Great book based on the phrase spoken by Greenspan to try and slow down the economy.

not much food in the book overall..a very shallow and general talk, but i found it interesting to see his comments (p220) on the interest rate and other potential risks in the mortgage market back in 2005. some of the points he mentioned are indeed drivers of the recent subprime meltdown

If you have Invested more than ten dollars in the share market or real estate than you should read this book.

This book has good info in it but man, does it get long. I read lots of analytical info with interest, but this book was very very slow for me, especially in the middle and later chapters.

The good news is that the first couple of chapters make it worthwhile. It does present some very important and valid concepts. The easily-bored reader could read the first few chapters and the last chapter, learn a lot of good info, and not miss much in the long middle chapters.

JD

This book has good info in it but man, does it get long. I read lots of analytical info with interest, but this book was very very slow for me, especially in the middle and later chapters.

The good news is that the first couple of chapters make it worthwhile. It does present some very important and valid concepts. The easily-bored reader could read the first few chapters and the last chapter, learn a lot of good info, and not miss much in the long middle chapters.

JD

read the book.

It will open your eyes to the 'truths' of wall street.

This is an excellent book! It may seem dry at times with alot of statistics, but overall it provides a good insights into the field of behavioral finance.

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.

New Haven's Robert J. Shiller, is a highly regarded expert on market volatility. Shiller chose Alan Greenspan's term "irrational exuberance" for the title of this book alluding to the trend of stock market highs and the frame of minds lurking in the background that propagated that trend. What goes up must come down eventually. I see three statements regarding this grizzly business surfacing in this book. He addresses historical and social foundations for current trends. Secondly, he renders warnings on privatization and ill investments of Social Security and private retirement funds as opposed to plans that minimize risk-management principles and lastly Mister Shiller constructs a reassessment of investment principles and alternatives for the future player. The emergence of information at our fingertips via the Internet and an never ending trend in television, newspaper and radio news to over editorialize the actual events like chocolate shots covering a vanilla cone distort and gloss over every aspect of our lives today. Are we going to have another `storm of the century' or will the skies be sunny and warm tomorrow? Your guess is as good as mine. I think that is the point that Shiller is making in his book. What goes? Anything that makes you feel good for the next 15 minutes and don't think beyond that. I think we are headed for that place down below in a hand basket but I don't want to think too far ahead.

Robert Shiller starts his book by stressing the troubling lack of credibility of research and analysis being done on the stock market, to say nothing of the clarity and accuracy with which it is communicated to the public. "To be fair to the Wall Street professionals whose views appear in the media, it is difficult for them to correct the basic misconceptions about the market because they are limited by the blurbs and sound bites afforded them. One would need to write books to straighten these things out, writes the author. This is such a book."

Sometimes a picture or a graph is worth a thousand words. By plotting the S&P stock price index expressed in real terms or the evolution of price relative to earnings, Shiller vividly depicts the unsustainable nature of the high-tech boom that ended at about the time the first edition of the book was published. He also identifies three other episodes of grossly inflated prices: the Twentieth Century Peak of 1901, the market frenzy that ended with the Black Monday crash of October 28, 1929, and the go-go years of the 1960s. He characterizes these market episodes as speculative bubbles--unsustainable increases in price brought on by investors' buying behavior rather than by genuine, fundamental information about value.

There is always a vast supply of theories in bubble times to justify the market heights and to nurture bullish views about the future. Shiller lists several factors that plausibly caused the market to climb in the last recent episode of "irrational exuberance": the arrival of the internet, the decline of foreign economic rivals, the surge in materialistic values, the growth of mutual funds, the expansion of defined contribution pension plans, the decline of inflation, the declining cost of making a trade, and others. Each factor played a role and they certainly reinforced each other in a unique combination, but, as the author notes, most of them are one-off events and they do not by themselves justify a radical departure from the past or the dawn of a new era of permanently high prices. Indeed, Shiller shows that the belief in a radical change in the rules of the game, what he calls `new era economic thinking', accompanied all previous market peaks in US history.

