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Irrational Exuberance
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In this timely and prescient update of his celebrated 2000 bestseller, Robert Shiller returns to the topic that gained him international fame: market volatility. Having predicted the stock market collapse that began just one month after the first edition was published, he now expands the book to cover other markets that have become volatile, particularly the recently red-hot housing market. He includes a full chapter on domestic and international housing prices in historical perspective.

Shiller amasses impressive evidence to support his argument that the recent housing market boom bears many similarities to the stock market bubble of the late 1990s, and may eventually be followed by declining home prices for years to come. After stocks plummeted when the bubble burst in 2000, investors moved their money into housing. This precipitated the inflated real estate prices not only in America but around the world, Shiller maintains. Hence, irrational exuberance did not disappear¡ªit merely reappeared in other settings.

Building on the original edition, Shiller draws out the psychological origins of volatility in financial markets, this time folding real estate into his analysis. He broadens the evidence that investing in capital markets of all kinds in the modern free-market economy is inherently unstable¡ªsubject to the profoundly human influences captured in Alan Greenspan¡¯s now-famous phrase, ¡°irrational exuberance.¡± As was true of its predecessor, the second edition of Irrational Exuberance is destined to be widely read, discussed, and debated.

CNBC, day trading, the Motley Fool, Silicon Investor--not since the 1920s has there been such an intense fascination with the U.S. stock market. For an increasing number of Americans, logging on to Yahoo! Finance is a habit more precious than that morning cup of joe (as thousands of SBUX and YHOO shareholders know too well). Yet while the market continues to go higher, many of us can't get Alan Greenspan's famous line out of our heads. In Irrational Exuberance, Yale economics professor Robert J. Shiller examines this public fascination with stocks and sees a combination of factors that have driven stocks higher, including the rise of the Internet, 401(k) plans, 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 event--the baby-boom effect, the public infatuation with the Internet, and 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 his or her future on the market's continued success. --Harry C. Edwards

Customer Reviews:

  • An excellent antidote for bull euphoria
    If you are primarily invested in stocks, this book will provide an excellent counterpoint to the constant hype and chatter that emanates from CNBC and Yahoo Finance, themselves targets of criticism in this book.

    Belief that the markets will rise in the "long-term" is just that: a belief. As with any faith, there is history. Shiller examines the source of this faith in the same way an anthropologist might examine an ancient religion. Shiller examines human nature and the mechanisms of the media and the markets that amplify these tendencies. He supports these arguments by citing numerous studies and graphs. To further strengthen his arguments, he considers the views of perma-bulls and tackles their arguments head-on. Finally, he makes a surprising recommendation on how to invest for the next twenty years, a recommendation that has been echoed by none other than Warren Buffett.

    As with any controversial book, Shiller is not without his critics who attempt to tear down his arguments. Although his arguments are not iron-clad, neither are his critics' arguments. With the decline of the NASDAQ from above 5000 to below 2000, it is time to revisit this book....more info

  • 2nd edition coming
    If you believe Shiller was prescient in early 2000, take note that a second edition is in the works, and he adds his concerns about current real estate valuations this tiem around. From CNN article on 8/12/04:

