69 of 71 people found the following review helpful
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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Initial post: Mar 30, 2008 4:18:20 PM PDT
Last edited by the author on Mar 30, 2008 11:31:21 PM PDT
Jon Thomas says:
An excellent review. As you seem to suggest, it might be wiser for an aggressive would be stock investor to take a trip to the nearest casino or Las Vegas to try their luck at losing large sums of money. I believe Keynes coined the expression, "casino capitalism" as a less than subtle criticism of the, "It's a new era and not a bubble!" mindset. Less of the get rich quick mentality and more of the "stick to the fundamentals" is what Shiller and the reviewer seem to suggest. When Shiller first came out with this book in the late 90's, I listened to a Wall Street sharker hammer him verbally over NPR early one morning. He all but accused Shiller of being un-American. Maybe he had an unintended point.... Shortly thereafter, the tech bubble imploded. Most recently, the housing bubble collapsed--only a year or two after Alan Greenspan was boasting about the wonderful new adjustable interest rate financial device that had been devised by the banking industry. Didn't P.T. Barnum say something about "one being born every minute?" Some things never change. A sucker in the 19th century looks a lot like one in the 21rst century. I've read the 1rst edition of Shiller's book. Will read the 2nd edition after I order it.
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