Irrational Exuberance

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.

Table of Contents:
List of Figures and Tables ix Preface xi Acknowledgments xix One The Stock Market Level in Historical Perspective 3 Part One Structural Factors TWO Precipitating Factors: The Internet, the Baby Boom, and Other Events 17 Three Amplification Mechanisms: Naturally Occurring Ponzi Processes 44 Part Two Cultural Factors Four The News Media 71 Five New Era Economic Thinking 96 Six New Eras and Bubbles around the World 118 Part Three Psychological Factors Seven Psychological Anchors for the Market 135 Eight Herd Behavior and Epidemics 148 Part Four Attempts to Rationalize Exuberance Nine Efficient Markets, Random Walks, and Bubbles 171 Ten Investor Learning-and Unlearning 191 Part Five A Call to Action Eleven Speculative Volatility in a Free Society 203 Notes 235 References 269 Index 283

About the Author :
Robert J. Shiller is the Stanley B. Resor Professor of Economics at Yale University. He is author of Market Volatility and Macro Markets, which won the 1996 Paul A. Samuelson Award.

Review :
Dazzling, richly textured, provocative ... It is by far the most important book about the stock market since Jeremy J. Siegel's Stocks for the Long Run... -- William Wolman Business Week 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... The Economist Robert Shiller ... has done more than any other economist of his generation to document the less rational aspects of financial markets... Mr. Shiller believes that the whole stock market, not just the Dow, is inflated by a speculative bubble. -- Paul Krugman The New York Times 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. -- John Cassidy The New Yorker Alan Greenspan faces long odds in trying to nudge the stock market to where he'd like it to go. The chairman of the Federal Reserve has argued that the buoyant market--by making Americans feel so much wealthier--has triggered a consumer spending spree that threatens inflationary wage pressures. The idea is to dampen spending and the ravenous appetite for stocks. Anyone who thinks this will be easy should read Irrational Exuberance, a new book by Yale University economist Robert J. Shiller. Beyond arguing that the present market is a 'speculative bubble,' 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 The Washington Post Thus it is an event of some significance that Shiller has written a crystal-clear and tough-minded critique of the factors that have driven US stock markets to their current levels and called his book Irrational Exuberance. In it, he argues that Federal Reserve chairman Alan Greenspan had it exactly right when he uttered the famous phrase in a speech in 1996. The current high levels of the market don't represent a consensus judgment by a cadre of sober experts, says Shiller. Instead, today's market is sky high because of wishful thinking by millions of people, egged on by professionals in and around Wall Street whose incentives all run in the direction of the more the merrier. -- David Warsh Boston Globe 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 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... [Shiller's] arguments should ... give pause to anyone who has money in the stock market. -- John Cassidy The New Yorker Shiller has written a crystal-clear and tough-minded critique... -- David Warsh Boston Globe 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 The Wall Street Journal A counterweight to the plethora of get-rich-quick investment guides. Library Journal 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 The Independent 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 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 To appreciate just how high the S&P index is, read Professor Robert Shiller's excellent new book, Irrational Exuberance. -- Steve H. Hanke Forbes [An] excellent new book... If you want to preserve capital, unload most of your stocks and invest in government bonds. -- Steve H. Hanke Forbes A must-read ... refreshing, well-reasoned ... and very readable. -- Michael P. Niemira Barron's 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 Shiller has provided an accessible guide to the usually impenetrable literature on financial markets, especially the American stock market. Foreign Affairs Although its message may be unwelcome to many, this important book should be read by anyone interested in economics or the stock markets. -- Rene M. Stulz Science Informative and well-argued ... A calm and reasonable antidote to today's euphoria. -- Jeff Madrick The New York Review of Books A modern classic of "serious" economics that demands to be read, and can be enjoyed, by the interested non specialist. The Economist No one else has examined the behavior of the American investor in the 1990s with more authority or better timing. Library Journal