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Irrational Exuberance

3.9 of 5 stars 3.90 · rating details · 1,089 ratings · 43 reviews

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...more

Paperback, 336 pages

Published February 22nd 2005 by Currency (first published March 1st 2000)

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Aug 31, 2011 Teddee rated it 5 of 5 stars · review of another edition

Shelves: finance

A good common sense primer on the flaws in the efficient markets hypothesis, which is the standard model presented in most finance textbooks. He acknowledges the difficulty of modeling self-fulfilling expectations and bubbles but uses a lot of surveys to demonstrate his case.

Shiller discusses various structural, cultural, and psychological factors that have given rise to the irrational exuberance in the market relative to historic norms.

It is quite suggestive of this book's influence that months...more

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Apr 20, 2013 Omar Halabieh rated it 4 of 5 stars

This book serves as an awakening call from "the present...whiff of extravagant expectation, if not irrational exuberance, in the air. People are optimistic about the stock market. There is a lack of sobriety about its downside and the consequences that would ensue as a result." The author advances that "we need to know if the price level of the stock market today, tomorrow, or any other day is a sensible reflection of economic reality, just as we need to know as individuals what we have in our b...more This book serves as an awakening call from "the present...whiff of extravagant expectation, if not irrational exuberance, in the air. People are optimistic about the stock market. There is a lack of sobriety about its downside and the consequences that would ensue as a result." The author advances that "we need to know if the price level of the stock market today, tomorrow, or any other day is a sensible reflection of economic reality, just as we need to know as individuals what we have in our bank accounts." That being said, the purpose of the book is to advance "a better understanding of the forces that shape the long-run outlook for the market."

This book covers a myriad of factors ranging from technology, to cultural to psychological that aid the formation and reinforcement of speculative bubbles. It ends with a section on implication of these findings on the various members of society whether individuals, institutions or government.

Below are key excerpts that I found particularly insightful:

1- "Many of the foregoing factors (that are candidates for causing a market boom) have a self-fulfilling aspect to them, and they are thus difficult, if not impossible, to capture in predictive scientific explanations."

2- "There are many ultimate causes for this exuberance...and the effect of these causes can be amplified by a feedback loop, a speculative bubble, as we have seen in his chapter. As prices continue to rise, the level of exuberance is enhanced by the price rise itself...The changes in thought patterns infect the entire culture and they operate not only directly from past price increases but also from auxiliary cultural changes that the past price increases helped generate."

3- "The role of the news media in the stock market is not, as commonly believed, simply as a convenient tool for investors who are reacting directly to the economically significant news itself...The news media are fundamental propagators of speculative price movements through their efforts to make news interesting to their audience. "

4- "Ends of new eras seem to be periods when the national focus of debate can no longer be upbeat. At such time, a public speaker may still think that it would be good business to extol a vision of a brilliant future for our nation's economy, but it is simply not credible to do so. One could, at such times, present a case that the economy must recover, as it always has, and that the stock market is underpriced and should go up, but public speakers who make such a case cannot achieve the command of public attention they do after a major stock run-up and economic boom. There are times when an audience is receptive to optimistic statements and times when it is not."

5- "We have explored the justification people have given, at various points in history, for changing market valuations, and we have seen evidence of the transitory nature of these cultural factors. Ultimately, however, the conclusions we draw from such evidence depend on our view of human nature and the extent of human abilities to produce consistent and independent judgements."

6- "Two kinds of psychological anchors will be considered here: quantitative anchors, which themselves give indications for the appropriate levels of the market that some people use as indications of whether the market is over-or underpriced and whether it is a good time to buy, and moral anchors, which operate by determining the strengths of the reason that compels people to buy stocks, a reason that they must weigh against their other uses for the wealth which they already have (or could have) invested in the market."

7- "The effects of new stories on the stock market sometimes have more to do with discovery of how we feel about the news than with any logical reaction to the news. We can make decisions then that would have been impossible before the news was known. It is partly for this reason that the breaking off of a psychological anchor can be so unpredictable: people discover things about themselves, about their own emotions and inclinations, only after price change occur. Psychological anchors for the market hook themselves on the strangest things along the muddy bottom of our consciousness."

8- "Rationale response to public information is not the only reason that people think similarly, nor is the use of that public information always appropriate or well reasoned."

