Irrational Exuberance FROM OUR EDITORS
Taking his title from Alan Greenspan's 1996 cautionary phrase, Shiller demonstrates that the uniqueness of investors today make traditional economic interpretations obsolete. With the urgency of this morning's headlines, he warns that the herd behavior that triggered the market's recent roller-coaster dips and rises will continue to distort its mechanisms, and he advises reader-investors about actions that they can take or should avoid.
ANNOTATION
Irrational Exuberance is a must-read for pension-plan sponsors and endowment managers in the United States and abroad. It will also be studied by investment advisers, policy makers, and anyone from Wall Street to Main Street who doesn't want to be caught sitting on the speculative bubble if (or when) it bursts.
FROM THE PUBLISHER
"In this update of his 2000 bestseller, Irrational Exuberance, Robert Shiller returns to the topic that gained him international fame: market volatility. Shiller breaks new ground in this second edition by laying out in even clearer and starker terms the market excess that continue to destabilize the economy and disrupt our lives." "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 is inherently unstable - subject to the profoundly human influences captured in Alan Greenspan's now-famous phrase, "irrational exuberance."" The ultimate solution to this troubling condition, he maintains, would involve better-designed public institutions such as a revamped social security system, new forms of insurance to protect people's incomes and homes, and a broader array of investment options.
SYNOPSIS
Shiller credits an unprecedented confluence of events with driving stocks to uncharted heights. He analyzes the structural and psychological factors that explain why the Dow Jones Industrial Average tripled between 1994 and 1999, a level of growth not reflected in any other sector of the economy. In contrast to many analysts, Shiller stresses circumstances that alter investors' perceptions of the market. These include the entry of the Internet into American homes, the misimpression that the aging of the baby-boom generation builds long-term protection into the market, and herd behavior, such as day-trading. He also examines cultural factors, including sports-style media coverage of the Dow's ups and downs and "new era" thinking about the economy. He considersﾽand challengesﾽefforts to rationalize exuberance that are based on either efficient-markets theory, narrowly construed, or the claim that investors have only recently learned the true value of the market.
In the most controversial portion of the book, Shiller cautions that a market that is overvalued by historical standards is inherently precarious. Among his prescriptions is an urgent plea to immediately end what he argues are perilous schemes to privatize social security in favor of plans to reformit. He also argues that private pension plans that encourage many people to put their entire retirement funds in the stock market should be modified. And he calls on our savings and investment institutions to take more sensible account of emerging risk-management principles. Shiller's analysis is convincingly documented, andﾽregardless of the market's future behaviorﾽhis book will stand as an important elaboration of why stocks soared and what our investment alternatives are.
FROM THE CRITICS
Burton G. Malkiel - Wall Street Journal
Irrational Exuberance presents a message investors would be wise to heed: Make sure your portfolio is adequately diversified. Save more and don't count on the double-digit gains of the past decades continuing to bail you out during retirement. Mr. Shiller's book offers a dose of realism and is a great read.
David Warsh - Boston Globe
Thus it is an event of some significance that Shiller has written a crystal-clear and tough-minded critique of the factors that have driven US stock markets to their current levels and called his book Irrational Exuberance. In it, he argues that Federal Reserve chairman Alan Greenspan had it exactly right when he uttered the famous phrase in a speech in 1996. The current high levels of the market don't represent a consensus judgment by a cadre of sober experts, says Shiller. Instead, today's market is sky high because of wishful thinking by millions of people, egged on by professionals in and around Wall Street whose incentives all run in the direction of the more the merrier.
John Cassidy - New Yorker
During the past decade, he has emerged as a leader in the new field of "behavioral finance" which seeks to apply lessons learned from other academic disciplines, particularly psychology to economics. Irrational Exuberance is not just a prophecy of doom. Encompassing history, sociology, and biology, as well as psychology and economics, it is a serious attempt to explain how speculative bubbles come about and how they sustain themselves.
Robert J. Samuelson - Washington Post
Alan Greenspan faces long odds in trying to nudge the stock market to where he'd like it to go. The chairman of the Federal Reserve has argued that the buoyant market -- by making Americans feel so much wealthier -- has triggered a consumer spending spree that threatens inflationary wage pressures....The idea is to dampen spending and the ravenous appetite for stocks. Anyone who thinks this will be easy should read Irrational Exuberance, a new book by Yale University economist Robert J. Shiller. Beyond arguing that the present market is a "speculative bubble," 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."
Diane Coyle - Independent (London)
As the share prices of dot.coms and high-tech companies fall to earth, you have to wonder whether the bubble is finally bursting. Yet many people still find it hard to shake the gut feeling that nothing should be allowed to spoil the party, even though the rational mind insists stock markets have been wildly overvalued. Robert Shiller, a highly respected professor of economics at Yale University in the US, offers in this timely book some food for the intellect to chew on. He points out that if the general level of share prices were to fall back to their mid-1990s level - a drop in the S&P 500 from about 1,400 to about 500 - the inflation-adjusted losses would be comparable to the destruction of all the farms, or all the homes in America.Read all 10 "From The Critics" >
WHAT PEOPLE ARE SAYING
Michael Brennan, Anderson School of Management, University of California, Los Angeles
This is an excellent book by a distinguished scholar. It raises an issue of
the utmost importance for the U.S. economy and presents a persuasive case
that the U.S. stock market may be significantly overvalued. It is well
written for a popular as well as a professional readership
— Michael Brennan
While Irrational Exuberance may overstate the extent of "overpricing"
and predictability in the market, it presents a message investors would be wise to heed: Make
sure your portfolio is adequately diversified. Save more and don't count on the
double-digit gains of the past decades continuing to bail you out during retirement. Mr. Shiller's
book offers a dose of realism -- particularly if you have been reading books like "Dow 36,000,"
"Dow 40,000" and "Dow 100,000" -- that serious investors will ignore at their peril." — Burton G. Malkiel, author of Random Walk Down Wall Street, in a review for the Wall Street Journal, April 4, 2000
This is an excellent book by a distinguished scholar. It raises an issue of the utmost importance for the U.S. economy and presents a persuasive case that the U.S. stock market may be significantly overvalued. It is well written for a popular as well as a professional readership.
— Princeton University Press
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