Irrational Exuberance

by Robert J. Shiller

As Robert Shiller’s new 2009 preface to his prescient classic on behavioral economics and market volatility asserts, the irrational exuberance of the stock and housing markets “has been ended by an economic crisis of a magnitude not seen since the Great Depression of the 1930s.” As we all, ordinary Americans and professional investors alike, crawl from the wreckage of our heedless bubble economy, the shrewd insights and sober warnings, and hard facts that Shiller marshals in this book are more invaluable than ever.

The original and bestselling 2000 edition of Irrational Exuberance evoked Alan Greenspan’s infamous 1996 use of that phrase to explain the alternately soaring and declining stock market. It predicted the collapse of the tech stock bubble through an analysis of the structural, cultural, and psychological factors behind levels of price growth not reflected in any other sector of the economy. In the second edition (2005), Shiller folded real estate into his analysis of market volatility, marshalling evidence that housing prices were dangerously inflated as well, a bubble that could soon burst, leading to a “string of bankruptcies” and a “worldwide recession.” That indeed came to pass, with consequences that the 2009 preface to this edition deals with.

Irrational Exuberance is more than ever a cogent, chilling, and astonishingly far-seeing analytical work that no one with any money in any market anywhere can afford not to read–and heed.

Genres: Economics, Finance, Nonfiction, Business, Psychology, Money, History

304 pages, Paperback

First published March 15, 2000

About the author

Robert James "Bob" Shiller (born Detroit, Michigan, March 29, 1946) is an American economist, academic, and best-selling author. He currently serves as the Arthur M. Okun Professor of Economics at Yale University and is a Fellow at the Yale International Center for Finance, Yale School of Management. Shiller has been a research associate of the National Bureau of Economic Research (NBER) since 1980, was Vice President of the American Economic Association in 2005, and President of the Eastern Economic Association for 2006-2007. He is also the co-founder and chief economist of the investment management firm MacroMarkets LLC.

Reviews

[Geoff Noble · Rating 2 out of 5]

I really battled to get into this book. I didn't enjoy it at all. We all know that market bubbles exist and I really don't think Robert Shiller added much to the discussion (I will no doubt come under fire here from all the fans out there). This was summed up for me in the last chapter when he listed things that could go wrong in the future. He listed every conceivable scenario in the world. While I agree that you need to consider all possibilities and investing is about probabilities, it is in my opinion very easy to write a book saying all these things could go wrong and then listing everything that could go wrong.

Don't get me wrong. Robert Shiller is a very smart man but I really battled to enjoy this book. Not recommended.

[Robert P. Hoffman · Rating 5 out of 5]

This is a book that needs to be reread in order for the points to absorbed.

Shiller starts out with three chapters that present statistics showing that stocks and real estate are not investments that people can count on to earn a good long-run return. He shows that if people got into the market at the wrong time they could end up having to wait for a long time before the value of stocks returned to the price that people paid for the stocks. He shows similar statistics for real estate.

In the chapter on bonds he talks about how bonds do not do a good job of forecasting future inflation rates.

In Chapter Four and Five he presents his view of how booms get going and how they are amplified. It took me a few readings to understand his main point. I believe his main point is to show that sometimes the price of stocks and the price of real estate go up for no good reasons.

In Chapter Four he identifies precipitating factors that he argues are not connected to fundamentals. They are factors that should not drive prices upward. In Chapter Five he talks about how booms are like Ponzi schemes--and there is sometimes fraud and sometimes just people telling a story that is not supported by any evidence.

Shiller presents detailed examples that are designed to show that when prices fall rapidly they do so for reasons not connected to anything that would justify the price declines. Further, he argues that the metaphor of a bubble is misleading: the bubble doesn't suddenly burst. Instead a decline might be followed by a brief recovery, a time of stability, and then further decreases in the price.

I think Shiller argues this because he wants to demonstrate that prices change for no good reasons--either in an upward or downward direction.

Shiller argues that every time there are booms in stock prices that someone will talk about their being a New Era that justifies the rise in stock prices. One explanation for the boom would be that there really was a New Era and as people tried to take the consequences of the New Era into account they would bid up prices too high. Once they realized what was going on then stock prices would fall.

Shiller rejects this argument. He argues that in almost all the cases stock prices first go up and then after the fact people start to put stories together to justify the rise in stock prices.

Below is what I prepared for class to discuss this:

One point that comes up again and again the book is that investing in stocks and real estate is not a strategy that can be counted on to generate high returns.

Even if we accept this claim we might argue that at least if put money into the stock market that we can count on getting a return that exceeds the return on bonds. That claim is addressed by the author in Chapter Eleven of his book—the chapter Efficient Markets, Random Walks, and Bubbles.

In addition to these two claims, the last chapter in the book: Speculative Volatility in a Free Society, is of great importance

It is important for three reasons.
(1) It states one of the main themes of the book: there are times when high stock prices and high real estate prices come about “for no good reasons.” A corollary (or maybe it is an analogy) of this is that when prices fall they do so “for no good reasons.” (p. 225)
(2) Bubbles do real damage to people’s well-being. “All of our plans for the future, as individuals and as a society, hinge on our perceived wealth, and plans can be thrown into disarray if much of that wealth evaporates tomorrow.” (p. 227) The chapter contains a great example of the damage stock market bubbles have done: we have saved too little and underfunded pension obligations. Why? Because of the belief that home prices would continue to rise and stock prices would continue to rise and therefore we didn’t need to save as much.
(3) Instead of giving investment advice to individuals that is not supported by the evidence, we should work on developing financial instruments that would help people hedge against risks that they face from interruptions in their flow of income.

Who is Shiller Arguing With and What is the Basis of the Argument
We have talked about efficient markets and in Chapter Eleven Shiller explicitly introduces the theory of efficient markets.

Economists who believe in the theory of efficient markets argue that when market prices go up or down we should be able to point to fundamental factors that can account for the change in the price. The fundamental factors are connected to the current and future cash flows. While economists believe that future prices of financial and real assets are unpredictable, they believe that after the fact we can explain the changes in prices: they must have changed because something that mattered in the world around us.

