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Irrational Exuberance

Irrational Exuberance

Robert J. Shiller
Copyright Date: 2015
Edition: STU - Student edition, 3
Pages: 392
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  • Book Info
    Irrational Exuberance
    Book Description:

    In this revised, updated, and expanded edition of hisNew York Timesbestseller, Nobel Prize-winning economist Robert Shiller, who warned of both the tech and housing bubbles, now cautions that signs of irrational exuberance among investors have only increased since the 2008-9 financial crisis. With high stock and bond prices in the United States, and rising housing prices in many countries, the post-subprime boom may well turn out to be another illustration of Shiller's influential argument that psychologically driven volatility is an inherent characteristic of all asset markets. In other words,Irrational Exuberanceis as relevant as ever.

    ButIrrational Exuberanceis about something far more important than the current situation in any given market because the book explains the forces that move all markets up and down. It shows how investor euphoria can drive asset prices up to dizzying and unsustainable heights, and how, at other times, investor discouragement can push prices down to very low levels.

    Previous editions covered the stock and housing markets-and famously predicted their crashes. This new edition expands its coverage to include the bond market, so that the book now addresses all of the major investment markets. This edition also includes updated data throughout, as well as Shiller's 2013 Nobel Prize lecture, which puts the book in broader context.

    In addition to diagnosing the causes of asset bubbles,Irrational Exuberancerecommends urgent policy changes to lessen their likelihood and severity-and suggests ways that individuals can decrease their risk before the next bubble bursts. No one whose future depends on a retirement account, a house, or other investments can afford not to read it.

    For more information, including new developments and regular data updates, please go to

    eISBN: 978-1-4008-6553-6
    Subjects: Economics, Finance

Table of Contents

  1. Preface to the Third Edition
    (pp. xi-xviii)
  2. Preface to the Second Edition, 2005
    (pp. xix-xxiv)
  3. Preface to the First Edition, 2000
    (pp. xxv-xxx)
  4. One The Stock Market in Historical Perspective
    (pp. 1-10)

    When Alan Greenspan, then Chair of the Federal Reserve Board, used the termirrational exuberanceto describe the behavior of stock market investors, the world fixated on those words.¹ He spoke at a black-tie dinner in Washington, D.C., on December 5, 1996, and the televised speech was followed the world over. As soon as he uttered these words, stock markets dropped precipitously. In Japan, the Nikkei index dropped 3.2%; in Hong Kong, the Hang Seng dropped 2.9%; and in Germany, the DAX dropped 4%. In London, the FTSE 100 was down 4% at one point during the day, and in...

  5. Two The Bond Market in Historical Perspective
    (pp. 11-17)

    The path of interest rates through time has been a matter of intense public concern, for interest rates are viewed as central to everything in the economy. Interest rates are viewed as something abstract and fundamental, the price of time itself. And yet they show fluctuations through time that reveal a speculative and human component, not entirely unlike that of the stock market, discussed in the previous chapter.

    There are both short-term interest rates, rates on loans or bills for a year or less, and long-term interest rates, rates on bonds, mortgages, or loans extending over decades. Prices of long-term...

  6. Three The Real Estate Market in Historical Perspective
    (pp. 18-36)

    The same forces of human psychology that have driven the stock market and the bond market over the years have the potential to affect other markets. The market for real estate, particularly individual homes, would seem likely to display speculative booms from time to time, since the psychological salience of the price of the places we see every day and the homes we live in must be strong, and because home prices are such a popular topic of conversation. Yet the market for real estate is different from the stock and bond markets in important ways.

    Home prices increased sharply...

  7. Part One Structural Factors

    • Four Precipitating Factors: The Internet, the Capitalist Explosion, and Other Events
      (pp. 39-69)

      What ultimately caused the values of the stock markets in so many countries to rise dramatically from 1982 to the remarkable peak around 2000? Why, after two major corrections, are the values of these markets returning again at the time of this writing to those elevated levels? What accounts for the long downtrend in real long-term interest rates in many countries over the past couple of decades? What ultimately caused the boom in real estate markets in so many cities around the world to follow the stock market boom? To answer these questions, and questions like them that will surely...

    • Five Amplification Mechanisms: Naturally Occurring Ponzi Processes
      (pp. 70-98)

      In the previous chapter, we examined a number of precipitating factors that have helped drive the stock market and the market for homes. In this chapter, we consider how the effect of these factors is amplified by mechanisms involving investor confidence, investor expectations for future market performance, and related influences on investor demand. To provide context and concreteness, we shall first examine evidence about investor confidence and expectations.

