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Irrational Exuberance Hardcover – 14 Mar 2005
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Robert J. Shiller, Co-Winner of the 2013 Nobel Prize in Economics
New York Times Bestseller
Winner of the 2000 Commonfund Prize for the Best Contribution to Endowment Management Research
From review of Princeton's previous edition: "Robert J. Shiller . . . has done more than any other economist of his generation to document the less rational aspects of financial markets."--Paul Krugman, New York Times
From review of Princeton's previous edition: "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."--John Cassidy, New Yorker
From review of Princeton's previous edition: "Informative and well-argued . . . A calm and reasonable antidote to today's euphoria."--Jeff Madrick, New York Review of Books
From review of Princeton's previous edition: "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
From review of Princeton's previous edition: "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, Wall Street Journal
From review of Princeton's previous edition: "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
From review of Princeton's previous edition: "Dazzling, richly textured, provocative . . By far the most important book about the stock market since Jeremy J. Siegel's Stocks for the Long Run."--William Wolman, Business Week
From review of Princeton's previous edition: "Shiller has provided an accessible guide to the usually impenetrable literature on financial markets, especially the American stock market."--Foreign Affairs
From review of Princeton's previous edition: "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, Washington Post
From review of Princeton's previous edition: "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."--Economist
From review of Princeton's previous edition: "[An] excellent new book. . . . If you want to preserve capital, unload most of your stocks and invest in government bonds."--Steve H. Hanke, Forbes
From review of Princeton's previous edition: "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
From review of Princeton's previous edition: "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
From review of Princeton's previous edition: "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
From review of Princeton's previous edition: "A must-read . . . refreshing, well-reasoned . . . and very readable."--Michael P. Niemira, Barron's
From review of Princeton's previous edition: "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, Independent
From review of Princeton's previous edition: "Shiller has written a crystal-clear and tough-minded critique."--David Warsh, Boston Globe
The point of Irrational Exuberance is not to help investors dump their houses before the current exuberance fades. It is to deepen our understanding of the events we are watching as one bubble gives birth to another and to encourage readers to think about economic behavior and economic policies that can cushion the nasty side of volatility."--Sharon Reier, The International Herald Tribune
"The first edition of this book was widely read because of its timing. This one, too, seems perfectly timed, coming when we're starting to fear we've been fooling ourselves. Again. . . . There's a world of important information for everyone."--Lyn Miller, USA Today
"The second edition's new component . . . 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."--Library Journal
"There's plenty of new material in this edition. . . . Chief among the new additions is Shiller's deeper focus on recent excesses in the stock market and his skepticism about investing in real estate. . . . . Shiller's ideas have so many devoted followers that I wouldn't be surprised to see many more editions."--Angele McQuade, BetterInvesting
"Yale University Professor Robert Shiller pretty much called the stock market drop when this book was first published in 2000. In this fact-packed book, Shiller describes the psychological origins of volatility, among other things. And in the newest edition, Shiller compares the recent housing boom to the stock market bubble of the 1990s."--Registered Rep.
About the Author
Robert J. Shiller is the Stanley B. Resor Professor of Economics at Yale University. He is author of "The New Financial Order: Risk in the 21st Century" (Princeton) and "Market Volatility and Macro Markets", which won the 1996 Paul A. Samuelson Award.
Top customer reviews
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. I'm not an investment expert and I'm wary of simplistic explanations in areas I don't know very well.
Having said that I do think there is a great deal of sense in what he says, and it is well worth a read if only to puncture any lingering illusions you may have about efficient markets.
All in all a highly entertaining and informative read, it is sure to change your views about continuing house- and stock- price moves as well as axioms on market psychology and the role of the media in speculative bubbles.
You won't be disappointed.
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.