Whet makes people receptive to these optimistic statements is not, as the title of the book would suggest, a kind of irrational exuberance or collective madness, but is rather to be found in patterns of human behavior identified by psychological research. People tend to make judgments in uncertain situations by looking for familiar patterns and assuming that future patterns will resemble past ones. They need psychological anchors to determine whether stocks are priced right or when to enter and exit the market. They hold beliefs which they like to see confirmed, and the media industry can slant stories toward these beliefs. Indeed, the media and the investment community have an interest in encouraging conventional wisdom about the market and exploiting the get-rich fantasy. As the author notes:

"People writing for or quoted in the media regularly pose the question, after a big one-day decrease in the market, of whether this time the market has `found its bottom' or, after an increase, whether the market has `begun a long-term rally'. The symmetrically opposite questions seem never to be asked. One never sees media accounts after an increase inquiring whether the market has `found its top' or, after a decrease, whether the market has `begun a long-term decline.'"

The conclusion is cautiously optimistic: if reasonable attitudes toward risk and return are promoted by opinion leaders and transmitted through word-of-mouth or by virtue of example, the general public will `unlearn' some basic misconceptions about the stock market and will take proper steps to protect their existing wealth from excessive risk. No doubt this book will have contributed to this result.

Really got me thinking and was filled with very useful, helpful, informative, but easy and simple to understand tricks. One of my favorites. A+

I think that Shiller is giving a brilliant insight into the mechanics of market behaviour, other than those of ''fundemental analysis'' or ''technical analysis'' that are the most popular among investors. Behavioural finance is the prisma through which markets have to be seen and this is very clear in this book. Finally, this book is an axcellent piece of material for PhD students that work on issues of behavioural finance...

About Robert J. Schiller's book, Irrational Exuberance (2000; 2nd ed., 2005), it's hard to say enough good things. First Schiller, who is Stanley B. Resor Professor of Economics at Yale University, had uncanny timing. His warning on the excesses of the technology bubble stock market came out at its very peak, in mid-March of 2000. He wrote in an afterward to the paperback edition (2001) that as he made publicity visits to bookstores in April of 2000, a large carnage had already occurred in the market, particularly for tech stocks and e-business names. Second, he writes in a transparent style. Third, he and his team, instead of tossing out opinions about what they think investors do, carry out frequent sample surveys of both individual and institutional investors. Fourth, he undergirds his hypothesis with numerous insights from economics, psychology, game theory and history. Finally, he gives many cross-references to booms and busts around the globe.

The second edition points to over-valuations in the U.S. real estate market that Schiller believes were comparable to the excesses of the dot-com era in stocks. This prediction may prove to be accurate as well, but the unraveling so far has not proceeded in so dramatic a fashion as did the technology crash.

From what valuation method does Schiller proceed his analysis of stocks? Fundamentally, he bases it on price-earnings ratios. (Price-earnings ratios have been shown to be a crucial characteristic in predicting long term stock portfolio performance; see James P. O'Shaughnessy, What Works on Wall Street [1998, rev.]). More precisely, he uses as his numerator the real (inflation-adjusted) S&P (Standard & Poor's) Composite Stock Price Index. For the denominator, he uses the moving average of the past ten years of real S&P Composite Earnings. Advantages of these data series: the source is considered reliable; they go back to 1841 continuously; they are inflation-adjusted.

Using the price-earnings data and ratio as defined above, a first great cyclical high can be seen in June 1901: a P/E ratio of 24.5 times. Subsequently, P/E declined, and stocks performed in a desultory fashion, until June of 1920. The second great peak, occurring at the end of the Roaring Twenties, was 32.6 times--reached during September of 1929. The Great Crash followed. A third peak occurred during the so-called "go-go" era of the 1960s: 24.1 times in January of 1966. This too came a cropper, followed by years of stock market underperformance--bottoming out in terms of P/E ratio in the early 1980s. The US stock market P/E ratio at the height of the technology boom in 2000 reached an unprecedented 44.3 by January of 2000. Then, boom-boom, out went the lights!

