When I obtained this book, I figured it had information about both investments and the economy. Like any other book of this type, I always ask, "How can I be a better investor or what new information can I learn about the economy". The book cover explained the book would be about bubbles such as the real estate and housing bubble.

Unfortunately, I was seriously disappointed in a book written by a Yale University professor. In the beginning and throughout the book, Mr. Shiller explains more about surveys that he did. In one case, he was very proud of the way he did his survey. Apparantly, he can ask the right question to get the right answer. I could never figure out how useful these surveys were but they seem to make good fillers for a book.

The book become briefly interesting around page 100. Yes! Page 100. At this time he introduces unlikely investors in previous bubbles such as hotel waiters, etc. This is a good point since my own experience has suggested unlikely investors in all bubbles. In the 30's it was the shoeshine boy, in the late 70's it was the priest, and the late 2000's it was the sports figures.

Again, the book becomes interesting around page 200 for a discussion about regulation. This discussion was very shallow and never really mentioned the real cause of the housing meltdown. My own analysis always suggested former President Clinton started it and then was allowed to continue unchecked my fellow democrats. In the index of the book you can find Clinton's name mention once. I would say -- not good research for a professor. However, Mr. Shiller is good at conducting surveys.

Towards the end of the book, I figured this is a second edition so he must be like a movie producer trying to profit off his first success. Later, I figure the professor is like any one else trying to make a living -- just slap something together and it might sell! In the end, was I a better investor because I read the book -- No. Did I learn anything new (and useful) regarding economics -- No. If you have to read it, borrow the book from the library.

This book does not quite work because the author gives us no algorithm to determine when the market is irrationally exuberant or merely going up.

This book tries to get at the heart of what causes bubbles. Schiller is honest that there is no one cause that can be purely attributed the to building of a financial bubble nor does he contend that the bursting of a bubble can be predictable. He uses examples from all the major stock market crashes from the past century. Part of focus is on the media and its influence on the generals public attitude towards various asset classes, mostly stocks and housing. Its a great reference to have if you think another bubble is on the verge of building as the book cites repeated themes that can be seen in the media that occurred in other bubble creation.

Great read. Won't get your rich (at least now) because we just missed one of the largest bubbles ever to be seen in housing. However, if humans are still running the world for the next 50 years be assured we'll have some more bubbles to come.

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

Last year in my country you can see some commercials in the TV inviting to invest in Mutual Funds, and I believe lots of people turned to that. The problem is that the very next year, beginning in January, the housing bubble burst and we know the rest of the story. Although this book was written before that, the book remain valid at explaining the particular behaviour of the markets in these moments of furor, the "irrational exuberance", and the panic that follows it. In my opinion the book is a good investigation of the markets, you can see the author analyzing all the factors involved, including sociological and psicological (this make the book a little slow). Is good to invest in the financial system, but in awareness of its behaviour.

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.

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.

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)

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).

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.