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441 of 462 people found the following review helpful
5.0 out of 5 stars An Act of Courage
Robert Shiller argues that the stock market has experienced a bubble. He makes his case on the basis of a sober statistical judgement. However, in layman's terms, what he says boils down to, "If it walks like a duck, it is a duck." Demonstrating the absurdity of today's stock prices does not require clever statistical modeling.
This begs the question...
Published on March 22, 2000 by Arnold Kling

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179 of 222 people found the following review helpful
3.0 out of 5 stars Speculating on a Bubble
Speculating on a Bubble
Taking his cue from Federal Reserve Chairman Alan Greenspan, Yale economics professor Robert Shiller delivers a dirge for the longest-running bull market in American history. Irrational Exuberance tells the reader why today's market is overvalued, how it got that way, and what policymakers should do about it. Along the way, he takes some...
Published on March 25, 2000 by Bruce I Jacobs


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441 of 462 people found the following review helpful
5.0 out of 5 stars An Act of Courage, March 22, 2000
By 
Arnold Kling (Silver Spring, Md USA) - See all my reviews
(REAL NAME)   
This review is from: Irrational Exuberance (Hardcover)
Robert Shiller argues that the stock market has experienced a bubble. He makes his case on the basis of a sober statistical judgement. However, in layman's terms, what he says boils down to, "If it walks like a duck, it is a duck." Demonstrating the absurdity of today's stock prices does not require clever statistical modeling.
This begs the question of why a bubble emerged in the late 1990's. Shiller discusses several cultural factors such as the ever-higher profile of the stock market in the media, including the Internet.
This begs the question of how it is possible for so many people wrongly to be optimistic about stocks. Shiller cites many findings in psychology, such as Asch Conformity, to explain how people can listen to others against their own best judgement.
This begs the question of whether it could be Shiller who is irrational. Shiller examines and refutes the arguments that pundits have made to rationalize exuberance.
There are three audiences for this book, all of whom will find it threatening.
1. Ordinary investors. You will not want to read this book, because it asks you to confront an issue that you would be more comfortable avoiding. However, once you do dive into it, you will be rewarded with sober facts and analysis that you can use to resist the siren calls of pundits, brokers, and friends to buy into the bubble.
I can assure you that Robert Shiller did not write this book to make his own fortune. The book jacket says nothing like "five strategies to survive the bubble," although he does mention some conservative investment alternatives. There certainly is no endorsement from Suze Orman or any of the other best-selling gurus that he swiftly skewers. This is just an honest book from a scholar with the highest integrity: an act of courage.
2. Economists. I can see a lot of squirming, particularly as Shiller discusses psychological studies that undermine the cherished rationality assumptions of our profession. Shiller is generous with those who disagree with him. He won't say it, but I will.
Shame on us.
Those of us who know better have been too silent. Paul Krugman wastes his bully pulpit in the New York Times discussing IMF esoterica, and only when Shiller's book came out did he mention the bubble.
Then there are those of us who don't know better. The hundreds of finance professor hacks whose tenure rests on mindless justifications and interpretations of irrational stock price movements. ("Events of type X create, on average, $Y of value." Oh, please.)
3. Policy analysts
This book certainly will not appeal to those who think that the biggest problem we are going to face in the next ten years is what to do with budget surpluses. Shiller correctly points out that the social security debate needs to be conducted, at a fundamental level, about what exactly we are promising ourselves. The trade-off between compassion and freedom must be faced. I wish he had illustrated this with a spectrum of alternatives--libertarian, socialist, and in between. This might have helped flesh out an otherwise terse discussion.
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68 of 70 people found the following review helpful
5.0 out of 5 stars Rational Analysis, October 9, 2006
This review is from: Irrational Exuberance (Hardcover)
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.
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77 of 80 people found the following review helpful
4.0 out of 5 stars Irrational Exuberance, March 30, 2000
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This review is from: Irrational Exuberance (Hardcover)
Robert J. Shiller's "Irrational Exuberance" is about the most bearish book you could ever read about the stock market. Filled with charts and graphs and footnotes of every description, the book--whose title comes from a quote by Alan Greenspan--attacks Wall Street ideas that have become so accepted that they are household sayings. The principal such idea is that securities have always been the best investments over the long run--beating out bonds, foreign currencies, rare stamps, gold and the like. Shiller points out quite a few examples of how market prices, principally the Dow, have remained pretty flat over some periods of 10, 20, 30 years when corrected for inflation. In some circumstances, you might have done better if you put your spare cash in the bank.
Of course the market has been a great place to stash your cash if you got in at the right time--in 1982, for example, at the very start of the longest-running bull market in history. But put your money there now at your own risk. Seventy-two percent of mutual fund managers believe that we're in a speculative bubble now, with the Dow, at 11,000, reaching for figures that far exceed the historic level which would put the rational figure at 6,000. Shiller would not be surprised if the Dow settled in at, say, 10,000--in the year 2020! And what's more, he'd not be astonished if the Dow sank to 6,000 in the near future.
I was convinced after reading Shiller. He has marshalled his facts in a carefully researched screed against following the sheep-like crowds and I have replaced the tens of millions I had invested in common stocks with far more secure, if less exciting, instruments.
Harvey S. Karten film_critic@compuserve.com
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29 of 29 people found the following review helpful
5.0 out of 5 stars Schiller's prophetic book offers practical investment implications, August 22, 2006
This review is from: Irrational Exuberance (Hardcover)
About Robert J. Schiller's book, Irrational Exuberance (2000; 2nd ed., 2005), it's hard to say enough good things. First Schiller, who is Stanley B. Resor Professor of Economics at Yale University, had uncanny timing. His warning on the excesses of the technology bubble stock market came out at its very peak, in mid-March of 2000. He wrote in an afterward to the paperback edition (2001) that as he made publicity visits to bookstores in April of 2000, a large carnage had already occurred in the market, particularly for tech stocks and e-business names. Second, he writes in a transparent style. Third, he and his team, instead of tossing out opinions about what they think investors do, carry out frequent sample surveys of both individual and institutional investors. Fourth, he undergirds his hypothesis with numerous insights from economics, psychology, game theory and history. Finally, he gives many cross-references to booms and busts around the globe.

