Sequels often disappoint when compared to their predecessors, but author Robert Shiller has proved the exception to the rule with his second edition of
Irrational Exuberance. When the original book released in 2000, Shiller's prescient analysis of bubble-like market behavior provided perspective on the painful meltdown of stock-price valuations that subsequently occurred. Five years later, the Yale professor's bearish predictions about real-estate valuations are enough to give any savvy investor or homebuyer pause.
Shiller is one of several well-known economists and pundits who've begun a running dialogue in the last few years around the drawbacks of unchecked free markets. Few writers, though, dissect the phenomenon of bubble behavior as clearly and thoroughly as Shiller does. As with the first edition of his book, Shiller begins this one with reams of quantitative data around the late 1990s stock-market runup. This new edition adds data on real-estate price trends in the early 2000s, and points out the striking parallels between the earlier stock-market boom and bust, and current trends with housing prices in the United States. Shiller actually believes the two phenomena are related; as investors lost confidence in the stock market and moved their money into real estate, one asset class fell while the other rose. According to Shiller's analysis, the pattern is destined to repeat itself.
Aside from the initial data, the real strength of Irrational Exuberance is the straightforward, almost clinical way in which it explains why things happen as they do. The book walks readers through structural reasons for market bubbles, then ventures into "softer" analyses which professional economists less confident than Shiller would be scared to touch. It examines cultural factors behind market bubbles, such as hype-mongering news media, and psychological factors, such as herd behavior.
Another improvement in this latest edition of Shiller's book is his inclusion of more personal commentary, and he mentions the influence that his wife, herself a clinical psychologist, has had on his intellectual development and his view of psychological impacts on economic behavior. Other personal insights from Shiller center on experiences he had while touring and lecturing around the first book, and some of the most interesting passages are those in which he describes common questions or feedback from his audience, and what he thought in reaction--but didn't voice while on his tour.
In the end, Shiller closes his book with an intriguing set of policy proposals. He argues for a revamping of the U.S. social security system, a new system of house-price insurance for homeowners, and risk reduction through portfolio diversification. Fans of the brainy academic will note with approval that Shiller practices what he preaches: he has begun trying to implement some of his ideas in the real world through two private consulting firms he has founded, Macro Securities Research and Macro Financial. The hope is if Shiller's as correct with this second book as he was with his first, readers will all learn something from these new companies. --Peter Han
From review of Princeton's previous edition: "Robert J. Shiller . . . has done more than any other economist of his generation to document the less rational aspects of financial markets. (Paul Krugman
New York Times)
From review of Princeton's previous edition: "
Irrational Exuberance is not just a prophecy of doom. . . . [I]t is a serious attempt to explain how speculative bubbles come about and how they sustain themselves. (John Cassidy
New Yorker)
From review of Princeton's previous edition: "Informative and well-argued . . . A calm and reasonable antidote to today's euphoria. (Jeff Madrick
New York Review of Books)
From review of Princeton's previous edition: "What set off this speculation and what feeds it? Shiller ranges widely his explanations, laying them out in the first 168 pages in easy-to-read, sometimes passionate prose. . . . [T]hose first 168 pages are must reading for anyone with savings invested in stocks. (Louis Uchitelle
New York Times Book Review)
From review of Princeton's previous edition: "Mr. Shiller's book offers a dose of realism. . . . [I]t presents a message investors would be wise to head: Make sure your portfolio is adequately diversified. Save more and don't count on double-digit gains of the past decades continuing to bail you out during retirement. (Burton G. Malkiel
Wall Street Journal)
From review of Princeton's previous edition: "Although its message may be unwelcome to many, this important book should be read by anyone interested in economics or the stock markets. (
e M. Stulz," Science)
From review of Princeton's previous edition: "Dazzling, richly textured, provocative . . By far the most important book about the stock market since Jeremy J. Siegel's Stocks for the Long Run. (William Wolman
Business Week)
From review of Princeton's previous edition: "Shiller has provided an accessible guide to the usually impenetrable literature on financial markets, especially the American stock market. (
Foreign Affairs)
From review of Princeton's previous edition: "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.' (Robert J. Samuelson
Washington Post)
From review of Princeton's previous edition: "
Irrational Exuberance should be compulsory reading for anybody interested in Wall Street or financially exposed to it; at the moment, that would be roughly everybody in the United States. (
Economist)
From review of Princeton's previous edition: "[An] excellent new book. . . . If you want to preserve capital, unload most of your stocks and invest in government bonds. (Steve H. Hanke
Forbes)
From review of Princeton's previous edition: "Likely to be the year's most-talked-about finance book. . . . You can agree or disagree with it. But you owe it to yourself to read it if you are investing in equities or contemplating doing so. (Fred Barbash
International Herald Tribune)
From review of Princeton's previous edition: "Irrational Exuberance is likely to cause a stir. . . . Shiller illustrates how the current market is like a naturally occurring Ponzi scheme in which investors become promoters for the game after receiving initial payments with money taken from subsequent investors. (David Henry
USA Today)
From review of Princeton's previous edition: "
Irrational Exuberance is not billed as a personal finance book. But it is. You can agree or disagree with it. But you owe it to yourself to read it if you're investing, or contemplating investing, in inequities. (
The Washington Post)
From review of Princeton's previous edition: "A must-read . . . refreshing, well-reasoned . . . and very readable. (Michael P. Niemira
Barron's)
From review of Princeton's previous edition: "So why have share prices soared so high in the past five years, taking market valuations past all historical records? Professor Shiller's answer, as the title indicates, is not encouraging. His message is: diversify now as much as you can, and batten down the hatches. (Diane Coyle
Independent)
From review of Princeton's previous edition: "Shiller has written a crystal-clear and tough-minded critique. . . . (David Warsh
Boston Globe)
The point of
Irrational Exuberance is not to help investors dump their houses before the current exuberance fades. It is to deepen our understanding of the events we are watching as one bubble gives birth to another and to encourage readers to think about economic behavior and economic policies that can cushion the nasty side of volatility. (Sharon Reier
The International Herald Tribune)
The first edition of this book was widely read because of its timing. This one, too, seems perfectly timed, coming when we're starting to fear we've been fooling ourselves. Again. . . . There's a world of important information for everyone. (Lyn Miller
USA Today)
The second edition's new component . . . is Shiller's exploration of how market psychology has responded to the ensuing five years of retrenchment. One chilling conclusion he reaches from his knowledge of past market performance is that the 2005 market may still be correcting and that a return to 2000 levels may be a decade away. He further warns that many investors are still too heavily invested in equities and that proposals to invest Social Security funds in the stock market would subject the retirement system to unacceptable risk. Shiller expands his focus to include the booming real estate market where he sees another speculative bubble building. (
Library Journal)
There's plenty of new material in this edition. . . . Chief among the new additions is Shiller's deeper focus on recent excesses in the stock market and his skepticism about investing in real estate. . . . . Shiller's ideas have so many devoted followers that I wouldn't be surprised to see many more editions. (Angele McQuade
BetterInvesting)
Yale University Professor Robert Shiller pretty much called the stock market drop when this book was first published in 2000. In this fact-packed book, Shiller describes the psychological origins of volatility, among other things. And in the newest edition, Shiller compares the recent housing boom to the stock market bubble of the 1990s. (
Registered Rep.)
