Irrational Exuberance | Robert J. Shiller

Irrational Exuberance | Robert J. Shiller | great read

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	Irrational Exuberance Robert J. Shiller Crown Business, 2006 - 336 pages average customer review:based on 91 reviews view larger image
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highly recommended

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.

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Credible Exposition

The author first mentioned the twelve precipitating factors
for a bubble. Precipitating factors like capitalism explosion
and ownership society, new information technology, supportive
governmental monetary policies and analysts' optimistic forcast.

This ultimately resulted in a feedback loop which amplified
the 'story' behind the stock or even in a painting like Mona
Lisa. If a stock or any investment had a strong credible story
behind it, the story greatly enhanced the value of the investment.

How was this possible? It was through the channels of the media
and word-of-mouth. Word-of-mouth was cited to be more potent
though less accurate. The analogy of how ants communicate and
how epidermics spread was used to desbribe how bubbles formed.

"New-era thinking' was another reason bubbles formed. The advent
of automobiles and radio in the '20s; the television in the '50s;
and the internet in the '90s.

The book is well structured and support material is sufficient
to prove its point. One gripe is the complex and cumbersome
sentence syntax used. Commas were missing where they could be
inserted to make reading easier.

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great read

this is a very good book from an economist who has a balanced view on social and behavioral economics.
He is one of the very few grounded economist that i know of.

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.

Lame Attempt to Understand Non-Rational Factors behind Speculative Bubbles.

I've always enjoyed articles by Yale economist Robert Shiller, so I had high hopes for "Irrational Exuberance", not least because it has been talked up in every financial journal, web site, or newsletter that I read. I was disappointed. "Irrational Exuberance", borrowing a phrase from then-Fed Chairman Alan Greenspan, attempts to explain the psychological bases of speculative bubbles. The first edition addressed the millennium tech stock bubble and was published just months before it burst in 2000. This second edition has added a chapter on the housing bubble of the mid-2000s and incorporates commentary on residential real estate bubbles in some other chapters as well. It was published in 2005, also shortly before that bubble burst.

Shiller begins with brief chapters on historical stock market and real estate bubbles, to give the reader some perspective and demonstrate why these were, indeed, bubbles. He then names 12 factors that he believes precipitated the stock boom of the 1990s that culminated in a bubble: global capitalist explosion and the "ownership society", cultural and political change favoring business success, new information technology, supportive monetary policy and the Greenspan Put, Baby Boom and Baby Bust, expansion in reporting of business news, analysts' optimistic forecasts, expansion of defined contribution pension plans, growth of mutual funds, decline of inflation, expansion of the volume of trade, rise of gambling opportunities.

"Irrational Exuberance" analyzes the psychological factors behind bubbles, those that are not rational or due to economic fundamentals. Shiller discusses feedback theories of markets, the role of the media, examines the potential role of big news stories (which he concludes are not an important factor), the concept of "new era thinking" that preceded the 4 major stock market peaks of the 20th century, and speculates on why people are deceived by bubbles, which he terms "naturally occurring Ponzi processes". He references a lot of psychological studies that demonstrate people's overconfidence in their own judgments -and others that demonstrate that people will believe the majority view or expert view even if it strikes them as wrong.

There is not a lot of economics in "Irrational Exuberance". It's about psychology. Shiller has distributed a lot of questionnaires and analyzed a lot of data over the past few decades in attempts to understand the psychology of markets. But he often cites surveys of the public at large, most of whom do not directly participate in the stock market, when talking about market behavior. And he cites a lot of psychological studies that draw dubious conclusions. He quotes a Barron's survey from April 1999 in which 72% of respondents believed that stock market was overpriced. This would indicate that the problem is not that people are fooled by bubbles, but that some flaw in management discourages them from acting on their understanding. Shiller doesn't have much to say beyond the obvious, which he stretches to 230 pages by doing things like discussing epidemic models after he has just stated that they can't be applied to the spread of ideas.

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