It is that claim that that Shiller is attempting to show is false.

Much of what is contained in the book is directly related to Shiller’s attempt to show that the claim is false. Here are some examples:

(1) From the very beginning Shiller is interested in showing how changes in stock prices, real estate prices, and bond prices cannot be accounted for by changes in fundamentals. I view this as clearing the decks. If we think fundamentals explain most of the changes in stock prices then there is no need for any other explanations.

Shiller in the chapter on efficient markets focuses on examples of where assets were mispriced and remained mispriced for a long period of time.

I think this is also the reason why Shiller doesn’t believe that the housing boom resulted from the introduction of new financial instruments.

(2) Given that efficient markets is the accepted theory, even if Shiller is able to cast doubt on this theory, people are not going to abandon it unless there is a compelling alternative explanation. In two critical chapters, Chapters Four and Five, Shiller offers an explanation of how we can see volatility in prices without there being anything having to do with fundamentals. I missed this the first few times reading the chapter. But on p. 40 Shiller states that “I will concentrate here mostly on factors that have had an effect on the markets not warranted by rational analysis of economic fundamentals.”

I read Chapter Four as offering explanations about how things can get going and Chapter Five as offering an explanation as to how we can get a sharp boom. If we buy what is being said we have an explanation as to why stock prices and real estate prices can go up “for no good reason.” (And that is why I believe that understanding the stories of Ponzi schemes is crucial to understanding Shiller’s point. A Ponzi scheme is based upon fraud. He is arguing that while there is no fraud going on that the same mentality and dynamic is occurring when we have amplifying factors that push stock prices up.)

(3) Shiller spends much time going through detailed examples that only make sense if you realize his main point: stock prices do not change for good reasons.
• The chapter on New Era thinking is an attempt to show that stories as to why prices rose were after the fact storytelling.
• The chapter on herd behavior and epidemics is an attempt to show how people are drawn into the market not because of changes in fundamentals but because of the influence of authority, because of behavior that can be described by models of epidemics.
• The chapter on the news media (which you were not assigned) goes through examples that are designed to show that there was no news that could have justified the stock price changes that occurred.
• The chapter on whether people have a new view of the stock market presents his argument that this isn’t an adequate explanation: stock prices rise “for no good reasons.”

(4) When bubbles collapse they so for reasons that are not related to fundamentals. In addition Shiller makes two other points.
First: there is a gap between the collapse and any financial crisis.

Second: the collapse isn’t a complete collapse but rather there are downturns and then upturns.

Some other points that arose during class today:

(1) People believe things that are not supported by evidence (in particular they believe that stock prices and land prices will rebound, but there is no basis for such a belief).
(2) Role of emotions. In Chapter Nine Shiller states that “popular accounts of the psychology of investing are simply not credible. Investors are said to be euphoric or frenzied . . . [I]n both booms and crashes, investors are described as blindly following the herd like so many sheep.” But Shiller argues that “people are more sensible during such financial episodes than these accounts suggest. Financial booms and crashes are, for most of us, not emotion-laden events.”

But at various points Shiller talks about the role of emotions. I don’t believe Shiller is inconsistent. On p. 80 of the third edition he talks about the emotions of regret and envy. Those emotions he argues play a key role in how people behave. I believe Shiller is rejecting that people lose control of themselves and act like some out of control mob.

(3) Shiller gives examples that are designed to show that prices are much more volatile than we would expect if prices are driven by fundamentals.

(4) Shiller has a statistic that is of great relevance to his argument. If markets are efficient then stock prices of firms in the same industry, even if they are located in different regions, should have great volatility then the stock prices of firms in different industries who are located in the same region. However, if some of the arguments made in Chapter Ten (Herd Behavior and Epidemics) are correct then we would expect the exact opposite. Be able to explain why the different theories have different predictions and be able to explain what results Shiller finds.

[Mehrsa · Rating 4 out of 5]

I read this because I got to have dinner with Shiller recently and I wanted a reminder of his theories. I wonder if it's outdated or it's still true that markets are over priced. I think he's absolutely right that they're not efficient, but is it time to sell? He said he didn't know.

[Vonetta · Rating 4 out of 5]

Two subjects I love: finance and psychology. Which is called behavioral finance, but whatever.

All I can say is, I read the wrong edition. Ugh. The third edition is Shiller's grand middle finger to the markets after the crash of 08/09 and subsequent recession. I should have read that instead, but this was a solid, still relevant (and eerily prophetic) blast from the past.

[Omar Halabieh · Rating 4 out of 5]

This book serves as an awakening call from "the present...whiff of extravagant expectation, if not irrational exuberance, in the air. People are optimistic about the stock market. There is a lack of sobriety about its downside and the consequences that would ensue as a result." The author advances that "we need to know if the price level of the stock market today, tomorrow, or any other day is a sensible reflection of economic reality, just as we need to know as individuals what we have in our bank accounts." That being said, the purpose of the book is to advance "a better understanding of the forces that shape the long-run outlook for the market."

This book covers a myriad of factors ranging from technology, to cultural to psychological that aid the formation and reinforcement of speculative bubbles. It ends with a section on implication of these findings on the various members of society whether individuals, institutions or government.

Below are key excerpts that I found particularly insightful:

1- "Many of the foregoing factors (that are candidates for causing a market boom) have a self-fulfilling aspect to them, and they are thus difficult, if not impossible, to capture in predictive scientific explanations."

2- "There are many ultimate causes for this exuberance...and the effect of these causes can be amplified by a feedback loop, a speculative bubble, as we have seen in his chapter. As prices continue to rise, the level of exuberance is enhanced by the price rise itself...The changes in thought patterns infect the entire culture and they operate not only directly from past price increases but also from auxiliary cultural changes that the past price increases helped generate."