Schiller explores from many perspectives just how markets sometimes reach such giddy highs. One "amplification mechanism" is likened to a naturally occurring Ponzi process. Charles Ponzi attracted 30,000 investors and $15,000,000 within seven months during 1920. Ponzi promoted his scheme by cashing out some early investors, which excited many followers. Ponzi schemes always involve an attempt to pyramid investor inputs while wasting or defrauding much of the principal outside of the touted investment theme. Schiller points out that rapidly rising stock markets can bring in an unintended Ponzi dimension, as late-comers seek to replicate earlier investors' apparent success.

Such feedback loops lead to circles of investor behavior, which can promote the expansion of a bubble, but also can lead to its rapid deflation. Schiller also shows how news media attention to feedback loops can intensify their force and expand the volume of participation by investors. Often, behind investment fads, there are popular ideas about "new eras" that supposedly render irrelevant any historical comparisons. Feedback loops are facilitated by the demonstrated over-confidence of many individuals in their judgments as well as by evolved patterns of mass behavior.

Generally, markets threaten to become untethered whenever investors' principal focus is on price performance rather than fundamental value criteria. In such an atmosphere, it can be imagined that trees truly can grow to the sky. Or at least that there will be a "greater fool" who will take you out of your investment in a timely fashion.

Schiller does not purport to offer a rule of thumb for market trading practice. Indeed, any scheme that could be used continuously and in static form to operate a successful trading system (a putative "money machine") would surely be arbitraged away by perceptive traders. Instead, he lays out a more intuitive case for how to avoid investing in major market excesses when they occasionally occur. His proposed solutions included a salutary emphasis on hedging activities. Some of the hedges he lays out are novel but may not be practical to implement, owing to the problem of illiquidity (lack of ability to trade).

Andrew Szabo
(Greenwich Financial Management)

If you are looking to understand the real estate market, this book is fantastic.
If you want to learn about mean reversion, this book is very good.
For stock market information, this book is good but not great.

When I read the first edition six years ago, I loved it and read it with the cap off the highlighter most of the time. I read the second edition recently and enjoyed it again.

He is brilliant and the book is easy to read.

He doesn't get into the business of market timing and trying to call peaks and valleys. What he does is go into some theories for why we see the types of price actions which we do. Some of his ideas seem improbable, others seem to click more intuitively. But, he gives good source documentation for everything, so you can enrich your understanding with lots of other work that has been done already.

Also, the book is pretty readable.

I read this book with great interest. My husband had a copy in his collection of books on investing. My husband was an investor for many years and used a technique called passive investing. From the material things he left around the house and our life style I can only assume he was more successful than most investors.

My husband left me with a large investment portfolio. For years he tried to teach me about stocks and bonds. He told me about index funds but for one reason or another I could not grasp just what he was talking about. I decided that it was about time I learned how to invest. My lawyer helped me transfer title to our securities account and suggest I get a good book on the subject. I looked through my husband's library and all his books looked too technical. In desperation I typed in on the Amazon web site "How to Make Money in the Stock Market and found this book.

I read all the reviews and decided to buy the book. This little book told me what I wanted to know. Like what was the strategy was my husband following. Where could I go for help when needed? In the book I found a web site that directed me to other investors who follow strategies using index mutual funds. I often asked my husband what stocks he purchased and he would say all of them. He had mentioned index funds.

I went to the web site he often visited and was mentioned in the book. When I logged on to my surprise the other posters knew my husband and was familiar with his investing techniques. I had found investing friends.

I urge all widows at a loss to buy this little book titled How to Make Money in the Stock Market-Buy 2,500 Different Stocks for $1,000-Pay no Commission by Gordon L. Eade a retired investor with 50 years experience. It only took me 45 minutes to read the book. I know now how to manage my husband's portfolio and where to go to get accurate and unbiased investment advice when needed. I will read all the other books mentioned in this book to further my knowledge of how to invest in stocks and bonds. For now I am comfortable and am certain my financial future is secure. For those who don't care to get too involved-read the chapter on AUTOMATIC PORTFOLIOS. These are portfolios offered by Vanguard that adjust risk automatically.

