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Irrational Exuberance by Robert J. Shiller

Irrational Exuberance

by Robert J. Shiller

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An excellent inbetween book. Not too academic and dry but also not too simplistic. The most complete treatment of bubbles I've read.

Shiller is a great empiricist, and tests out efficient markets hypothesis through various econometric tests and survey data. Shiller actually asks investors through extensive survey data to see what their motivations and logic is, a pretty simple but radical move from assuming them to be rationally calculating agents. Through this data Shiller shows how irrational, and self contradicting investment behavior can be. Additionally, Shiller does alot of searches through news and media in order to see if the news portion of efficient markets theory holds i.e. is there actually news that explains price movements? To my knowledge both of these attempts at gathering data are novel (and in hindsight) obvious.

An interesting take on speculative bubbles. Shiller shows (at least to my satisfaction) that 1) Bubbles in asset prices do exist and 2) We should look beyond pure financial theory to explain the behavior of bubbles. Shiller explores possible explanations for increases in asset price, and shows that at least, there is no real rational basis for certain increases in prices (looking at population growth, construction price and interest rates do not explain the housing prices for example), and that certain implications of efficient markets are violated. In particular, he could not find any news to explain large price movements, and that stock prices are too volatile compared to dividends growth (an apparent violation of the Gordon discount model).

Shiller then goes on to suggest some possible explanations for the behavior of bubbles. He argues many factors, a combination of social, psychological and cultural factors. He goes in length about feedback loops, herd behavior, word of mouth contagion, and the role of media in drawing attention to issues. Shiller discusses how certain vivid stories (in particular "new era" theories) can capture the imagination of investors and unmoor asset prices. Shiller also describes how irrational enthusiasm, mixed in with a convincing story can overwhelm quantitative fact and forecasts driving self-creating bubbles. Sometimes investors, encouraged by the raise in prices, jealous of others "success" and with a gambler's high can pile on into markets. Shiller also surveys behavioral economics, in particular anchoring, and overconfidence in their roles in bubbles. This section actually seems a bit weak to me, Shiller seems to be throwing everything at the wall to see what sticks, and some of these explanations (while I believe happen to be true) are difficult if not impossible to falsify.

Ultimately, Shiller suggests improving markets by broadening participation, encouraging opinion leaders to educate investors and reducing short constraints (for example creating markets to allow investors to short asset prices such as housing easily). An enjoyable (if somewhat technical at points) read overall. ( )
  vhl219 | Jun 1, 2019 |
A prominent strain of investing advice asserts that market timing is hopeless, and encourages investing heavily in index funds without attempting to judge how reasonable their current price level is. I’m not sure to what extent Shiller’s own concrete investment advice - this book offers little of it - would differ, but his discussions of stock market history, real estate market history, and the efficient market hypothesis do provide a very intriguing note of caution to that sort of thinking. ( )
  brokensandals | Feb 7, 2019 |
The book was well written and straightforward in its presentation and premises. Although one can't help but agree with the author's conclusion of a stock market bubble and its long-term impact, the author presents his psychological/sociological interpretation without basis far too often. I would have liked to see more substantiation of investor behavior and their motives; too often the author made assumptions about investor motivation. ( )
  James.Igoe | Jul 26, 2017 |
Great book. Explains the mentality and economic principles behind bubbles, especially the recent tech and housing bubbles. ( )
  fliesbath | Oct 26, 2015 |
Sometimes stresses the long-term picture, but it must be noted that that is still based on trends and patners. Goes through 12 factors. Links Ash, Milgram experiments to learning about authority/majority being right-information. People have inconsistent views.
  ohernaes | Mar 7, 2015 |
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Amazon.com Amazon.com Review (ISBN 0767923634, Paperback)

CNBC, day trading, the Motley Fool, Silicon Investor--not since the 1920s has there been such an intense fascination with the U.S. stock market. For an increasing number of Americans, logging on to Yahoo! Finance is a habit more precious than that morning cup of joe (as thousands of SBUX and YHOO shareholders know too well). Yet while the market continues to go higher, many of us can't get Alan Greenspan's famous line out of our heads. In Irrational Exuberance, Yale economics professor Robert J. Shiller examines this public fascination with stocks and sees a combination of factors that have driven stocks higher, including the rise of the Internet, 401(k) plans, increased coverage by the popular media of financial news, overly optimistic cheerleading by analysts and other pundits, the decline of inflation, and the rise of the mutual fund industry. He writes: "Perceived long-term risk is down.... Emotions and heightened attention to the market create a desire to get into the game. Such is irrational exuberance today in the United States."

By history's yardstick, Shiller believes this market is grossly overvalued, and the factors that have conspired to create and amplify this event--the baby-boom effect, the public infatuation with the Internet, and media interest--will most certainly abate. He fears that too many individuals and institutions have come to view stocks as their only investment vehicle, and that investors should consider looking beyond stocks as a way to diversify and hedge against the inevitable downturn. This is a serious and well-researched book that should read like a Stephen King novel to anyone who has staked his or her future on the market's continued success. --Harry C. Edwards

(retrieved from Amazon Thu, 12 Mar 2015 18:06:34 -0400)

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"In January 2000, an Ambassador taxi twisted its way up the narrow road leading towards Dharamsala in the Himalayan foothills of northern India - the home-in-exile of the Dalai Lama. Inside was a fourteen-year-old boy, the 17th Gyalwa Karmapa, one of the most important figures in Tibetan Buddhism. His arrival was the culmination of an extraordinary escape that had brought him 900 miles across the Himalayas, in conditions of high danger, from the monastery in Tibet where he had lived since he was seven years old." "The Karmapas, the great wisdom teachers and miracle workers of Tibetan Buddhism, are the oldest line of identifiable reincarnates in Tibet, older even than the Dalai Lamas. When the 17th suddenly appeared in Dharamsala, everyone was taken by surprise - the global media, the Chinese government, his devotees around the world.". "Fascinated by this charismatic young figure, Mick Brown travelled to Dharamsala to meet him, and found himself drawn into the labyrinthine - not to say surreal - web of intrigue surrounding the 17th Karmapa's recognition and young life. The Karmapas traditionally leave a letter before they die, predicting exactly where their next incarnation will be found. The discovery of the 17th in 1992 shook the foundations of the Karmapa lineage, and was followed by the appearance of a contestant to his throne.". "In this feud of Byzantine complexity, Mick Brown gains unique access to both sides, following each twist in the tale with clarity and zest. Here are stories of miracles and allegations of murder, political conspiracy and the settling of two hundred-year-old scores. Piety jostles with greed, truth with falsehood, the strength of human aspiration with the frailty of human nature. And at the centre of it all is the extraordinary figure of one of the great spiritual teachers of the coming age: the 17th Karmapa."--BOOK JACKET.… (more)

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