    >>.... "I would say a bubble is happening," said Robert Shiller, whose book "Irrational Exuberance" (Princeton University Press, 2000) warned, correctly, that the stock market was grossly overvalued by investors' unfounded optimism. "When it's going to burst is the real question," he said. "It's difficult [to know]." The Yale economist and principal at real estate firm Fiserv Case Shiller Weiss is now working on the book's second edition, which will among other things look at whether America's obsession with the stock market has been displaced by exuberance for real estate. During a housing bubble, he said, buyers who would otherwise consider a house too expensive go ahead and buy anyway because they overestimate future price appreciation and underestimate risk. The bubble bursts, or deflates, when buyers are no longer so sure that prices will continue to increase. "The essence of a bubble is investor enthusiasm," said Shiller. ...more info
  • Insightful, but heavy going
    Having plowed through this tome last summer, I sold my portfolio then wondered if I'd fallen victim to my own irrational exuberance until the market fell in the autumn. Shiller makes a convincing case for being more aware of what is driving the market and stocks, while investing in the long run by buying low and selling high. The key is listening to your own common sense about overheating and investing in a VARIED portfolio rather than 25 tech stocks. The book would have been better had it been lighter and less turgid to read, but the information was insightful and well thought out....more info
  • Excellent Book! A must read!
    This is an excellent book! It may seem dry at times with alot of statistics, but overall it provides a good insights into the field of behavioral finance....more info
  • Perspective
    I want everyone to go back and read the first review of this book buy David Roth in April of 2000. His pathetic "analysis" of the market perfectly captures the absurd psychology of investors in the bubble-era. His review alone shows the importance of this book.
    -Dan...more info
  • Right ON!!
    As a insurance agent dealing with the public everyday, Robert Shiller has hit it right on. The 401k, new era thinking, and ponzi scheme like returns by new money coming in so fast, thus driving up returns artifically, all combined for this incredible run up. Also, I would be remiss if not adding in all the new "Financial Planners" which are nothing but mutual funds sales people and we can not leave out the talking heads that are on TV everyday. Watch who their advertisers are for a clue.

    I can sell Life Insurance, Bank Products, Mutual Fund Products and I have only sold bond funds over the last 3 years thanks to Professor Shiller's back up. I had clients tell me with an attitude, just 2 years ago, that they would make 15% annually for the rest of their lives. I haven't seen them lately and I haven't seen anybody come in to pay back their cash value loans. What they have not learned is that "Wall Street" is about making money for "Wall Street" and not for the average investor.... Most people that I question do not even know what a PE Ratio is!! They are clueless and the "Wall Street Barrons" are taking their money.

    Unfortunately, they don't know only the NASDAQ has blown up, stay tuned for the S&P and Dow as their day has not come yet! If you have any doubts or questions, Mr. Shiller's research nails it, stocks always come back to norm the problem is that time is unknown. Right on Professor Schiller!...more info

  • Great Book for the Times
    This book tries to get at the heart of what causes bubbles. Schiller is honest that there is no one cause that can be purely attributed the to building of a financial bubble nor does he contend that the bursting of a bubble can be predictable. He uses examples from all the major stock market crashes from the past century. Part of focus is on the media and its influence on the generals public attitude towards various asset classes, mostly stocks and housing. Its a great reference to have if you think another bubble is on the verge of building as the book cites repeated themes that can be seen in the media that occurred in other bubble creation.

    Great read. Won't get your rich (at least now) because we just missed one of the largest bubbles ever to be seen in housing. However, if humans are still running the world for the next 50 years be assured we'll have some more bubbles to come....more info
  • Right on the money 3 years later.
    This is a treaty on Behavioral Finance. Shiller makes a strong case that markets are not efficient, but respond to crowd psychology.

    Shiller rebuts the Efficient Market Hypothesis. He has analyzed many U.S. stock market crashes. In each case, he did not find information absorbed by institutional and individual investors that justified the market downturns. In all cases, it appears the investors were "aware" of the reasons for the market downturn as explained by the financial press after the downturn occurred. For Shiller, this means that the reasons were false, and that investors do not digest information in such an efficient and immediate way as stated in the Efficient Market Hypothesis.

    Shiller believes investors are irrational, and trade based on certain premises such as herd instinct, momentum, belief that stocks always go up. These beliefs are reinforced by the media. The resulting market valuation at the time the book was published (first quarter 2000, the market's peak) was far above its intrinsic value. As they say, the rest is history. Shiller's timing was perfect. We have been in a Bear market ever since....more info

  • Looking pretty smart right now...
    Shiller points out the factors contributing to the biggest bull market in U.S. history, which by now are obvious to nearly everyone. However, if you're in want of technical, quantitative research, you'll be disappointed. Shiller relies on market inefficiency to advance his argument, but makes his case with more "squishy" arguments, and writes at length about behavioral and psychological factors. His concept of a "cascade of information" that contributes to long-term bull or bear trends is especially interesting.