The second edition points to over-valuations in the U.S. real estate market that Schiller believes were comparable to the excesses of the dot-com era in stocks. This prediction may prove to be accurate as well, but the unraveling so far has not proceeded in so dramatic a fashion as did the technology crash.

From what valuation method does Schiller proceed his analysis of stocks? Fundamentally, he bases it on price-earnings ratios. (Price-earnings ratios have been shown to be a crucial characteristic in predicting long term stock portfolio performance; see James P. O'Shaughnessy, What Works on Wall Street [1998, rev.]). More precisely, he uses as his numerator the real (inflation-adjusted) S&P (Standard & Poor's) Composite Stock Price Index. For the denominator, he uses the moving average of the past ten years of real S&P Composite Earnings. Advantages of these data series: the source is considered reliable; they go back to 1841 continuously; they are inflation-adjusted.

Using the price-earnings data and ratio as defined above, a first great cyclical high can be seen in June 1901: a P/E ratio of 24.5 times. Subsequently, P/E declined, and stocks performed in a desultory fashion, until June of 1920. The second great peak, occurring at the end of the Roaring Twenties, was 32.6 times--reached during September of 1929. The Great Crash followed. A third peak occurred during the so-called "go-go" era of the 1960s: 24.1 times in January of 1966. This too came a cropper, followed by years of stock market underperformance--bottoming out in terms of P/E ratio in the early 1980s. The US stock market P/E ratio at the height of the technology boom in 2000 reached an unprecedented 44.3 by January of 2000. Then, boom-boom, out went the lights!

Schiller explores from many perspectives just how markets sometimes reach such giddy highs. One "amplification mechanism" is likened to a naturally occurring Ponzi process. Charles Ponzi attracted 30,000 investors and $15,000,000 within seven months during 1920. Ponzi promoted his scheme by cashing out some early investors, which excited many followers. Ponzi schemes always involve an attempt to pyramid investor inputs while wasting or defrauding much of the principal outside of the touted investment theme. Schiller points out that rapidly rising stock markets can bring in an unintended Ponzi dimension, as late-comers seek to replicate earlier investors' apparent success.

Such feedback loops lead to circles of investor behavior, which can promote the expansion of a bubble, but also can lead to its rapid deflation. Schiller also shows how news media attention to feedback loops can intensify their force and expand the volume of participation by investors. Often, behind investment fads, there are popular ideas about "new eras" that supposedly render irrelevant any historical comparisons. Feedback loops are facilitated by the demonstrated over-confidence of many individuals in their judgments as well as by evolved patterns of mass behavior.