While the first publishing of Irrational Exuberance in early 2000 was indeed timely and prescient, that was a long time ago in the financial markets. Shiller now trots out the same arguments in 2005 about the housing market, adding some notes to the preface and a new 2nd introductory chapter about home prices. This is disappointing because all it says is there is a lack of consistent long term price data on houses, so we end up with detailed data about U.S. cities. Location matters in real estate, not so much for stock prices, but that doesn't seem to make much difference to Shiller. Yes, home prices have been relatively less "exuberant" in Cleveland, but how vibrant is Cleveland in the global economy? There are other commentaries I've seen which go in much greater depth about the housing market. I'll buy the argument that prices have increased, but I won't accept Shiller's innuendo that home prices are the same type of market as stock prices. There's not much meat here for real estate analysis, so if you get this book, it's just another historical analysis of things like the tulip mania and other bubbles. I should write a book like that, since there is so much material available to package, and I've seen several books that flog the "insights" for all they are worth.

This includes Holland, as any good book on bubbles must, through a paragraph about homes on the Herengracht canal in Amsterdam. The validity of this metric is that the buildings haven't changed much on the outside in almost 400 years. The real (inflation adjusted) price gain works out to 0.2% per year. Cool, in the long run real estate prices just beat inflation. Does that translate into a prediction of imminent collapse in global housing prices? I'm not sure you can connect those dots. In the long run, prices will equalize somehow. Shiller doesn't add anything to the discussion of how that equilibrium will be achieved.

This book is an interesting and informative look at market and real estate bubbles. It has helped me to understand the crazy real estate bubble here in the San Francisco Bay Area, and it has also helped me to look at the stock market from a more educated perspective.

This is the most well articulated and thoroughly researched account of the factors that contribute to speculative bubbles (or periods of irrational exuberance) I have come across. So well written it would be enjoyable for those not in the finance industry. It provides perspectives on where the stock and housing markets are now in the context of historical tendancies, beyond the daily noise and media hype. Can't say enough about this book. I'll probably be reading it a few more times.

If you already appreciate that markets (especially stock markets) are prone to periodic "speculatory bubbles" whose primary cause is greed and herd-behavior, then you know most of what this book has to offer. Shiller presents lots and lots of possible causes, but since he can't demonstrate their relative, quantative effect, I see little point.

There is no real investment advice save "diversify." There was an interesting appendix on using commodities as a diversification, but the conclusion is there are no really good ways at present.

Perhaps the most interesting passage was where he described how people hearing his warning lecture just before the 2000 crash, some of whom agreed with him, went out and bought anyway! This brings home the extraordinary psychological power of these speculatory markets.

I suppose that researchers or those in search of extreme data might find some interest here, but it seems much-too-much detail (to little avail) for most investors.

Greenspan knew the Super dollar shock would cause foreign policy makers to tighten monetary and fiscal policies. US foreign capital inflows are driven up by a strong dollar and fuels inflation through currency depreciation and flows into the super dollar compel foreign governments to hold domestic interest rates high and has the affect of export US recession worldwide. In 1982, 30 million people worldwide were unemployed in OECD countries. Massive amounts of capital out-flowed from Japan into the US.

Greenspan knew dollar decline had to be orderly and gradual allowing synchronized adjustments that would not upset LDC financial instability; in the 80s foreign investment remained strong at $100 billion propping up the dollar and in 1984 the dollar bought 263 Yen and 3.47 DM; $160 billion deficit represented 3.6% GNP. What would happen in a lightening fast dollar plunge? A lightening fast dollar plunge would cause world economic imbalances to adjust in a hard landing with sharp increases in interest rates necessary to lure global investors back into the dollar and these global investors would want guarantees of a positive real interest rate. A lightening fast dollar plunge could trigger a recession causing disinflation in LDC debt crisis or a full fledged systematic financial crisis. The fed would be forced to pump liquidity to stave off depression. A falling dollar has a 18 month lag before exports increase and manufacturing capacity would need to expand by 30% requiring huge leaps in capital investment, at a time when money has become tight and collateral values dropped.

In 1987, Greenspan focus was to protect the dollar from further falling and in Sep 3, 1987 received approval for a ý point discount rate hike to 6%, designed to dispel the myth the fed was a hostage to the dollar. Baker concern was that the rate increase would be perceived as defending the dollar and not fighting inflation. The trade deficit got into the bond market and interest rates hit 10.4%. Stock prices reacted poorly and retreated in price. Greenspan said, "he saw no inflation danger" and the market did not trust his credibility and his statement fueled suspicion. Black Tuesday was seven days away.