3- "The role of the news media in the stock market is not, as commonly believed, simply as a convenient tool for investors who are reacting directly to the economically significant news itself...The news media are fundamental propagators of speculative price movements through their efforts to make news interesting to their audience. "

4- "Ends of new eras seem to be periods when the national focus of debate can no longer be upbeat. At such time, a public speaker may still think that it would be good business to extol a vision of a brilliant future for our nation's economy, but it is simply not credible to do so. One could, at such times, present a case that the economy must recover, as it always has, and that the stock market is underpriced and should go up, but public speakers who make such a case cannot achieve the command of public attention they do after a major stock run-up and economic boom. There are times when an audience is receptive to optimistic statements and times when it is not."

5- "We have explored the justification people have given, at various points in history, for changing market valuations, and we have seen evidence of the transitory nature of these cultural factors. Ultimately, however, the conclusions we draw from such evidence depend on our view of human nature and the extent of human abilities to produce consistent and independent judgements."

6- "Two kinds of psychological anchors will be considered here: quantitative anchors, which themselves give indications for the appropriate levels of the market that some people use as indications of whether the market is over-or underpriced and whether it is a good time to buy, and moral anchors, which operate by determining the strengths of the reason that compels people to buy stocks, a reason that they must weigh against their other uses for the wealth which they already have (or could have) invested in the market."

7- "The effects of new stories on the stock market sometimes have more to do with discovery of how we feel about the news than with any logical reaction to the news. We can make decisions then that would have been impossible before the news was known. It is partly for this reason that the breaking off of a psychological anchor can be so unpredictable: people discover things about themselves, about their own emotions and inclinations, only after price change occur. Psychological anchors for the market hook themselves on the strangest things along the muddy bottom of our consciousness."

8- "Rationale response to public information is not the only reason that people think similarly, nor is the use of that public information always appropriate or well reasoned."

9- "Policies that interfere with markets by shutting them down or limiting them, although under some very specific circumstances apparently useful, probably should not be high on our list of solutions to the problems caused by speculative bubbles. Speculative markets perform critical resource-allocation functions, and any interference with markets to tame bubbles interferes with these functions...Most of the thrust of our national policies to deal with speculative bubbles should take the form of facilitating more free trade, as well as greater opportunities for people to take positions in more freer markets. A good outcome can be achieved by designing better forms of social insurance and creating better financial institutions to allow the real risks to be managed more effectively. The most important thing to keep in mind as we are experiencing a speculative bubble in the stock market today is that we should not let it distract us from such important tasks."

[Aristidis Marousas · Rating 3 out of 5]

A little dry for me. I actually ended up skimming through most of it because you could get the main point of each chapter in each chapters' final paragraph.

I can see why this is a popular book, as Shiller discusses a lot of history about the stock market. However, I do not feel as though I've really learned any new aspects about the markets, besides some small details of history discussed.

If you're reading this book then you probably already know that there's more to the stock market than luck, or the latest headline. If you're expecting Shiller to solve the stock market problem for you, move on.

[Gaetano Venezia · Rating 5 out of 5]

An important treatise on the oversized impact of structural and psychological biases in supposedly efficient, rational markets.

[This book] is an attempt to characterize the complex nature of our real markets today, considering whether they conform or do not conform to our expectations and models.
. . .
[It] challenge[s] financial thinkers to improve their theories by testing them against the impressive evidence that suggests that the price level is more than merely the sum of the available economic information. (xxvi)

With these aims in mind, Schiller takes on dominant narratives and economic theories by examining three major markets—bonds, stocks, and real estate. Showing again and again how recency bias, herd mentality, post hoc reasoning, and many other biases create convincing but false narratives about markets, Schiller relentlessly compares recent events to historical ones. Taking care to emphasize real prices over nominal prices, Schiller shows that recently received “wisdom” often simply ignores or misreads long-term data. In many cases, Schiller can actually show that recent “wisdom” is actually contradicted by the usual market dynamic.

Schiller makes a good case overall, but such a massive, paradigm-defining undertaking could have benefitted from more thorough examples and discussion for each of the structural and psychological factors he discusses.

I felt the need to read the book twice because I felt like I had missed small but important steps or examples in Schiller’s arguments. On my second read I was able to connect the dots better; I also confirmed that many of the connecting steps are in fact just a few sentences or small examples. Schiller’s quick moving, paradigm-defining arguments are appropriate for the popular press, but I felt the need for stronger engagement with counterexamples and arguments in the chapters themselves.

In some cases, Schiller overstates his arguments. For example, he claims that owner-occupied housing is a weak long-term investment relative to stocks (33). Now, I acknowledge that US housing prices have barely appreciated more than inflation over the long run:

[For] home prices since 1890 . . . there appears to be no overall continuing uptrend in real home prices. It is true that for the United States as a whole, real home prices were almost twice as high in 2006 as in 1890, but all of that increase occurred in two brief periods: the time right after World War II . . . and a period that appears to reflect a lagged response to the 1990s stock market boom . . ., with the first signs of increase occurring in 1998. Other than those two periods, real home prices overall have been mostly flat or declining. Moreover, the overall increase (with real prices up 48% in the 124 years from 1890 to 2014, or 0.3% a year) was not impressive. (27)

The pattern of change from year to year in home prices bears no consistent relation with [building costs, population, or interest rates]. None of these can explain the “rocket-taking-off” effect starting around 1998. Building costs have been mostly level or declining all the way back to 1980, with no major break in the trend. Population growth has been very steady. While interest rates have been declining, the decline in long rates has been fairly steady, all the way back to the early 1980s. (21-22)

However, national trends aren't all that relevant to personal investment decisions. Throughout Chapter 3, Schiller gives examples where rapidly growing, strong economic cities—like Boston, Chicago, and Los Angeles—experience housing bubbles: prices rise rapidly and then at some point fall dramatically. But even in the data he provides, housing prices are still higher over the long-term. In some cases, there is robust and significant appreciation (real increases of 3-5% over 30 to 100+ years). Additionally, he doesn’t discuss any areas that go through price depreciation and why that might happen. Intuitively it makes sense to me that housing prices would fall in Rust Belt cities and rural areas that haven’t pivoted with the rise of the creative class—think Detroit and St. Louis and small towns across the Midwest whose population is around half of what it was in their heydays. These falls would then be averaged out in national figures by the areas that are in high demand. If one thinks there are good reasons for certain areas to loose value, there must be corresponding areas that gain value to counterbalance them in the national figures.