      The amplification mechanisms work through a sort of feedback loop; later in this chapter, they will also be described as a type of naturally occurring Ponzi process. Investors, their confidence and expectations...

  8. Part Two Cultural Factors

    • Six The News Media
      (pp. 101-122)

      The history of speculative bubbles begins roughly with the advent of newspapers.¹ One can assume that, although the record of these early newspapers is mostly lost, they, or their pamphlet analogues, reported on the first bubble of any consequence: the Dutch tulip mania of the 1630s.²

      Although the news media—newspapers, magazines, and broadcast media, along with their new outlets on the Internet—present themselves as detached observers of market events, they are themselves an integral part of these events. Significant market events generally occur only if there is similar thinking among large groups of people, and the news media...

    • Seven New Era Economic Thinking
      (pp. 123-149)

      Speculative market expansions have often been associated with popular perceptions that the future is brighter or less uncertain than it was in the past. The termnew erahas periodically been used to describe these times.

      Of course, there is some obvious validity to the new era notion. The general trend over the past century was a rise in the standard of living and a decline in the impact of economic risks on individuals. By many measures the world has indeed been gradually growing into a new and better era. But the most salient characteristic of popular new era thinking...

    • Eight New Eras and Bubbles around the World
      (pp. 150-162)

      Large stock market moves like the U.S. examples I discussed in the previous chapter have also occurred in many other countries over the years, affording us numerous other observations. These suggest that speculative bubbles—periods of exaggerated but temporary investor enthusiasm, often associated with “new era” theories—are in fact commonplace.

      In this chapter, I examine the largest stock market moves around the world that preceded the peak of the Millennium Bubble in 2000. For some of these, I rely on accounts by the news media. Of course, media accounts are not always reliable, and I cannot claim to have...

  9. Part Three Psychological Factors

    • Nine Psychological Anchors for the Market
      (pp. 165-174)

      We have seen that the market is not well anchored by fundamentals. People do not even know to any degree of accuracy what the “right” level of the market is: not many of them spend much time thinking about what its level should be or whether it is over- or underpriced today. So what is it that ties down the market’s level on any given day? What anchors the market? What is it that determines whether the Dow is at 4,000 or 14,000? What ultimately limits the feedback from price changes to further price changes that amplifies speculative price movements?...

    • Ten Herd Behavior and Epidemics
      (pp. 175-192)

      A fundamental observation about human society is that people who communicate regularly with one another think similarly. There is at any place and in any time a zeitgeist, a spirit of the times. It is important to understand the origins of this similar thinking, so that we can judge the plausibility of theories of speculative fluctuations that ascribe price changes to faulty thinking. If the millions of people who invest were all truly independent of one another, any faulty thinking would tend to average out, and such thinking would have no effect on prices. But if less-than-mechanistic or irrational thinking...

  10. Part Four Attempts to Rationalize Exuberance

    • Eleven Efficient Markets, Random Walks, and Bubbles
      (pp. 195-213)

      The theory that financial markets are efficient forms the leading intellectual basis for arguments against the idea that markets are vulnerable to excessive exuberance or bubbles. Extensive academic research has been widely seen as supporting this theory.

      Theefficient markets theoryasserts that all financial prices accurately reflect all public information at all times. In other words, financial assets are always priced correctly, given what is publicly known, at all times. Price mayappearto be too high or too low at times, but, according to the efficient markets theory, this appearance must be an illusion.

      Stock prices, by this...

    • Twelve Investor Learning—and Unlearning
      (pp. 214-222)

      At times of apparent speculative overpricing, such as the time of this writing, a rationalization for the exuberance in the stock market, as well as other speculative markets, is that the public at large has learned that the long-term value of the market is really greater than they had thought it was and is greater than conventional indicators would have suggested it should be. According to this rationalization, the price-earnings ratio in the stock market is higher today than the historical average because the public has now learned some simple facts, facts about historical returns and diversification or about the...

  11. Part Five A Call to Action

    • Thirteen Speculative Volatility in a Free Society
      (pp. 225-238)

      The high valuations that the U.S. and other stock markets attained at the peak in 2000, the relatively high valuations that it showed again in 2007 and once more in 2014, came about for no good reasons. The high valuations that the prices of homes attained in many markets by the opening years of the twenty-first century, peaking around 2006, and then again in many countries after the financial crisis, came about for no better reasons.

      The high stock market levels did not, as so many imagine, represent the consensus judgment of experts who have carefully weighed the long-term evidence....

  12. Appendix Nobel Prize Lecture: Speculative Asset Prices
    (pp. 239-280)