Greenspan said he wanted a strong dollar; he believed market forces would stabilize the dollar on their own; he reasoned bonds would have sold off their positions as a result of the falling dollar. Dec 1987, the dollar slide had started. The goal was to get dollar sellers to buy back dollars at a higher price. This was done by punishing the traders betting short on the dollar. The fed, Bundesbank, BOJ, joined by banks from Switzerland, Italy, Canada, and Austria pounded the markets. The largest plays armed with insider info, policy moves, well timed intervention created psychological uncertainty. Central Bankers acted like market players. The fed traders called Tokyo to ask for the dollar price, this scared the Tokyo because this action was not ordinary and they saw a coordinated intervention action emerging. Monday, $2 billion entered; Tues $1.5 billion as the central bank engaged in unusually aggressive infliction of pain on the dollar shorts. Blocks of dollars were bought at $25 million and the intervention was very noisy. The dollar rose, the central bankers intervened at higher and higher levels on dollar purchases with the dollar settling at 127 Yen and 1.63 DM up 8.3% and 10.4%. In 1987, Central bank intervention amounted to $120 billion in dollar assets, of which, $35 to $50 billion were concerted thought G7 processes. The rising dollar averted a Tokyo stock market crash.

By 1991, Greenspan needed to reverse negativism and create confidence to avert a downward spiral into depression. Three forces were at work: 1. tighter supply and demand conditions for global savings; Germany and Japan were consuming their national savings surpluses. 2. Higher real interest rates were demanded by global investors 3. Higher dollar inflation expectations among global investors were expected. The US faced a $400 billion deficit or 6.5% GNP and real estate values which represented the collateralized debt was falling. Suddenly the US was facing the S&L financial shock which required a $350 billion bailout. Greenspan knew the falling dollar was not enough to correct economic imbalances, US budget deficit slashes needed to be implemented. In 1990, Drexel Lambert's $200 billion junk bond went under. Debt in the US was growing faster than tangible assets, US Corporate net worth was 95.47% of GNP in 1980s and by 1988, net worth had fallen to 74.3%. In 1992, Greenspan said, "To repair imbalance sheet means that instead of consumption and investment, people are paying off their debts, since, it'll take a long time to get back to equilibrium, the economy can't move forward." Fed policy took a down turn with Iraqi invasion of Kuwait, German reunification, deflation of Japan's economic bubble, and Bush no tax stance. The US was facing 1% growth and 5.4% inflation.

Saadam invasion of Kuiwat caused oil prices to leap from $18 barrel to $30 barrel, bond prices plunged, the shock was ill times since the economy faced slowing growth and heating up inflation. 35 banks were in danger of failing. The fed had to purse a hazardous bailout, as in the case of the $2.3 billion bail out of the Bank of New England. 25 banks closed with assets of $6.5 billion. In anticipation of downturn businesses slash inventories, cut spending, fired employees, banks retrench on lending as demand is falling, banks become more vulnerable, collateral value diminishes and bankers can not take a "wait and see" attitude for a turn into appreciating collateral values, and loans fell by 3.6%.

In 1990, Greenspan deployed three of its credibility restoring tools: 1. Greenspan lowered the fed funds rates from 7% to 6.5% 2. Greenspan eliminated the 3% reserve requirement banks must maintain on non interest bearing depositions on short-term CDs. 3. Greenspan cut the discount rate to 5.5%. Amazing the Banks survived financial ruin, as the market fixed the problem. Banks recovered, "The market bid up stock prices beyond any conceivable immediate relation to future earnings". By 1992, Mega bank mergers had increased profits by double. The fed had trimmed requirements for deposits on checking from 12% to 10% and freed another $8 billion for banks to lend. The fed rate dropped from 3.75% to 3% and the Fed added $10 billion too boost the economy and the economy recoveried.

Shiller sees current market price-earnings ratios (mid-20s) as still far higher than historical averages, and President Bush's "Ownership Society" a plus for economic growth but also encouraging speculation.

