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Amazon.co.uk Review
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, Amazon.com --This text refers to an out of print or unavailable edition of this title.
Louis Menand, The New Yorker
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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). It also discusses the role of the media (which ultimatley Shiller regards as having at best a short-term influence on market behaviour), the psychology of the investor (for me the least convincing part of the book) and an interesting chapter discussing the arguments of efficient market theorists and their attempts to justify current stock market levels with reference to dividend values (since they are so clearly at variance with price earnings ratios).
Finally Shiller concludes with his recommendations to overcome the irrationality of markets. Paradoxically, these mean an expansion of the role of the market through the commodification of more risks and the action of investors to spread their risks beyond the stock market.
Robert J. Shiller's book is a great introduction for those interested in the history and causes of financial exuberance. While you may not agree with his conculsions and proposals, the preceding examination of the various causes seems comprehensive and is lucidly explained. Of particular interest are the chapters discussing feedback mechanisms and how financial bubbles are inflated What this section lacks, perhaps because no one has found the answer, is a description of what causes the feedback loop to breakdown and the bubble to deflate. In summary I consider this to be a worthwhile addition to the literature on financial markets and how they can go wrong.
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