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Irrational Exuberance

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Irrational Exuberance

Princeton UP,

15 min read
10 take-aways
Audio & text

What's inside?

Recall the stock market bubble and crash in 2000? Real estate prices are doing the same – and here`s the warning bell.

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Editorial Rating

9

Qualities

  • Innovative
  • Applicable

Recommendation

Shortly after a 1996 briefing by author Robert Shiller, Alan Greenspan, chairman of the U.S. Federal Reserve Board, warned the country about the mood of "irrational exuberance" that was pushing up stock prices. In hindsight, it's clear that the bull was just beginning. Anyone who heeded that warning would have missed nearly unprecedented gains. But Shiller proved prophetic when the market peaked and crashed in 2000, the year he published this book's first edition. Shiller isn't teaching market timing; he's debunking cherished investing axioms, such as the belief that stocks or real estate are necessarily great long-term investments. He discredits financial reporting, notes the psychological and emotional factors that make investors behave irrationally, and sounds a note of caution as timely now as it was at the turn of the millennium. This book vaccinates you against the virus of credulity. getAbstract suggests a copy for every investor - dog-eared from frequent rereading. It's a wise investment.

Summary

Remembering the Fundamentals

Orthodox financial theory assumes that people approach economic decisions rationally. Investors presumably look at financial reports, calculate returns, compare investments, consider fundamental economic values, note the alternatives, measure returns against risk and only then buy or sell. Because everyone from your neighborhood stock broker to the economists on the U.S. Federal Reserve Board uses models derived from that theory, the concept that people are rational has an immense impact on the economic system and the management of wealth. But impressive evidence suggests that individual investment decisions are not rational.

Most notably, during the late 1990s, millions of adults put money in the highly overvalued stock market based on the irrational conviction that it would continue to rise. Even when the market was higher than ever, even when stock prices were totally out of line with traditional relationships to earnings, profits and fundamental values, investors kept buying.

After the 2000 crash, investors seemed to focus their speculative irrationality on real estate. Although real estate prices began to rise in 1997, they really...

About the Author

Robert J. Shiller is a professor of economics at Yale University. His previous books include The New Financial Order, Market Volatility and Macro Markets.

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