Furthermore, home ownership seems like a good investment not principally because of price appreciation, but because of leverage and opportunity cost. If you are able to get a reasonable interest rate and own your property long enough (5 to 15+ years), it is likely that mere inflation will 1. lower your mortgage payments in real terms, and 2. raise the price of the house. This means you can pay a fraction of the cost upfront for a large asset—which then appreciates on the full value of the house. At the same time, your mortgage payment is a small fraction of the total cost—which declines in real cost over the years. In contrast, rent will just keep increasing with inflation. Assuming you have to live somewhere, this can be a good tradeoff for many household’s situations. Perhaps it’s not right to call housing an investment, but comparing the opportunity costs of stocks and owner-occupied housing, there are reasons to contest Schiller’s idea that real estate is worse in the long-term.

That said, Schiller does take a few paragraphs to note caveats and qualifications: his claim is primarily about national home prices, "regional real estate booms are nothing new" (22). But given the complications and potential confusions for such a large topic in a single chapter, and the fact that most people are only buying one home in a regional market, Schiller would have done better by sticking to just the macroeconomic argument, instead of commenting on whether buying a house is a good investment.

Despite my strong reservations about this particular argument, the book’s arguments in general are strong and make one contemplate common, fundamental assumptions about markets. I certainly re-evaluated my view of bubble dynamics and the supposedly superior value of stocks over the long-term. Thus, Schiller’s book serves as an important salve to the constant onslaught of media narratives and societal cliches about the economy.

Significant Themes and Quotes
Lack of relevant data market data and events to explain or forecast booms and busts:
"Ultimately, we learn how to forecast by looking at past episodes. Unfortunately, there are not really any past episodes of national home price booms in the United States to look at, except for the period just after World War II, and that episode appears to have been fundamentally different from the recent home price boom. We have only one observation of the spectacular crash of U.S. home prices after 2006, so it is hard to know how to generalize from this experience. This presents a dilemma for statisticians who want a scientific basis for their forecasts.” (21)

Market Analysts as Optimistic Marketers:
"Analysts affiliated with investment banks gave significantly more favorable recommendations on firms for which their employer was the co- or lead underwriter than did unaffiliated analysts, even though their earnings forecasts usually were not stronger.” (49)

"According to a study by Steven Sharpe of the Federal Reserve Board, analysts’ expectations of growth in the S&P 500 earnings per share exceeded actual growth in nineteen of the twenty-one years between 1979 and 1999. The average difference between the projected and actual growth rate of earnings was 9 percentage points. The analysts breezed through both the steep recession of 1980–81 and the recession of 1990–91, making forecasts of earnings growth in the 10% range.16 Since Sharpe’s study, analysts failed to predict the magnitude of the sharp drop in earnings around 2001.” (50)

The Increase in the Gambling Mindset and its Attendant Losses:
"In the United States, commercial gambling, both legal and illegal, experienced about a sixty-fold increase in real (inflation-corrected) terms between 1962 and 2000.37 According to a 2000 telephone survey, 82% of adults in the United States gambled in the preceding year, up from 61% in a 1975 study.38 The amount lost on gambling by people in the United States in 2000 was more than they spent on movie tickets, recorded music, theme parks, spectator sports, and video games combined.” (59)

Stock Market and Real Estate:
"In our questionnaire surveys of recent homebuyers in 2003 and 2004, Karl Case and I asked homeowners directly about possible feedback from the stock market to the housing market.
. . .
"The great majority of respondents said the stock market had no effect on their decision to buy a house. This is actually not at all surprising, since most people have a multitude of personal reasons to buy a house that must figure more prominently in their minds. But the interesting thing about these answers is that, of those who replied that the experience did affect their decision to buy a house, an overwhelming percentage said that it encouraged them. In fact (taking account of the rounding error in the percentages given), more than ten times as many said that the stock market encouraged them than said it discouraged them.” (97-98)

"The drops in the stock market in 2000–2003 had just gotten people increasingly fed up with the stock market and ready to transfer their affections to another market, one that they increasingly believed was the best investment for them. It is as simple as that; what they wrote seems plain and easily understood. There was a sort of cross feedback from the stock market to the housing market, and that must account for a good part of the housing boom that we saw.” (99)

Internet Hype in the Millennium Boom:
“[T]he arrival of the Internet in the mid-1990s was interpreted by many casual observers as a fundamental change that would boost the productivity of the economy, since the Internet is a communications and distribution system of fundamental importance. But, if we wish to consider whether the Internet is a communications and distribution system that will produce faster economic growth than in the past, we have to compare it with similar systems of the past, such as those represented by postal services, railroads, telegraph, telephones, automobiles, aircraft, radio, and express highways. All of these networks had profound effects on the economies of their days, helping transform their economies from a much more primitive state. It is
difficult to argue that the Internet is more important to the growth of our economy today than these were to the growth of economies of the past, and so there is no reason to expect faster growth than in the past.” (123-124))

Narratives Are Derived From Stock Market Movements:
"Conventional wisdom interprets the stock market as reacting to new era theories. In fact, it appears that the stock market often creates new era theories, as reporters scramble to justify stock market price moves. The situation reminds one of the Ouija board, where players are encouraged to interpret the meaning of movements in their trembling hands and to distill forecasts from them. Or the stock market is seen as an oracle, issuing mysterious and meaningless pronouncements, which we then ask our leaders to interpret, mistakenly investing their interpretations with authority.” (126)

