Irrational Exuberance: Second Edition (Hardcover)

by Robert J. Shiller (Author)
Key Phrases: real inflation corrected terms, home price boom, real home prices, United States, World War, Social Security (more...)

Editorial Reviews

Amazon.com Review
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 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. --This text refers to an out of print or unavailable edition of this title.

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Product Details

• Hardcover: 344 pages
• Publisher: Princeton University Press; 2 edition (February 22, 2005)
• Language: English
• ISBN-10: 0691123357
• ISBN-13: 978-0691123356
• Product Dimensions: 9.2 x 6.2 x 1.3 inches
• Shipping Weight: 1.4 pounds (View shipping rates and policies)
• Average Customer Review: 3.8 out of 5 stars See all reviews (90 customer reviews)
• Amazon.com Sales Rank: #251,206 in Books (See Bestsellers in Books)

Customer Reviews

Most Helpful Customer Reviews

347 of 365 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.

52 of 54 people found the following review helpful:

4.0 out of 5 stars Irrational Exuberance, March 30, 2000

By	Harvey S. Karten "Director, NY Film Critics O... (Brooklyn, NY United States) - See all my reviews (REAL NAME)

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 [e-mail]

38 of 40 people found the following review helpful:

5.0 out of 5 stars Rational Analysis, October 9, 2006

By	B.Sudhakar Shenoy (India) - See all my reviews (REAL NAME)

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.