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Irrational Exuberance (Paperback)
by Robert J. Shiller
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Behavioral finance, Stock market, Wall Street, Investment banking, Popular economics |
| Market price: ¥ 168.00
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¥ 148.00
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In this well researched book, Shiller makes a strong case that markets are not efficient, but respond to crowd psychology
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Author: Robert J. Shiller
Publisher: Doubleday Business; 2 edition
Pub. in: May, 2006
ISBN: 0767923634
Pages: 336
Measurements: 9.1 x 5.9 x 0.9 inches
Origin of product: USA
Order code: BA01308
Other information: ISBN-13: 978-0767923637
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- MSL Picks -
"Irrational Exuberance" is an expression that was actually coined by Robert J Shiller, and was used in his briefing of Alan Greenspan in 1996 before the Chairman of the Federal Reserve immortalized it in a public setting. The expression was used as a warning against a possible speculative bubble in stock market prices. As we know now, the market continued to climb until 2000 when it collapsed. The first edition was published just before the dramatic fall of the market, making Shiller somewhat of a guru of speculative bubbles.
Shiller points out that the Dow Jones had gone from 3,600 in 1994 to 11,700 in 2,000; the price-earnings ratio had reached an incredible 44.3. When the stock market crashed in 1929 the p-e ratio was at 32.6. By 1932 the market had lost 80% of its value. As we have seen, the bubble of 1929 pales in comparison to the bubble of 2000.
Traditional financial theory assumes that people act rationally when they make investment decisions. Investors ideally examine financial statements, calculate returns, evaluate economic factors, and then determine whether to buy or sell.
Shiller is an economist who specializes in behavioral finance and thus tends to emphasize cultural and psychological factors that cause people to invest in assets that have risen over and above levels justified by rational theory.
He identifies twelve factors that have led to the bubble in 2000:
1) The fall of the Berlin Wall and China's shift to a market economy, which led to the triumph of capitalism.
2) People are more materialistic than they were in the past. According to polls, everyone wants to get rich.
3) New technologies led people to believe that they were at the dawn of a new age prosperity.
4) Monetary policies encouraged a bubble rather than choking it off.
5) It was believed that the impact of the baby boomers on the market would be profound and lasting.
6) There was more media coverage of people getting rich during the boom, thus creating a "positive feedback loop."
7) The analysts were giving positive reviews of stocks, not because of fundamentals, but because the stocks were being underwritten by their employers.
8) Pension funds were speculating in the market trying to get better returns than the traditional fixed rate.
9) The enormous growth of mutual funds fueled the boom.
10) The persistence of low inflation was a factor.
11) The introduction of online trading expanded the opportunities for speculation.
12) The general mentality of casino society has set in with the huge increase of gambling.
With the publication of the second edition of his book, Shiller argues that many of these factors are at work in the real estate market boom. The prices of US homes have increased 52% from 1997 to 2004. Historically this is unprecedented. Today people are speculating in the real estate market like they did in stocks in the 1990's, and much like the stock market, the phenomenon is global. It is happening in London, Vancouver, Moscow, Shanghai, and elsewhere. All the indicators of a speculative bubble are present.
The problem I have with this book is that Shiller tries to explain increase in market value only in terms of psychology, and fails to take into account the real value that has been added on a scale unprecedented in history. Globalization, as Thomas Friedman describes it in "The World is Flat," has created new and lasting efficiencies in the global economy that resulted from the internet and other technologies. Even though technology stocks crashed in 2000, the internet and all of its benefits did not disappear, it in fact supercharged the global economy. The Dow Jones is almost back to where it was five years ago.
Shiller, however, is cautious about predicting a similar collapse of the housing market. He does warn against the false belief that home prices will inexorably increase because of growing populations and widening prosperity. Instead he advises to diversify into many classes of assets to dilute risk.
This book does not advise you to sell your home or any other property you may own, nor does it give any specific investment advice; it does, however, give an excellent overview of all the indicators of a speculative bubble.
(From quoting Izaak VanGaalen, USA)
Target readers:
Investment bankers, investment consultants, finance majors, academics, MBAs and other people interested in the topic of stock market.
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Robert J. Shiller is the Stanley B. Resor Professor of Economics at Yale University. He is the recipient of the 2000 Commonfund Prize, awarded for Best Contribution to Endowment Management Research, for Irrational Exuberance. He is also the author of Market Volatility and Macro Markets, which won the 1996 Paul A. Samuelson Award.
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From Publisher
In this timely and prescient update of his celebrated 2000 bestseller, Robert Shiller returns to the topic that gained him international fame: market volatility. Having predicted the stock market collapse that began just one month after the first edition was published, he now expands the book to cover other markets that have become volatile, particularly the recently red-hot housing market. He includes a full chapter on domestic and international housing prices in historical perspective.
Shiller amasses impressive evidence to support his argument that the recent housing market boom bears many similarities to the stock market bubble of the late 1990s, and may eventually be followed by declining home prices for years to come. After stocks plummeted when the bubble burst in 2000, investors moved their money into housing. This precipitated the inflated real estate prices not only in America but around the world, Shiller maintains. Hence, irrational exuberance did not disappear—it merely reappeared in other settings.
Building on the original edition, Shiller draws out the psychological origins of volatility in financial markets, this time folding real estate into his analysis. He broadens the evidence that investing in capital markets of all kinds in the modern free-market economy is inherently unstable—subject to the profoundly human influences captured in Alan Greenspan’s now-famous phrase, “irrational exuberance.” As was true of its predecessor, the second edition of Irrational Exuberance is destined to be widely read, discussed, and debated.
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| View all 9 comments |
Library Journal (MSL quote), USA
<2008-04-08 00:00>
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. |
The New York Times Book Review, Louis Uchitelle, USA
<2008-04-08 00:00>
No one has explored the strange behavior of the American investor in the 1990's with more authority, or better timing, than Robert J. Shiller. |
John Cassidy, The New Yorker, USA
<2008-04-08 00:00>
During the past decade, he has emerged as a leader in the new field of "behavioral finance" which seeks to apply lessons learned from other academic disciplines, particularly psychology to economics. Irrational Exuberance is not just a prophecy of doom. Encompassing history, sociology, and biology, as well as psychology and economics, it is a serious attempt to explain how speculative bubbles come about and how they sustain themselves. |
The Economist (MSL quote), USA
<2008-04-08 00:00>
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, from Alan Greenspan down to the proverbial shoe-shine boy. |
View all 9 comments |
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