Productivity Growth is not tightly linked to market gains:
"The statistics on the growth of labor productivity made some impressive gains in the United States in the late 1990s. This helped confirm, in many people’s minds, the advantages that the Internet and other new forms of high technology were offering to the economy, and was seen as justifying the appreciation in the stock market. And yet the high productivity growth in the late 1990s was partly a data error: the U.S. Bureau of Labor Statistics revised the 1998–2000 growth figures substantially downward in 2001, well after the stock market boom.33 Moreover, even to the extent that the productivity growth numbers were good, people read far too much into them. The numbers became a justification for admiring the Internet, when in fact the growth of productivity then had nothing to do with the fledgling new Internet, which was not yet a significant factor in the overall economy. Even beyond this, people didn’t realize how tenuous the historical relation between productivity growth and stock market gains really is.34 Productivity growth hasn’t been a reason to expect the stock market to do well. But the story in the 1990s that the reported productivity growth justified and explained the spectacular stock market appreciation was too good for stock market boosters and the news media to pass up.” (139)

Stocks are not always better than bonds in the long-term:
"The “fact” that Jeremy Siegel pointed out in his book Stocks for the Long Run in 1994, is that in the United States there has been no thirty-year period over which bonds have outperformed stocks. The supposed fact is not really true, since, as Jeremy Siegel himself pointed out in his book, stocks underperformed bonds in the period 1831–61.7 That may seem like a long time ago until one realizes that there have not been that many non-overlapping thirty-year periods in U.S. stock market history: only five such periods since 1861. There have been many overlapping thirty-year periods, but of course these are not independent pieces of evidence. Given the relatively short history of thirty-year periods of stock market returns, we must recognize that there is little evidence that stocks cannot underperform in the future. Siegel himself acknowledges this in the 2014 fifth edition of Stocks for the Long Run, published after the post-2000 correction, which brought more thirty-year intervals of U.S. stock market underperformance. The Moody’s Aaa Corporate Bond Total Return Index outperformed the S&P 500 Total Return Index in thirty-year periods ending in 2010 and 2011." (216)
. . .
Moreover, the United States may itself be the exception rather than the rule in terms of real returns on the stock market. Philippe Jorion and William Goetzmann have studied the real stock market appreciation rates (excluding dividends) for thirty-nine countries for the period 1926–96 and found that the median real appreciation rate was only 0.8% per year for these countries (compared to 4.3% per year for the United States).

"The evidence that stocks will always out-perform bonds over long time intervals simply does not exist. Moreover, even if history supported this view, we should recognize (and at some level most people must recognize) that the future will not necessarily be like the past. For example, it could be that, with investors buoyed by past successes in the stock market, there is now widespread over- investment. Companies may have hatched too many ambitious plans and spent too much on product development and promotion; therefore, they may not do as well as they have in the past. There was indeed substantial over-investment in the 1990s and 2000s, and this was a major factor in the world economic slowdowns starting in 2001 and 2007.
. . .
"So the “fact” of the superiority of stocks over bonds is not a fact at all. The public has not learned a fundamental truth. Instead, their attention has shifted away from some fundamental truths. They seem not to be so attentive to at least one genuine fundamental truth about stocks: that they are residual claims on corporate cash flow, available to stockholders only after everyone else has been paid. Stocks are, therefore, by their very definition, risky." (217)

Don’t throw the baby out with the bubble-bath water:
"Although the precise causal links are hard to disentangle even in these
dramatic episodes, one thing we do know about interest rate policy is that it affects the entire economy in fundamental ways, and that it is not focused exclusively on the speculative bubble it might be used to correct. It is whole-body irradiation, not a surgical laser. Moreover, the genesis of a speculative bubble is a long, slow process, involving gradual changes in people’s thinking. Small changes in interest rates will not have any predictable effect on such thinking—big changes might, but only because they have the potential to exert a devastating impact on the economy as a whole.

"The onset of the Great Depression of the 1930s was in fact substantially due to monetary authorities’ trying to stabilize speculative markets through interest rate policies, although the markets they were focusing on most were not the stock markets but the markets for their own currencies. Countries attempted to preserve the fixed exchange rate system, represented by the gold standard, against attacks. The countries that gave up earliest and abandoned their efforts to defend their currencies were the ones to emerge from the depression the soonest.” (227-228)

Markets are obsessed with conventional future valuation, not true value:
"[Market] participants [try] to buy into their predictions of the conventional valuation of assets in the near future, not the true value.

"A key Keynesian idea is that the valuation of long-term assets is substantially a matter of convention, just as it is with judgments of facial beauty. Whatever price people generally have come to accept as the conventional value, and that is embedded in the collective consciousness, will stick as the true value for a long time, even if the actual returns fail for some time to live up to expectations. If an asset’s returns are carefully tabulated and disappoint for long enough, people will eventually learn to change their views, but it may take the better part of a lifetime. And many assets, such as owner-occupied homes, do not have unambiguously measured returns, and a mistaken “conventional valuation” based on a faulty popular theory can persist indefinitely. The presumed investment advantages of, say, living in an expensive, land-intensive single-family home near a big city, rather than renting a cheaper and more convenient apartment in an urban high-rise, may just not exist, and most people will never figure that out.” (258-259)

[Brian Yahn · Rating 3 out of 5]

What a time to read a book about market panics & pandemics!

It's interesting that when the market goes up, people assume it makes sense, because they're making money and they like it. But when the market goes down, they think it's an over-reaction, because they liked the higher number better -- because that was their imagined net worth.

In reality, if stocks were valued in any true sense, prices almost never make any sense. When the market goes up, it's not because of fundamentals. And when it goes down, it's not because of fundamentals either.

It's interesting to read Shiller, because he only writes about what the market does. He doesn't try to predict what it will do. He doesn't put too much effort into making sense of what has happened in the past. He fundamentally believes that psychology plays a huge role in prices, and psychology is fickle.

However, for someone who is so interested in psychology and human behavior, Shiller's writing is very robotic. I didn't find much in this book that wasn't in The Black Swan or Thinking Fast & Slow or How Markets Fail -- and all of those books I found much more entertaining reads.