Further evidence that the market is overpriced is that the DJIA was about 3,600 in early '94, and then passed 10,000 during March, 1999 - tripling in 5 years, while GDP rose less than 40% and profits less than 60%. As for real estate, Shiller reports that in the eight most volatile states median home prices rose from '85-'02 from 4.9Xper capita income to 7.7X.

Why these large increases? Shiller offers a number of explanations:

1)Most investors are unaware of the troubling lack of credibility of most stock market research.

2)Mortgage lenders began including a wife's income during the 1970s in qualifying for a loan.

3)Capital gains tax cuts in '97 and '03. Also Proposition 13's passing in California.

4)Greenspan creating the impression that major losses would be prevented - eg. the Federal Reserve's stepping in after the '87 crash, '98 Russian debt crisis and Long Term Capital Management's failure, and the Y2K crisis.

5)Analysts' consistently optimistic forecasts (eg. only 1% said "Sell"), combined with the onset of regular business reporting on cable.

6)The growth of IRAs and mutual fund advertising.

7)Greenspan's "justification" for new stock levels through concluding that we were in a "new era" - tremendous business improvement via computers, without inflation or business cycle downturns. (A turnaround for Greenspan who in '96 originated the term (and concern over" stock market "irrational exhuberance.")

Shiller's recommendations include a monetary policy that gently leans against bubbles (he also points out that the 1930's Great Depression was substantially due to monetary authorities' trying to stabilize speculative markets through interest rate policies), opinion leaders offering stabilizing opoinions, imroving Social Security's design - reducing the felt pressure to invest for greater return (how would this occur without putting further pressure on stock market prices is not made clear), placing company funded/supported retirement plans on a sounder footing (same problem as prior recommendation), and an effective plan to increase savings (again, I'm unsure how this would

Shiller pursues his uncomplimentary examination of inexperienced investors authoritatively, all the way into their psyches and lapses of reasoning. Introspecting to the CNBC-led, over-hyped carnival sideshow that investing dilapidated into (fall 1999 to March 2000, when the top exploded), all-important valuations were relegated in favor of insane dot-coms, companies with NO business models, not expected to turn profitability until years later, and ever-accursed tech stocks, whose prices were trading profanely overextended. The culprit for investors' sins was financial media; from the most superficial propaganda outlet, ruining investing science into a fad, CNBC, to purportedly "respected" publications, WSJ, to radical, greenhorn publications, the Street.com and Motley Idiot. All sources mentioned had one unrighteous plan in common: the turbulent peddling of speculative garbage like YHOO at $200 without current year earnings to show for, OR shamelessly outright varmint: Pets.com! The culpable media obviously didn't incriminatingly impose people to go underweight in cash, homicidally overweight in tech-but their worst involvement was NEVER raising the alarm to cap Wall Street's mania, angrily opting instead to procure mutual fund talking-heads ruthlessly, to hypnotically fabricate longing, on television!

Discordant factors produced the disreputable herd mentality/behavior that Shiller dissects, striving to overthrow the Efficient Market Theory, which invites debunking. Shiller decidedly reasons the opposite of the Efficient Market Theory. It's unimaginable for persons to actually oppose Shiller's precognition, not because bears the world over were vindicated by equities' bleak performance, but because stocks' P/E ratios are calculated for precisely the reason Shiller alerted: to regulate stocks' unwarranted racketeering. It's fact, that at the bubble's start, techs in the networking and chip sectors were probably outperforming their "old-economy" peers, relating to earnings. Yet since most investors are miserably prepared, they were harshly ensnared by the lax press to pile on to those initially moderate rewards for stocks, to abuse those gains in overstepping ways. Likewise, one could argue that when the Bubble burst-and additional factors like 9/11 and corporate scandals contributing-those same feebly swayed "investors" sold the markets off nightmarishly worse than what was due. Again, because their paranoid nervousness took over their rationale in deciding how to approach markets. I retrospect with ghoulish HORROR, the relentlessness of wrongdoings that Wall Street, the collective body, committed in hazardously presaging themselves for the hardest bear ever.

