Irrational Exuberance [Hardcover]

Robert J. Shiller (Author)

Book Description

Publication Date: March 15, 2000

In this bold and potentially urgent volume, Robert J. Shiller, a respected expert on market volatility, offers an unconventional interpretation of recent U.S. stock market highs and shows that Alan Greenspan's term "irrational exuberance" is a good description of the mood behind the market. He warns that poorer performance may be in the offing and tells us how we--as a country and individually--can respond.

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 considers--and challenges--efforts 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 reform it. 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, and--regardless of the market's future behavior--his book will stand as an important elaboration of why stocks soared and what our investment alternatives are.

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.

Editorial Reviews

Amazon.com Review

CNBC, day trading, the Motley Fool, Silicon Investor--not since the 1920s has there been such an intense fascination with the U.S. stock market. For an increasing number of Americans, logging on to Yahoo! Finance is a habit more precious than that morning cup of joe (as thousands of SBUX and YHOO shareholders know too well). Yet while the market continues to go higher, many of us can't get Alan Greenspan's famous line out of our heads. In Irrational Exuberance, Yale economics professor Robert J. Shiller examines this public fascination with stocks and sees a combination of factors that have driven stocks higher, including the rise of the Internet, 401(k) plans, increased coverage by the popular media of financial news, overly optimistic cheerleading by analysts and other pundits, the decline of inflation, and the rise of the mutual fund industry. He writes: "Perceived long-term risk is down.... Emotions and heightened attention to the market create a desire to get into the game. Such is irrational exuberance today in the United States."

By history's yardstick, Shiller believes this market is grossly overvalued, and the factors that have conspired to create and amplify this event--the baby-boom effect, the public infatuation with the Internet, and media interest--will most certainly abate. He fears that too many individuals and institutions have come to view stocks as their only investment vehicle, and that investors should consider looking beyond stocks as a way to diversify and hedge against the inevitable downturn. This is a serious and well-researched book that should read like a Stephen King novel to anyone who has staked his or her future on the market's continued success. --Harry C. Edwards

From Library Journal

Taking his book's title and thesis from Alan Greenspan's 1996 description of investors, Shiller (economics, Yale Univ.) studies the current booming U.S. stock market in historical terms. His research into past U.S. and international markets indicates that during every speculative bubble there was always widespread consensus that high valuations were justified by each market's special circumstances. Every large market correction seemed to result from popular consensus rather than specific events or news. Shiller says that past bull and bear markets, though often based initially on sound fundamental reasoning, fed upon themselves to go beyond what the facts justified. He challenges the efficient market theory, demonstrating that markets cannot be explained historically by the movement of company earnings or dividends. He concludes that the current U.S. stock market is a speculative bubble awaiting correction. While the book certainly belongs in all academic business collections, public libraries should also purchase it as a counterweight to the plethora of get-rich-quick investment guides.
-Lawrence R. Maxted, Gannon Univ., Erie, PA
Copyright 2000 Reed Business Information, Inc.

See all Editorial Reviews

Product Details

• Hardcover: 312 pages
• Publisher: Princeton University Press (March 15, 2000)
• Language: English
• ISBN-10: 0691050627
• ISBN-13: 978-0691050621
• Product Dimensions: 1 x 6 x 9 inches
• Shipping Weight: 1.3 pounds
• Average Customer Review: 3.9 out of 5 stars  See all reviews (60 customer reviews)
• Amazon Best Sellers Rank: #761,862 in Books (See Top 100 in Books)

Most Helpful Customer Reviews

410 of 431 people found the following review helpful

5.0 out of 5 stars An Act of Courage March 22, 2000

By Arnold Kling

Format: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.

68 of 70 people found the following review helpful

4.0 out of 5 stars Irrational Exuberance March 30, 2000

By Harvey S. Karten

Format:Hardcover|Amazon Verified Purchase

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 [e-mail]

41 of 45 people found the following review helpful

5.0 out of 5 stars Rational Expectations April 5, 2000

By James R. Sanders

Format: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