[Karen · Rating 4 out of 5]

Considering the current Gamestop stock frenzy, this seems like a timely read.

[Thomas Neil · Rating 5 out of 5]

For someone attempting to make sense of the market post-covid, metrics don’t begin to do the situation justice. Hence, a need for a deeper dive into bubbles. The crypto and tech stock phase and the “new era” rhetoric that accompany feel like they have been lifted directly from Shiller’s notes.

[Eric Ketcham · Rating 4 out of 5]

This book did a good job of describing the irrationalities which occur in markets and analyzed the potential precipitating factors. Slightly long and repetitive but there is a lot of information, of which can be hard to fully grasp the first time around. Lots of historical data and references. Cool to see the different intricacies and applications of human psychology which move the market in different ways, and affect how we interpret different movements and expectations that arise.

[Anil Swarup · Rating 4 out of 5]

The term "irrational exuberance" was first used by Alan Greenspan in 1996 when he perhaps perceived a bubble building up in the stock market. He did precious little to either elaborate this concept or take any step to prevent bubble from bursting as it eventually did at the turn of the century. In this seminal book, Shiller attempted to convince the reader about the existence of such irrational exuberance. He even explores the causes of such an exuberance. He delves into the history of past three peaks of exuberance in the 20th century. He discerned a similar trend emerging in the financial markets. Thus whereas Greenspan merely made such mentions about the irrationality ( and kept retracting it as a Federal Chief would not have wanted to precipitate a crisis), it was Schiller who not only analysed it but also attempted a prescription in terms of how the adverse impact of such an incipient crisis could possibly be mitigated. It is in this context that he advocates a reform of Social Security system. He is convinced about history repeating itself but is pained at authorities not attempting to learn from past experiences. Future events, like the sub-prime crisis, confirm the apprehensions expressed by Shiller.
There is a lesson for every country in what Shiller has to say but are we listening? Perhaps Raghuram Rajan who also discerned certain 'faultlines' in a purely market driven financial system is now a position to take corrective steps, would take such steps............or will he also like Greenspan just utter those words and let the crisis develop leaving everything to the "invisible hand"?

[Garret Macko · Rating 4 out of 5]

This book is perhaps more conceptually relevant today than ever before. Some critics argue that given the constancy of Shiller's bearishness/market skepticism, he's bound to be staggeringly right every once in a while—such flourishes, they say, are hardly reflective of any unique insights. While, with the exception of those who possess vastly superior information or technology, I'm massively skeptic of anyone who claims to possess powers of market clairvoyance, I think Shiller's work (now in it's third edition, published in 2015 to include material from his 2013 Nobel lecture) speaks to a trend that pervades all markets, whether financial or not; at its core, I think it's an artifact of human nature. Left unchecked, arrogance, myopia, and greed can generate vicious feedback loops that fuel chaos and cause destruction.

[Ujjwal Porwal · Rating 5 out of 5]

This was an excellent book by an extremely smart man. In this book Robert Shiller explains market bubbles and busts using behavioural economics and irrational side of investors. He demonstrated how prices change for no good reason either upwards or downwards. Apart from being a book stocks it's a book about behavioural or irrational side of economics.

Important to note that: -
Robert J. Shiller jointly won the Nobel Prize for his theory on predicting the stock markets. He shared the same Nobel with Eugene Fama who won it for proving efficient market hypothesis i.e. stock markets can't be predicted. So the main take away is that it's (almost) impossible to predict the stock market or pick stocks over a short term. Whereas it's empirically possible to predict the total market returns over a long term.

[Karl · Rating 4 out of 5]

This book is kind of dangerous. Shiller is wrong on the big picture but super convincing. Problem is he argues through analogies not basic principles. He puts up this analogy where

[Tariq Mahmood · Rating 4 out of 5]

The financial markets are not guaranteed investment; it is no different from other forms of investments. Stocks and shares can go up and down based on emotional buying and 'smart investors'. And who are these smart investors, these are mafias of investors working together to change prices up and down. And with 24-hour trading and millions of personal investors, stocks are like gambling :(

Just check the pump and dump technique.......

https://www.forbes.com/sites/johntobe...

[Yousif Al Zeera · Rating 4 out of 5]

Stock market, bond market and real estate market. When, where and why in a bubble? What is psychology's role into the markets? Is it really efficient markets? In-depth coverage with historical case studies and comparison studies of trends of different markets shed loads of light into the subject. Suitable for business graduates (banking, finance, accounting, etc.). The appendix (The author's Noble Prize Speech) is a bit advanced and can be skipped in case you can't withstand too much mathematical talk.

[Oren · Rating 4 out of 5]

Robert Shiller is my favorite person to see interviewed on economics. He chooses his words carefully, always saying the economy is unpredictable while being heralded as a prophet. No matter how many times he stares into a camera and tells people he has never predicted the future of the economy, people still believe the myths. Like Kurt Cobain yelling songs about how much he hates his job and fans while growing more popular by the hour.

So I've been wanting to read this book for years. I've read some of Shiller's academic papers and enjoyed them. Shiller really digs into the complete picture of economics, delving, or forging even, into the area of psychology in order to fill-out the frame. In this book, Shiller and his research associates have put huge amounts of time into looking at past significant changes in the stock and housing markets in order to try and understand them. This time included data base and internet searches for news stories including certain phrases to try and understand the prevalence of certain ideas.

One of these ideas is economic bubbles. Bubbles are those events which can't reasonably be explained by fundamental ideas of business or economics. They are agreed to be strictly events of sociology or some outside influence that suddenly causes business or market changes by extraordinary force. One of the issues of studying economics is that much of it is learned from history. Few people understand this fact. Many believe that the future of economics can be predicted or calculated/modeled with certainty. Shiller is clearly in a camp of people who don't believe that but is also, as a scholar, open to what can be learned from such calculations and models. Several bubbles are identified and attempts are made to understand or explain them in hindsight.