9- "Policies that interfere with markets by shutting them down or limiting them, although under some very specific circumstances apparently useful, probably should not be high on our list of solutions to the problems caused by speculative bubbles. Speculative markets perform critical resource-allocation functions, and any interference with markets to tame bubbles interferes with these functions...Most of the thrust of our national policies to deal with speculative bubbles should take the form of facilitating more free trade, as well as greater opportunities for people to take positions in more freer markets. A good outcome can be achieved by designing better forms of social insurance and creating better financial institutions to allow the real risks to be managed more effectively. The most important thing to keep in mind as we are experiencing a speculative bubble in the stock market today is that we should not let it distract us from such important tasks."(less)

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Jul 15, 2011 Eric rated it 4 of 5 stars

Shelves: business, non-fiction

Robert Shiller's classic March 2000 attack on the dot-com bubble was both well timed and well written. Though Shiller does not make specific predictions about the immediate direction of the market in the text, he debunks many of the arguments used back then that "this time is different" or that extremely high valuation levels were here to stay. Shiller, a Professor of Engineering at Yale who is also known for creating a national index of housing prices in the US, could easily have released a new...more

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May 04, 2009 Bob rated it 4 of 5 stars

Very interesting book on the markets, investor psychology, and our misperceptions of both, as well as a survey of history and markets around the world. It was prescient in 2000 and is very applicable now. After the internet bubble burst in 2000, the market eroded further following the 9/11 attack. Since then it powered up for the a huge bull market for next five years, this time fueled by the housing market and low interest rates. If things look too good to be true, they probably are, and we've...more

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Sep 05, 2007 Jason rated it 4 of 5 stars · review of another edition

9/4/07

I learned that we're all going to lose our savings in a massive crash and we're doomed.

Doomed.

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Aug 07, 2009 Joshua Parkinson rated it 3 of 5 stars

Just finished this today, August 7, 2009: a moment when irrational exuberance seems to have crept back into world stock markets-- 30 straight days of gains?? The book is a must read for any investor (or person, for that matter) interested in the irrational behavior of groups and individuals. Shiller details the circumstances of various bubble/bust cycles throughout modern history, from the Dutch tulip bubble onward.

And it must be said: the man wrote this book at the height of the 2000 internet...more

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Oct 08, 2012 Sabrine Faragallah rated it 5 of 5 stars · review of another edition

There is no topic Schiller does not address with respect to debunking pop-psychology and critiquing textbook market theory.

It had to be divine providence that one observation Schiller debunks, “There has been no 30 year period over which bonds have outperformed stocks,” came up in conversation among colleagues this past week. The discussion centered around the fact that the U.S. has a superior appreciation rate stocks on average while other countries do not. What I wanted to interject to say, b...more There is no topic Schiller does not address with respect to debunking pop-psychology and critiquing textbook market theory.

It had to be divine providence that one observation Schiller debunks, “There has been no 30 year period over which bonds have outperformed stocks,” came up in conversation among colleagues this past week. The discussion centered around the fact that the U.S. has a superior appreciation rate stocks on average while other countries do not. What I wanted to interject to say, but held back at the sake of seeming to be a defiant contrarian, was that “the future will not necessarily be like the past…companies may have…too many ambitious plans and spent too much on product development and promotion…new technology may diminish the advantage enjoyed by existing companies…these changes could raise…the probability that stocks will underperform in the next thirty years.”

I appreciate that Schiller points out that mis-information from media sources amplify the “new era thinking”. Many get rich fables overlook the fact that there is a risk premium to holding stocks, and lead a reader to believe she has “smart money” if she follows the simple subscription in the book or article, but next guy, he of course has “dumb money.”

What I felt most compelling from Schiller’s discussion on investor exuberance was the emotion of anxiety and the promotion of ownership culture in the US. Anxiety that if investors do not do what their neighbors, co-workers, or supervisors do in terms of the next big thing or seek the American "right" to ownership, they will be left behind and economically disadvantaged. One of my favorite conclusions the following: “The anxiety that one’s labor is turning into a commodity that is traded internationally in impersonal markets can boost the perceived value of both stocks and housing as investments in something whose value may be more enduring. The decline in the sense of stability in the local community, coupled with the increasing dominance of telecommunications brings a rise of a culture dominated by celebrities…[and] glamour.”

What I liked most about this conclusion is how it ties in so well with my recent read, “When Work Disappears.” We have shifted our values towards the glamorous life and we have created a culture dominated by celebrity status, evident by social networking, reality shows, and the like, and seemingly neglected both investing and social policy sense, until of course the next socio-economic disaster occurs, which ties into Shiller’s prescription in his final chapter. I am always left with the same conclusion; the individuals in power to make the decisions are too short sighted to make any meaningful policy change. The best I can personally take away from this book is to observe market trends with skeptical eyes.
(less)

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May 06, 2011 Steve Bradshaw rated it 5 of 5 stars

Shelves: investment

A tremendously unbiased history of the US stock and real estate markets and a must read for anyone investing money (in any asset!)