    Shiller debunks market efficiency by pointing out that Malkiel, Fama and the rest of the new finance crowd depend on the concept of the rational investor seeking the efficient frontier. Shiller gives us plenty of reason to believe that the majority of investors in the stock market are not rational at all (and often completely idiotic).

    Disturbingly, however, Shiller winds up his treatise by taking pity on the fools that were dumb enough to pay $200 for Yahoo! and engages in a rather unbecoming of flailing and hand-wringing about what should be "done" about a stock market bubble. That is, what should the GOVERNMENT do about NASDAQ 5000?

    This spoils the book. The answer, clearly, is that the government (Shiller uses the more benign term "public policy) should not care one iota about the stock market in a capitalist system. The fact that the question was even raised left a horrible taste in my mouth and induced me never to buy a Shiller book again.

    In any case, it's bound to become a classic for its timing (March 2000) more than any other reason and is certainly worth a read....more info

  • Rational exuberance
    This book does not quite work because the author gives us no algorithm to determine when the market is irrationally exuberant or merely going up....more info
  • Deep and Not too academic
    I have an advanced degree in economics and know Shiller's academic work, but I was pleasantly surprised that this was not too "ivory tower". Lots of facts and references to real world events make it more easily readable. The tone and sentence contruction does remind one of university days tho.

    As one can expect, however, the key point that was missed is how to identify the characteristics of any future "irrational exhuberance" and thereby avoiding its perils. Basically, he segregates what does not cause bubbles, but then mixes into the possible causes a stew of multiple ideas. Anything clear and concise can't come from someone who doesn't take a view and stakes his reputation on it. That Shiller doesn't do.

    I would give the historical work top scores, but current/future events are weak....more info

  • 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 difficult to put it down. Intellectually stimulating and bound to be economically rewarding.
    ...more info
  • not much food
    not much food in the book overall..a very shallow and general talk, but i found it interesting to see his comments (p220) on the interest rate and other potential risks in the mortgage market back in 2005. some of the points he mentioned are indeed drivers of the recent subprime meltdown...more info
  • An ovation for Mr. Shiller
    If you read this book when it was published, it served as a warning about the market. If you are reading it in the summer of 2002, it will serve as an explanation of the market. Recommended....more info
  • Want to be smarter?
    read the book.

    It will open your eyes to the 'truths' of wall street....more info
  • bring a lunch...
    This book has good info in it but man, does it get long. I read lots of analytical info with interest, but this book was very very slow for me, especially in the middle and later chapters.

    The good news is that the first couple of chapters make it worthwhile. It does present some very important and valid concepts. The easily-bored reader could read the first few chapters and the last chapter, learn a lot of good info, and not miss much in the long middle chapters.

    JD...more info
  • Packed With Knowledge!
    Shortly after a briefing by author Robert Shiller, Alan Greenspan warned the country about the "irrational exuberance" pushing stock prices excessively high. The year was 1996 and, in hindsight, it's clear that the bull was just beginning to run. Anyone who heeded that warning would have passed up some of history's most impressive gains. Yet, if history is any guide, stock prices could be in for a 10 or 20 year decline, falling back below the bull market's gains. But Shiller isn't teaching market timing; he's debunking some cherished investing axioms, such as, the belief that stocks are the best long-term investment. He discredits financial reportage, limns to the psychological and emotional factors that make markets behave irrationally and proves that nothing is new about "new economy" prattle. The book is a very effective vaccination against the costly virus of credulity. We [...] suggest this book for every investor's shelf - dog-eared and worn from frequent re-reading.
    ...more info
  • Bubbles and crises
    Last year in my country you can see some commercials in the TV inviting to invest in Mutual Funds, and I believe lots of people turned to that. The problem is that the very next year, beginning in January, the housing bubble burst and we know the rest of the story. Although this book was written before that, the book remain valid at explaining the particular behavior of the markets in these moments of furor, the "irrational exuberance", and the panic that follows it. In my opinion the book is a good investigation of the markets, you can see the author analyzing all the factors involved, including sociological and psicological (this make the book a little slow). Is good to invest in the financial system, but in awareness of its possible behavior. ...more info
  • Thoroughly Engaging Book
    "Irrational Exuberance" is indeed a broad study, and (often painfully) detailed as well. Prof. Shiller's approach to the subject is intelligent, academic, and balanced.