Generally, markets threaten to become untethered whenever investors' principal focus is on price performance rather than fundamental value criteria. In such an atmosphere, it can be imagined that trees truly can grow to the sky. Or at least that there will be a "greater fool" who will take you out of your investment in a timely fashion.

Schiller does not purport to offer a rule of thumb for market trading practice. Indeed, any scheme that could be used continuously and in static form to operate a successful trading system (a putative "money machine") would surely be arbitraged away by perceptive traders. Instead, he lays out a more intuitive case for how to avoid investing in major market excesses when they occasionally occur. His proposed solutions included a salutary emphasis on hedging activities. Some of the hedges he lays out are novel but may not be practical to implement, owing to the problem of illiquidity (lack of ability to trade).

(The author of this review, Andrew Szabo, is founder of MindBodyForce.com)
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42 of 46 people found the following review helpful
5.0 out of 5 stars Rational Expectations, April 5, 2000
By 
This review is from: Irrational Exuberance (Hardcover)
'Irrational Exuberance' will no doubt consolidate Robert Shiller's position within his chosen field, but the book is also of considerable value to the intelligent lay person. Other writers have drawn attention to the market's overpriced level. Other writers have also done the numbers and concluded that stock returns are not likely to out pace bond returns, for example, over the next decade. But no other writer provides such a detailed and convincing analysis of the factors that have stoked our mania for stocks and brought us to the top of a speculative bubble. Shiller's account of what academics such as Prof. Irving Fisher thought of stock market valuations in the 1920s is a useful reminder that even the experts can get it wrong. More importantly, his analysis of past decades suggests a cyclical movement in the all too human desire to believe in a new economic age. Among the truths which Americans evidently have not learned is that new economic eras do not result in permanent stock market booms. That technology enables more efficient production which in turn helps keep inflation low has been acknowledged publicly by Alan Greenspan. But the market's reaction extends way beyond what this fundamental change might warrant, for all of the reasons Shiller cites.
While Prof. Shiller's analysis is highly credible, his suggestions for the individual investor are, in places, difficult to understand. Indeed his discussion of diversification may only be deciphered by his fellow economists. Lay men and women can hardly be expected to know what "...taking short term positions in claims on income aggregates," means. Nor can they regard his advice to invest in markets that do not yet exist as practical guidance. These, however, are minor quibbles. Unlike many market commentators these days, Shiller's underlying social conscience puts him on the side of the little guy. Yet even so, this books is aimed primarily at policymakers who have the power to influence public behavior for the good. The prospect of thousands of retirees living on the margins because they invested too much of their 401(k) money in the stock market is surely one which will compel their attention.
Jim Sanders Annandale, Virginia
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18 of 18 people found the following review helpful
5.0 out of 5 stars A Profoundly Important Book�More Topical Then Its 1st Day!, January 22, 2001
By 
"ronlv" (Las Vegas, NV USA) - See all my reviews
This review is from: Irrational Exuberance (Hardcover)
The bearer of bad news in society, in a company, in a group is most of the time treated badly. This rule of human nature shows up in many of the previous reviews of this book. Given the decline in the equity markets since the publication of this book, the reason I am reading this book again is to consider whether the market correction is sufficient. The book originally contributed to my courage to be conservative on the market and hence was one of the most valuable books I have ever read.
On December 5, 1996 Chairman Alan Greenspan used the phrase "Irrational Exuberance" when speaking of his deep concern about the high level of stock prices -- not as a forecast but as a long term threat to economic soundness. Why Greenspan weakened in resolve, is barely addressed in this book. The question of why Greenspan started his Federal Reserve board tenure speaking gravely of the need for no inflation (meaning zero inflation not 2-3% inflation) and then weakened and accommodated 2-3% inflation for the next ten years is not even addressed in this book. The book even fails to address the impact on stock price levels of ten years of excessive monetary growth. The book clearly speaks to the public policy issue that there has to be a reckoning for the excessive stock price levels.
Having made my living in the stock market investment business for more than forty years, the book for me reads easily. I believe the average reader can get through the book with very few uses of a dictionary. It is well written for the average reader. It is cleanly organized. It starts out with a powerful statistical case. It follows with a review of nearly every imaginable consideration of the severity of general market volatility. The fourth chapter "The News Media" is written with such courage and clarity. It seems to me so profound-it by its self justifies the purchase of the book. It lays out the true motives of the media. Every citizen, investor or conservative saver should read it.