Shiller delightfully lays out the pitfalls of investing in stocks at times of high PE ratios (a point that hits home given the book's first release date in late 1999) along with the wisdom of investing in times of economic upheaval and in value stocks that offer consistent earnings and dividends. A big take away for me was the impermanence of economic runs, both good...more

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Oct 04, 2008 Todd rated it 4 of 5 stars

Shelves: finance

Read this while fighting off a cold over a two day period.

The first edition of this book was published in 2000 and concerned the stock boom of this period. The second edition (which is the one I read) was published in 2005 and contains new material concerning the housing price boom.

After the crazy past few weeks with the economy, this seemed like the perfect book to read to get some insights into what is going on. Indeed after a few enlightening chapters covering stock and housing prices, the ma...more Read this while fighting off a cold over a two day period.

The first edition of this book was published in 2000 and concerned the stock boom of this period. The second edition (which is the one I read) was published in 2005 and contains new material concerning the housing price boom.

After the crazy past few weeks with the economy, this seemed like the perfect book to read to get some insights into what is going on. Indeed after a few enlightening chapters covering stock and housing prices, the main part of the book discusses a whole bunch of factors that might contribute to booms: structural, cultural, and psychological.

Then an attempt is made to make sense of booms in light of efficient market theory, which seems to contradict the very idea of market booms by stating that "smart" money will eventually give things the correct price. I'm not so familiar with economics, so this part was a little over my head.

The last section lays out some further warnings about the market in general and makes some recommendations against people getting so burned by market crashes.

I don't know if I am able to put the events of the past few weeks into better perspective, but I did learn a lot from this book. The section on housing prices was especially illuminating for me because I had always been taught that houses are a great investment. But if you look at the long term growth of housing prices overall, you will see that this is definitely not the case.

Another myth dispelled by this book is that stocks always do better over bonds in a 30 year period. He points out that while this is true since 1900, there have only been 4 independent 30 year periods in this time. In the 30 year period before 1900 bonds did outperform stocks. (In fact if I remember right in The Four Pillars Of Investing, the 20th century was an exception in that stocks outperformed bonds.)

I would definitely recommend this book if you are interested in thinking about a wide range of causes for market bubbles. The writing is a bit dry, so your interest in the topic will have to carry you along.

Don't read this book if you are looking for a general book on investing. There are plenty of books better targeted at that subject. But after you've read a few investing books, this book will go over some of the same theory from an interesting angle.(less)

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Oct 18, 2009 Amanda rated it 2 of 5 stars

I finished the book impatiently. This book gave a lot of details of the historical details of stock market, current stock market bubbles and people's optimistism towards the current stock performance. It is nothing new to me.
The main point of this book is stock market is random walk, people should be more cautious about stocks and irrational Exuberance is the cause of bubbles in stock market or housing market.
I am very aware of this.
I am more interested to learn some new theories about how to...more

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Dec 06, 2010 Nicolas Pujol rated it 5 of 5 stars

The polite version of the "sucker problem" in financial markets: why we are drawn to companies that have performed retrospectively and are often times over valued. Financial bubbles are generally easy to spot, almost obvious, yet they keep happening over and over. Shiller explains the phenomenon. Highly recommended on the topic of (over) valuation.

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Mar 29, 2011 Christie rated it 4 of 5 stars

This is definitely not a light read, as it took me a couple of months to get through it. Shiller's style is very academic, with a fair amount of data/data analysis. He is also, in a word, brilliant. He provides many convincing arguments against efficient markets, predicting the .com bubble just months before it happened. Of course it is even more applicable today after the recent real estate bubble burst. My only other complaint was the recommendations he made. After providing strong evidence pr...more

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Feb 16, 2013 Glenn Van rated it 4 of 5 stars

Robert Shiller is such an amazing analytically mind and a very unpretentious personality. The book is not the number crunching approach of the Case Shiller Index, but a spot on identification of the booms we have suffered, yes, Suffered in the past 2 decades. Great information for anybody, not just figureheads.

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Oct 31, 2011 Kirsten rated it 4 of 5 stars

Okay, I believe it's actually the later publication of this book that I own (09?) but I'll give it four stars for it's extreme thoroughness. I haven't gotten all the way through this thing yet, - it's certainly not a light and fluffy book for the train commute but I'm happy to have read it none the less.

