Irrational Exuberance (book)
- For other uses of the term Irrational exuberance, see the Irrational exuberance (disambiguation) article.
Irrational Exuberance is a March 2000 book written by Nobel Prize-winning Yale University professor Robert Shiller, named after Alan Greenspan's "irrational exuberance" quote. Published at the height of the dot-com boom, it put forth several arguments demonstrating how the stock markets were overvalued at the time. The stock market collapse of 2000 happened the exact month of the book's publication.
The second edition of Irrational Exuberance published in 2005 is updated to cover the housing bubble, especially in the United States. Shiller writes that the real estate bubble may soon burst, and he supports his claim by showing that median home prices are now six to nine times greater than median income in some areas of the country. He also shows that home prices, when adjusted for inflation, have produced very modest returns of less than 1% per year. Housing prices peaked in 2006 and the housing bubble burst in 2007 and 2008, an event partially responsible for the Worldwide recession of 2008-2009.
There are some economists who challenge the predictive power of Shiller's publication. Eugene Fama, the Robert R. McCormick Distinguished Service Professor of Finance at The University of Chicago and co-recipient with Shiller of the 2013 Nobel Prize in Economics, has written that Shiller "has been consistently pessimistic about prices," so given a long enough horizon, Shiller is bound to be able to claim that he has foreseen any given crisis.
- "[t]he stock market has not come down to historical levels: the price-earnings ratio as I define it in this book is still, at this writing , in the mid-20s, far higher than the historical average. … People still place too much confidence in the markets and have too strong a belief that paying attention to the gyrations in their investments will someday make them rich, and so they do not make conservative preparations for possible bad outcomes."
The plot of the S&P Composite Real Price Index, Earnings, Dividends, and Interest Rates. From Irrational Exuberance, 2d ed.
Price-Earnings ratios as a predictor of twenty-year returns. From Irrational Exuberance, 2d ed.
Plot of U.S. home prices, population, building costs, and bond yields. From Irrational Exuberance, 2d ed.