Several bone headed media people have argued that America's savings rate is seriously understated because stock market ownership is not included in the savings. After reading this book you should be able to vividly see the difference. If not already be thinking seriously as to when does the purchase of stocks become a speculation or out right gambling. Speculation is accepting high risk because it offers a risk reward balance. Gambling in stocks is not understanding this balance. Investing is buying with a basis for believing you have fair value in your favor. The discussion on gambling habits in society and the stock market is superb. The last chapter: A Call to Action "Speculative Volatility in a Free Society" is so pathetic in insight that I suggest that you read it first or forswear never to read it. Otherwise it is such a let down ending to the book as to be seriously irritating.
As the author has already been vindicated in the market place and the book is written in a scholarly manner, I can't think of any reason why an equity investor would not read this book. If you don't it seems that you would be in a state of denial. There are so many new avenues to consider in this book that it is one of those books that an investor will keep the rest of their life and read it several times.
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17 of 17 people found the following review helpful
4.0 out of 5 stars The Most Important Book of The 21st Century, October 16, 2000
By 
"mikey957" (Toronto,Ontario ,Canada) - See all my reviews
This review is from: Irrational Exuberance (Hardcover)
Having read Irrational Exuberance these are a few subtitles that come to mind. The real historical truth about investing for the long term. What Financial Advisors, Fund Managers and Brokers will probably never tell you or talk about. Let reality be your guide when deciding how much and for how long you should invest, and The true nature of the stock market a revealing look at its hundred and twenty nine year history. Let me now share with you some examples of the important information you will find in this book. This book dispels the notion that is currently touted that long term investing, five, ten, fifteen and twenty years will result in an average annual return between ten and twelve percent. If you take the period Sept 1929 and add fifteen years (Sept/1944) your average annual return would have been -0.5%. This same return was obtained if you take the period Jan1966 and add fifteen years (Jan 1981). Now add twenty years to Jan 1966(Jan 1986) and your average annual return would have been 1.9%. A full explanation and more data on historical returns are found in chapter one. How about this for an eye opener (the second highest price earnings ratio of all time 32.6 by June of 1932 the market lost 80.6%). The S&P composite index did not return to its Sept1929 value until Dec1958 (29.25 years). Well, you can rationalize this by saying that was a long time ago but " real prices bounced around near their Jan1966 peak surpassing it somewhat in 1968 but then falling back and real stock prices were down 56% from their Jan 1966 value by Dec 1974". "Real stock prices would not be back up to their Jan 1966 level until May of 1972 (26.33 years)". The cause of stock market bubbles: precipitating factors, cultural factors and psychological factors are explained and discussed in this book's other chapters. If you compare Harry S. Dent's book "The Roaring 2000" copy write 1998 there are no footnotes, none of the facts are referenced regarding source of information, completely the opposite of Robert Shiller's book. All his data is fully referenced and researched. Mr. Shiller also discusses and points out weaknesses in several popularized books over the last few years. Here is an interesting fact in from 1921 to 1929 the market tripled in 9 years " the Dow Jones Index was 3600 in 1994 by 1999 it was 11000, it more than tripled in five years." "Yet basic economic indicators such as US personal income and gross domestic product rose less than 30% but if you factor in inflation the amount is closer to 16%". This book is written objectively, dispassionately and with humility. Mr. Shiller acknowledges his limitations and certain exceptions to the rule. What I would have liked to know is the historical low price earnings ratios of the last hundred and twenty-nine years? What price earnings ratio would be considered fair value for the market? What range of low price earnings ratio would be considered a good buying opportunity? There is a chapter on new era thinking that draws certain parallels between the 1920s, 1950s, 1960s and 1990s, which is fascinating and gives pauses for sober reflection. You will come to realize that the rhetoric from the past is quite similar to the present. Another interesting parallel is found on page 179 between Edwin Land (Polaroid) and Bill Gates (Microsoft). Polaroid's price earnings ratio was 94.8, starting with 1972 over the next twenty-five years Polaroid under performed the market on average 11% per year (if the market returned 21% Polaroid returned 10% per year). There is data regarding long periods when the stock market returns under performed short-term interest rates and bonds as well as evidence showing stock market prices have a life of there own (dividends and earning do not have a direct relationship to stock market prices). The final chapter contains what investors should be doing now and why. I consider this book to be one of the most important books of the 21st century. It profiles the market superbly.
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20 of 21 people found the following review helpful
4.0 out of 5 stars dejavu all over again, May 10, 2000
By A Customer
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This review is from: Irrational Exuberance (Hardcover)