CNBC, fund managers, analysts blindingly had the blameworthiest ulterior motives to exploit undereducated soccer moms, Sunday investors. Roughly analyzing, the more people CNBC guilefully suckered into longing dangerous techs, the more ratings they'd get, intensifying on-air "personalities"' payoffs, including CNBC's anchors' OWN holdings in various funds they'd get under GE. The more bait fund managers could lure to invest in their funds, the more they'd be compensated for escalating their funds' values. Ever-notorious ANALysts' ulterior motives laid not in the public's response, but in companies' stocks that they covered. Some were paid kickbacks for their suspiciously nothing-but-buy ratings. This triad of terror is accountable for falsely justifying the market's overreaching excesses beyond their, initially, reasonable beginnings. The drone public was simply mistaught that internet stocks' repugnant absence of income would materialize soon enough, networking high-fliers like CSCO and JNPR were said to "never suffer" from lack of business because of ever-expanding business that the growing internet would provide, and that the zombie public could expect profane, double-digit returns for years to come, laxly based on one year's (1999) fluke growth of speculative tech stocks which were preyed upon as a fad.

Also contributing to mania were factors that people mistook to maltreat as reasons for entering markets in a buy-and-hold savagery. As baby-boomers aged, they were unquestionably snared by CNBC's falsenesses to expose themselves supplementary more to equities which were on teetering foundations. The same's true of mutual funds' elevating popularity, as innumerable people were misdirected to blindly trap themselves in funds where they'd never monitor its performance for lengthy times. Other factors were also involved in this worst bear market in 100 years, constituents like 9/11, corporate improprieties, personal bankruptcies-the plausible, defining trigger that blew the markets up (particularly NASDAQ) was people overstretching their margins, thus being extorted to sell automatically. These are hallmark characteristics of hype markets' speculators being so overextended on long sides that when savvy investors decide to take their respective gains from months of abominable gains, selling significantly, margin calls are consequently called in on many accounts. This leads additionally bleakly into the domino effect of tumbling decks of cards.

It's pronounced message still corresponds to today's markets. CNBC's-ONCE AGAIN!!!!-restarting their impenitent Jihad of superficially, abusively embellishing the mediocre point the economy's currently at.

This is the second edition. The book opens with some great charts of real-estate appreciation corrected for inflation over the years. I have looked for such a chart for a long time over the web but never found one! The author also presents a simliar chart for stocks (this I've found very often in other places). The author uses these charts to back up his statements making his case very convincing!

Good reading for those who like evidence-based presentation of ideas!

"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 behavioural 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.

Shiller's book presents conclusions that are correct.However,all of these conclusions have been arrived at by other scholars long before Shiller published his book.The best general exposition is in the 3rd edition of Kindleberger's Manias,Panics,and Crashes(1996).Kindleberger is mentioned in one footnote in Shiller's book.The best technical exposition is Benoit Mandelbrot's Fractals and Scaling in Finance(1997).Mandelbrot is mentioned in one footnote in Shiller's book.Since the mid-1950's,Mandelbrot has shown that the financial markets are subject to wild risk,based on the approximate use of a Cauchy Distribution,and not the mild risk of the normal probability distribution ,the use of which is supported by no empirical results.The best short exposition of this problem is contained in chapter 12 of John Maynard Keynes's The General Theory of Employment,Interest and Money(1936;GT).Keynes (and later,Daniel Ellsberg)showed that the main problem in the stock markets is the existence of ambiguity and/or uncertainty about the future expected returns.Nowhere in this book is the fundamental analysis provided by Keynes in the A Treatise on Probability(1921) and applied in the GT given even a footnote.According to both Keynes and Ellsberg, fully rational decision makers are confronted with the necessity of making decisions on the basis of unreliable,vague,unclear,ambiguous,and underweighted probabilities in short periods of time.Such decision makers attempt to obtain additional relevant information by incorporating the views of experts whom they think are more knowledgeable than they are.This leads to crowd,group,herd and/or cascade effects that leads to the creation of bubbles,manias,panics,and crashes.This is not the reason given by Shiller.Instead,Shiller bases his claims on the so called "new" behavioral economics of Tversky,Kahneman ,Thaler,etc.This group of academics base their analysis on the claim that decision makers are hopelessly irrational and ignorant(they do not understand how to correctly apply statistics and probability based on applications of the normal probability distribution and its variants).Such irrational decision makers resort to a host of heuristics,mental shortcuts,and rules of thumb ,combined with their emotions and fears,in order to make decisions.There is obviously a major conflict about what the major reasons are for the boom-bust nature of the stock markets and all other FINANCIAL MARKETS.Shiller appears to have attempted to hide these major differences in this book.The conclusions are correct,but the reasoning supporting these conclusions is flawed and incomplete.