    The "market" require too much rationality to be efficient. We are irrational beings as much as rational beings. It is the DEGREE of efficency in "market" we now need to turn our attention to.

    As Prof. Shiller would be well aware, "Irrational Exuberance" is not compelling story book: it is very difficult to sum up the whole idea and to make conclusive(or impressive) summary of "speculative bubbles" and other market behaviors. But that is all what this book is about. I think the book is rather short. Good books always make me thirsty by wanting more....more info

  • Psychologizing Markets
    Stock markets are complex and mysterious creatures. Predicting their behavior is a fantasy that has persisted in investors' minds for ages, and various tricks have been conjured to anticipate (and profit) from stock movements. What all these techniques have in common in an expectation that markets can indeed be predicted-and that they all, invariably, fail.

    Robert Shiller, of Yale University, contributes to this debate by canvassing the salient features that characterize the stock market. First, he argues that markets tend to be irrational: prices skyrocket based on frenzy, not fact. Price-earning ratios, for example, tend to move much higher than earnings, implying that expectations are not based on higher expected earnings. The same irrationality, Mr. Shiller continues, can be observed in the relation of stock prices to dividends: stock prices are more volatile than dividends, meaning that prices cannot be fully reflective of expected dividends, as the efficient market theory would predict.

    So what determines stock prices then? This is the book's most creative part, at least for those familiar with economics but not psychology. Two factors, the media and "new era" thinking, tend to create an undue optimism about markets, causing prices to exceed rational limits. These two trends, however, are amplified by psychological phenomena: an overwhelming trust in the opinion of authorities, overconfidence in one's investment strategy, a linear reasoning that cannot be defended against uncertainties or complications, and so on.

    Any reader should be impressed by the complexity and accessibility of Mr. Shiller's analysis. If his book is taken as a prognosis of the 1990's bubble bursting, then "Irrational Exuberance" is a timely warning that proved correct. But what makes this book a classic is its magnificent combination of economics, econometrics, sociology and psychology in analyzing the stock market. This much needed interdisciplinary work makes this book a must read for investors and policymakers alike....more info

  • Points to ponder...
    I'm still mulling over what to make of this book. There are certain things which make a lot of sense and stand out from the rest of the stuff we read and hear about, be it on TV, internet, or magazines. The most important thing this book presents is the argument against the common notion of stocks as the best long term investment option when compared to bonds etc. It is definately not something I'm used to hear or read. Even the champions of long term investing, the Motley Fool, believes in stocks as the best long term investment. This book has compelling arguments to suggest otherwise. For instance, the lack of factoring in inflation factor while comparing performance of stocks vs bonds etc over any period of time. I'm still thinking about it and need to read some more stuff before I fully agree/disagree with the author.

    Besides that, the book talks about various personal, social, and psychological factors affecting the moves in stock market which underneath has nothing to do with economy in general. There are some interesting observations about the social/political/economic climate at the time of two stock market crashes of 1929 and 1987 and what was the general feeling of people about the stock market before and after the crash.

    The book also talks about the media frenzy and how 'celebrity' guests on CNBC and the like play a role in stock market behavior and how the so called guests can never really tell the truth because of their vested interested in the inflated stock market. This should not come as a surprise to anyone who catches even few minutes of CNBC before heading out for work in the morning!

    There is another interesting argument presented against the hoopla surrounding the 'new economy' and the author talks about how internet has not really played a big role in the current stock market booms (well speaking of when NASDAQ was @ 5000 level). Again, I don't fully agree with his explanation but some does make sense...

    Oh well, a refreshing and thoughtful book, will give you something to tinker upon and perhaps diversify! and go back to the old fashioned 'savings' rather than messing with your 401K by putting 100% in stocks (sounds familiar?)....more info

  • This phrase will live in infamy
    Great book based on the phrase spoken by Greenspan to try and slow down the economy....more info