Dr. Shiller has performed a service for those investors who have never endured a bear market and who have forgotten the meaning of risk.He makes a strong and convincing argument for the overvaluation of the stock market, however, he fails to explore in depth the similiarities between the state of the current market and the psychology prior to the crash of 1929. John Templeton once said that the most expensive words in the English language are "this time its different". The internet mania, the day traders, the popularity of CNBC,the massive increase in margin debt, the number of books proclaiming "Dow 36000, Dow 40000 and Dow 100,000, the intense interest in "How to Be a Millionaire", the lionization of Alan Greenspan, the internet millionaires, the bad breadth in the stock market and proclamations of a new era while interest rates are rising should give cause for concern. Dr. Shiller has written an excellent book but it stops short as to historical parallels which support his hypothesis. The problem with theory and practice, is that it is difficult to predict the timing of a crisis from psychological data. Markets continue to flow against the tide of human reason far longer than is anticipated from evidence to the contrary. Like Babson, who predicted the crash of 1929 for many years prior to the actual crash, the markets seem to be responding to Shiller's words of caution. There need not be a crash but a return to normalcy in the marketplace. This is a major contribution to investors.
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14 of 14 people found the following review helpful
5.0 out of 5 stars Right on the money 3 years later., May 28, 2003
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This review is from: Irrational Exuberance (Paperback)
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.
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179 of 222 people found the following review helpful
3.0 out of 5 stars Speculating on a Bubble, March 25, 2000
This review is from: Irrational Exuberance (Hardcover)
Speculating on a Bubble
Taking his cue from Federal Reserve Chairman Alan Greenspan, Yale economics professor Robert Shiller delivers a dirge for the longest-running bull market in American history. Irrational Exuberance tells the reader why today's market is overvalued, how it got that way, and what policymakers should do about it. Along the way, he takes some well-aimed swipes at efficient markets and so-called rational expectations. These latter theories, derived by (and largely confined to) academia, would have us believe that investors always behave rationally and that stock prices always reflect all pertinent information.
Professor Shiller is well known for his research into behavioral finance, including his many surveys seeking to uncover the thought processes of today's investors, both individual and institutional. It is understandable, then, that the bulk of the book, and its strongest part, concerns the ways and means by which human behavior, irrespective of economic fundamentals, leads to stock market bubbles. Peer pressure, herding, emotions such as regret and envy, perceptions shaped by personal contacts and by the media, all contribute to a psychological "positive feedback" loop whereby high stock prices beget still higher stock prices.
My gripe with the book relates to Professor Shiller's downgrading of the role played by mechanical "positive feedback" dynamic hedging strategies which are based on academic, Nobel Prize winning theories on the pricing of derivatives. Shiller states (p. 93) that these strategies are of interest to us "only because it shows us concretely how people's thinking can change in ways that alter the manner in which feedback from stock price changes affects further stock price changes, thereby creating possible price instabilities." My book, Capital Ideas and Market Realities (Blackwell, 1999), finds, after a thorough review of the role of dynamic hedging in the 1987 crash and in the volatility in the 1990s, including the downfall and Federal Reserve brokered rescue of the giant arbitrage hedge fund Long-Term Capital Management, that such trading strategies can be crucial elements in both stock market bubbles and stock market crashes. Rather than being merely symptomatic of a psychological feedback loop, such trading mechanisms create their own positive feedback loops, as well as crystallizing and amplifying some of the psychological factors cited by Professor Shiller.
Others may consider of greater consequence the book's failure to address the "two tier" nature of today's market-the so-called "new economy"/"old economy" schism. This is particularly troubling because much of Professor Shiller's quantitative evidence of over-exuberance in market pricing rests on various measures of corporate dividends-which, of course, are notoriously shunned by most "new economy" companies. As the book's overall argument can be (simplistically) summarized as "the future will eventually repeat the past," I would have liked to see him grapple more explicitly with what appear to be real qualitative differences between past and present.
I liked Professor Shiller's concluding summary of solutions and issues for investors and policy-makers. Some of these, including his thoughts on Social Security and on the need for diversification and diversifying investment vehicles, deserve to be brought to the forefront of public debate. It would also help matters if, as Professor Shiller suggests, the so-called "experts," as well as the media generally, raised the level of public discourse on the stock market and the economy-issues critical to all of us, whether we are investors or not.
Bruce I. Jacobs (cimr@jlem.com), Principal, Jacobs Levy Equity Management, and author of Capital Ideas and Market Realities (Blackwell, 1999).
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