While reading this book, I was reminded of the three laws of thermodynamics:
The First Law: You can't get anything without working for it.
The Second Law: The most you can accomplish by working is to break even.
The Third Law: You can only break even at absolute zero.

Most engineers can recite something a little more down to earth:
1) You Can't Win.
2) You Can't Break Even.
3) You Can't Quit.

Dr. Shiller does a good job of arguing our investment portfolios, on average, must obey laws 1 and 2, but suggests we can escape law number 3. I'm not convinced

The book starts very well, documenting a strong historical relationship between 10 year annualized growth and the ratio of 'stock price' divided by either earnings or dividends. He covers this material several times, and always makes good use of it. In short, the high price-earning ratios of 2000 were not sustainable. The title argument is proven in chapter 1.

The middle of the book is occupied by less compelling material. First, we review what Shiller called structural factors. These are facts such as the Internet and baby boomer demographics. This includes a detour into popular delusions caused by our natural tendency to get excited by the enthusiasms of others, honest or otherwise. Next, we cover what Shiller calls 'cultural' factors: news, popular concepts (both high-brow and faddish). Not willing to rely on these simple distinctions, Shiller call psychology a 3rd area of interest. In this section he covers what might be called 'behavioral finance' (psychological anchors and herd behavior).

Much of this is fascinating material and highly recommended. Unlike chapter 1, the implications are somewhat vague.

Finally, after reviewing what amounts to thermodynamic laws 1 and 2 applied to average investment portfolios, Shiller concludes the government can do a better job. Very specific comments on Social Security reform dominate the final chapter. Unfortunately, none of the book lays any foundation for his policy advocacy (he hates privatization). I suspect one's political persuasion will determine how one reacts to the argument, since there is almost no background or survey of policy options provided. For me, the sudden change in paces was an attempt to change the subject and avoid talking about thermodynamic law #3.

Irrational Exuberance 2nd Edition

Robert Shiller is at it again. After the timely release of his original Irrational Exuberance just one month before the stock market crash in 2000, he's back with the 2nd edition. The entire second chapter is an attack on the runaway housing market.

A main theme is how bubbleites or bubble-addicts, not being able to live without the thrill of participating in a runaway market became disheartened with the slumping stock market and headed to real estate.

Yes, it's a very interesting book, a bit scary; proclaiming the stock market is still vastly overvalued and the housing market could fall apart at any minute. He points out that real (inflation-adjusted) PE ratios are at the highest point (with the exception of the 2000 peak and the 1929 peak) on the S&P Composite Index when going back to 1860, and how real, (inflation-adjusted) home prices have only appreciated an average of .4% over the last 114 years.

If you Google Robert Shiller you come up with hundreds of articles discussing the housing bubble with his comments. Last week I read him saying the housing market could take a 50% clipping in some areas.

One thing is for sure, if the housing market pops in the near term he will have called two major bubbles within 5 years and will become the famous bubble boogie man.

By Kevin Kingston, author of: A 20,000% Gain in Real Estate


(...)

I read this book to find out how potentially dangerous the real estate bubble is. According to the professor the bubble is based on mass psychology. More and more herdlike investors buy just because prices are going up and up. That sure sounds dangerous. But what will happen next? Forecasters are uncertain about price levels of homes in one year's time, and for 5 to 10 years, they have no idea. There is danger out there but we don't know when it will hit us. No one knows how to forecast a turn in mass psychology. This all does not make real estate sound as solid as it is supposed to be. But if you are investing for the very long run as I do, don't sell in a panic, because on page 16 Professor Schiller writes: "Real estate home prices showed remarkable stability over the whole boom-and-bust cycle of the stock market surrounding 1929." So real estate is a solid investment after all.