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Mar 25, 2010 Jon rated it 5 of 5 stars

Shelves: finance

I honestly found this to be one of the most insightful books I've ever read that relates to the stock market. Schiller wrote this in 2000 right before the dot com "bubble" burst. Through the use of statistical and psychological reasoning he was able to make a good case that the market was acting irrationally (and it was proven so). This book is worth its weight in gold if you have an interest in understanding the market and more specifically market bubbles.

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Jan 12, 2010 Brian Sobolak rated it 4 of 5 stars · review of another edition

Shelves: non-fictiony

Markets are all psychology and very little fundamentals. I loved many of the insights of this book and the conclusions (401ks are kind of sham and it's a terrible idea to put people's future's mostly into the stock market). Eventually, the prose did head off into dry academic instead of something a little more engaging that I think he could have done.

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Mar 23, 2013 Erin rated it 5 of 5 stars

What causes bubbles? Schiller answers this question is a balanced, credible, and honest way, based on multiple examples from major stock market crashes. The analyses are clear and accessible, even for those who do not much about finance. I strongly recommend it!

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Jul 05, 2010 Converse rated it 3 of 5 stars · review of another edition

Shelves: economics

Starting with the conclusion that the stock market rise in the late 1990s was not justified in terms of earnings, Shiller explores what social, psychological, and other grounds led to the rise, & what might be done to ameliorate future bubbles

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Oct 09, 2011 Cliff rated it 3 of 5 stars · review of another edition

Shelves: non-fiction

The first edition of the book, dealing with stock market bubbles, was published shortly before the 'tech wreck' stockmarket crash of 2001 and the second edition, which expanded on the first by examining property bubbles, shortly before the global financial crisis.

The book is mainly concerned with the psychology that causes people to commit their savings to stocks or property, in the absence of evidence that they can make a satisfactory return on their investment. As such it is of limited value t...more

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Apr 22, 2013 Philski rated it 3 of 5 stars

Not as good as I was hoping. There was plenty of evidence but I felt it was disjointedly presented and not brought together as a cogent argument of why we have (and in some ways continue to) experience irrational exuberances in the stock and real estate markets... it was more like throwing things on a wall hoping something sticks. That being said he's right, regardless of the reason why.

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Jul 22, 2011 Sam rated it 4 of 5 stars · review of another edition

This book, published in 2000, suffers some from it's success -- after a decade of Shiller's predicted negative stock market returns & the rise of behavioral finance, a lot of this book's once-fresh ideas are now common.

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Mar 03, 2011 John rated it 4 of 5 stars

A little dry, but exhaustive in detail. Changed the way I look at the stock market and economic news. I only wish I had an updated version; this one predates the 2002 bubble burst.

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Apr 23, 2013 Matt rated it 2 of 5 stars

I'm not sure there's a whole lot to learn from this book other than that if you always have a negative outlook on the markets, you're going to be right sometimes.

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May 03, 2009 Julia rated it 3 of 5 stars

Shelves: econ

One of the people who has the right to say "I told you so" about the current economic crisis. It's not clear if the intended audience of this book is wonks or laypeople.

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Jan 18, 2012 Giorgos rated it 4 of 5 stars · review of another edition

Reference book on stock market behavior, bubbles etc. Very insightful and written in relatively easy language

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Nov 09, 2012 Devin Partlow rated it 2 of 5 stars

I don't know if the author took any stance in particular, except that there are many stances one could take

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Apr 05, 2009 Norbert rated it 5 of 5 stars

Shelves: business-and-economics

The updated version contains plenty of insightful data on the recent real estate bubble. Highly recommended!

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Dec 09, 2012 Justin rated it 5 of 5 stars

Shiller is rock star/sex pot economist! Man crush! A veritable Chuck Norris of economic thought.

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Aug 29, 2012 Donna Scott rated it 4 of 5 stars

Shelves: non-fiction

Riveting book which took my knowledge of economics to the limit. A bit heavy, but worth it.

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Aug 25, 2012 Sébastien rated it 5 of 5 stars

Excellent book. The words "irrational exuberance" defines culture of the past 2 decades.

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About Robert J. Shiller

Robert James "Bob" Shiller (born Detroit, Michigan,March 29, 1946) is an American economist, academic, and best-selling author. He currently serves as the Arthur M. Okun Professor of Economics at Yale University and is a Fellow at the Yale International Center for Finance, Yale School of Management. Shiller has been a research associate of the National Bureau of Economic Research (NBER) since 1980...more

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