocks I find it very hard to dismiss the central idea that in such cases bubbles are really just naturally-forming pyramid schemes.
finally personally I'm gob-smacked that anyone actually bothers to seriously listen to fund managers anymore. They were no better at avoiding the collapse of the bubble than the day-traders as our staff pension fund has learnt to its cost. The only big investor to arguably call it right was Tony Dye at PDFM but he was two years or so too early.
I'm only giving it four stars because a) it's now of historical interest and not that practical for the future and b) because I found it too easy to understand.
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