The efforts to employ psychology come up short for me. They get very close but don't offer satisfying results. As an example, there is a section which talks about epidemic diseases and how they spread. These models are then applied, with agreed limitations, to the spread of information. This is done to try and explain how an idea like, 'Houses never lose money" spreads through society and causes changes in prices through buying activity. These ideas all made sense but I never quite got the exact connection. The psychology was too light. Perhaps it's there, if I were to scour the notes section and references. I suspect Shiller has been quite thorough but the words themselves left me wondering, "Exactly what is the connection with psychology?" I believe it's there. Perhaps another reading is in order. I wonder what his wife, a psychologist or social scientist of some kind, thinks about his efforts to combine psychology and economics. It comes off a bit "psychology light."

The ideas of psychology and economic fundamentals are contrasted toward the middle of the book with the "efficient markets" theory. This theory essentially says that the market, in the long term, will always obey supply and demand laws. All of the people transacting to make up the economy serve to even-out lawbreaking events and therefore, the economy lends itself to predictability and, even, calculation. Shiller even admits that perhaps the reason some of his ideas show problems with the idea of an efficient market is that there hasn't been enough time to adequately, statistically signficantly, measure.

This book covers huge ground. Toward the end there is even some scathing commentary on how the United States military preference might play into future states of economy. The killing of so many people will no doubt find some retribution.

While I've leaned on Shiller's ideas and information heavily in a decision not to spend a large percentage of my net worth on a house, I came away from this book thinking intensely about how much I've leaned on the stock market. Shiller's idea of wise investing is clearly different form that espoused by the 401k support brought-in by the financial institutions holding the funds. I will look closely again at how my money is invested.

Good luck to those trying to predict the future state of the economy. Experts agree that is not the point. One can only try to learn from the past by taking reasonable actions based on fundamentals and the hypothesis that the past presents tendencies which will be repeated. Luck might swing one way or the other so best to learn as much as you can and apply the ideas so as not to be unlucky.

[Ondrej Kokes · Rating 4 out of 5]

I very much enjoyed this book. It may seem a bit dry to a non-economist (and admittedly even to me, an economist), but it offers a brilliant overview on financial economics and gives you a good idea why Shiller was awarded the Nobel prize in 2013.

It also offers a nice perspective on the economic climate between recession as the second edition was published in 2005 (the third ed is out now, 2015) and so it contains new material compared to the very first edition that came out just before the .com bubble. The newest edition should contain the Great Recession in full.

What I found most useful was Shiller's precise and conservative approach to researching things. He would offer a lengthy analysis of the news around crises, detail surveys he sent out at the time, focus on the impact of phrasing of these surveys etc. Even when he came to the efficient market hypothesis, his nemesis if you will, he would be very careful to dissect all the arguments of Fama et al. At one point he wrote somethign to the essence of "there is basically no evidence supporting this claim, but let's deal with it anyway."

This very friendly, polite and modest approach is what won me over, I simply like approaches like that.

[Mike Thicke · Rating 4 out of 5]

Shiller is rare among economists both for his sense of history and his openness to engaging with other disciplines (qualities that he shares with Thomas Piketty). In the first edition of this book, published in 2000, Shiller argued that the stock market was in the midst of a bubble. What is now known as the Dot-Com Bubble ended just as it was published. In the second edition, published in 2005, Shiller argued that the housing market was overvalued. In this edition, he argues that the stock market is again overvalued.

We'll see how that latest prediction turns out, but regardless in this book Shiller presents a compelling argument against the efficiency of markets and for applying psychology, sociology, and history to our understanding of market dynamics. Although I was already generally familiar with Shiller's work, I still found this book a valuable and nuanced presentation of his theory of market dynamics as well as a great source for understanding the various ups and downs of markets in the 20th century.

[Daniel · Rating 5 out of 5]

One of the best books on investments ever written. I wish I had read this when I was younger, rather than reading books like 'the Dow 20,000' etc. Painful lessons learnt.

[Justin · Rating 4 out of 5]

Well written and researched but had less actionable investing advice than I'd like

[Book Dragon · Rating 3 out of 5]

This book has been on my to read list for a while no, along with “A random walk down Wall Street”. I was pretty excited to read this book but it ended up being a bit of a let down. Shiller’s arguments are not factually wrong about markets being irrational but the book was academic and repetitive. He listed things that can go wrong in the market but in the end it comes down to probabilities. The edition that I read was from the late 90s when the market was at its peak at the dot com bubble, but the arguments that Shiller made are still relevant, even more so now in the age of crypto craze and meme stocks mania.

A little story for everyone that I learned from “The rise and Fall of Nations”: Each year on the Mara -Serengeti plains of Kenya and Tanzania, more than a million wildebeest walk a nearly two-thousand-mile loop that they have traced and retraced for generations.The cycles of market euphoria and despair often produce cliches about "herd behavior," but even in jungle life is more complicated than that stereotype. A certain "swarm intelligence" guides the wildebeest, ensuring the survival of the group even when it means an early death for many individuals. The wildebeest's circular migration has been mocked with the old proverb " the grass is always greener on the other side," but the herd is right about where the grass will be greener. It follows the rains, north into Kenya in the sprint, back south into Tanzania during the fall. 

The critical dangers appear twice a year at "the crossing" of the Mara River, which the herd must ford while traveling both north and south. Normally, to avoid predators, the herd heeds an ancient warning system - the shrieks of baboons, the harsh calls for jungle babblers. But this system fails on the banks of Mara, where the wildebeest mass by the tens of thousands, with danger in plain sight: floating crocodiles, rain-swollen waters, lions  in ambush on the far side. Heads down, the wildebeest appear to be talking all at once, their distinctive bellows like so many Wall Street analysts on a conference call, plotting their next move. The herd waits for one member to go. If this animal takes a step and retreats, fear paralyzes the multitude, but memories are short. Within minutes another will try, and if it plunges in, the mass follows - many into waiting jaws and deadly currents. An estimated 10 percent of the wildebeest population perishes each year, a large number of them during the crossing. People working in the global markets can get sucked into a culture that is programmed, like the wildebeest, to remain in constant motion. Every day research reports bombard these financial capitals, urging the crowd to chase the next Big Thing or to run from the next Big Correction.

Humans just can’t help themselves. Give it a read to check it off your reading list.

[Andy · Rating 3 out of 5]

This was pretty interesting and well written. The 3rd edition, updated in 2014 includes material on the 2008 mortgage driven crisis and even current "state of the economy" in 2014.
Shiller speaks very lightly: he doesn't say "The economy is going to go bust." He says: his CAPE ratio for the markets (a 10-year average PE) has only been higher at 2 times in history: 1929 and 2000. And that was 2014. That's scary but you just can't predict the future. We could have a booming economy and stock market for another 10 years, followed not by a bubble bursting, but by a slow deflation of sorts where average returns on stocks are low or negative. But we could also have a bubble burst.
Interesting notes include that bubbles like 2000 often are based on stories or reasoning that "The economy has changed!" Sure the internet was new and was going to make some companies more efficient and open opportunities for new business, but for many companies the effect of the internet would be small. It wasn't going to make every company in the S&P more profitable by huge amounts.
There is some good discussion of "efficient markets" and what makes markets act inefficient.
The book talks about bubbles in real estate, bonds and stocks.
Interestingly Shiller claims that real estate does not outperform stocks in the long run, and long term real estate prices in most places (that aren't running out of space) are driven mostly by construction costs, which have been going down over the years. And also interestingly, there is a claim that stocks do not outperform bonds over the long term, which is contrary to many things I've read, although I didn't see much data to support that claim. (I admit I was skimming when I read this section.)
Interesting book, but as you might guess there is little hard science on how to predict the exact time (within years) of a bubble, and not much to do about it (stay in stocks, but choose stocks with low CAPE). Still I'm worried enough to be thinking about how to prepare.

[James Ford · Rating 2 out of 5]

Unfortunately most of the ideas in this book are now fairly basic, although I admit that at the time it was written it was probably more enlightening (this was written pre-internet trading, pre-online financials, pre-online news and blog sites, etc.). The main point is that markets are not always rational for a number of (fairly obvious) reasons. A few interesting takeaways for me:

1. "New era economic thinking": this was the one very good chapter in my opinion. This chapter discusses the fact that every bubble was based on a general assumption that an upcoming "new era" of economic prosperity was on its way due usually to technological advances. Although these technological advances always do eventually materialize (transportation - trains, cars, planes, telegraph phone and television, internet, etc.), the market always gets ahead of itself when considering these advances. I do wish he would have applied his thinking to periods of sustained growth (i.e. discussed causes of sustainable growth vs unsustainable growth).
2. The shift to deferred contribution pension plans is a dangerous move and puts alot of elderly people at high risk.

I think the timing of this book (2000), its predicting of the dot com bubble bursting and pointing out all the reasons why the market was overvalued had alot to do with its success. Overall an ok read.

[Jai Gupta · Rating 3 out of 5]

The book gets its name and theme from the buzzwords used in Alan Greenspan's speech as the Chairman of the US Federal Reserve Board in 1996. It focuses on how the mood of 'irrational exuberance' is pushing up the stock prices and stretching the valuations and how the levels of the US Stock markets are way above rational. With thorough research and groundbreaking findings, Prof. Shiller convinces us about his theory of the unprecedented bubble. P/E ratios were dramatically out of line with historical precedent without any substantial reason. Though I found the book over-referenced and slightly repetitive, it nevertheless makes an interesting read. Prof. Shiller is an economist and not an investor, so, it is natural for him to inextricably link stock markets and economy. However, they are two separate entities and mostly do not explain each other. I don't deny that markets are not a gauge of economy or that they don't suffer from economic downturns, but there are individual stocks that can act independently. All in all, I recommend this book to anyone who is interested in economic analysis and not investing.

[Jeff Whistler · Rating 4 out of 5]

I am quiet rationally exuberant for this treaties on irrational exuberance. Shiller does an incredibly thorough expounding his life's work. He also was humble: acknowledging poor grad students did a most of the grunt work behind his analysis. Essentially humans are human, oh so human.

The efficient market theory is useful but not complete and cannot explain the way market behave in their entirety. Evolved from hunter gatherers, humans are filled with biases that spared us the bloody claw of nature, but are incongruent with the cold logic of capital markets. This leads to bubbles and troughs guided more by peoples perception of reality rather than economic reality itself. Such an idea is common knowledge now but not so when Shiller wrote this book. He was the man who changed the game! Or at least the perception of the game.

[Omar · Rating 4 out of 5]

A read that supplemented my fledgling knowledge of finance. I had picked up some books from the library on related topics, and thought this would be a nice supplement to try to put my understanding to the test and triangulate some lessons learned and smarten up about what's going on when the DOW is above 23,000, among other things...

In short, it's is a dry read, and the author's academic background (exposition style) comes through; however, in a world of irrational exuberance, where communication happens so fast, and policies are still in flux, it feels like a valuable book to have read that will make more sense over the long term.

[Samridhi Khurana · Rating 2 out of 5]

It is a literature on the bubbles existing in the world of financial markets. Shiller takes us through the various bubbles that sustained themselves due to herd mentality and feedback mechanisms in the markets. The underlying message of the book is to question the efficient market hypothesis and to caution the investors against the soaring markets due to amplification effects. Apart from this key message, I found most of the content to be repetitive and redundant.

[Sami Eerola]

Not gonna give any stars, because i do not understand economics or stock markets enough to evaluate this book. It was boring read, but there where some interesting stories about the history of financing and psychological research on ways that our brains trick us to do bad financial decisions. The same cognitive errors of judgement that are used here in the context of stock market could be applicable to conspiracy theories and other phenomenon of irrational thinking.