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Irrational Exuberance – Robert J. Shiller

6th November 2020
irrational exuberance book cover


Irrational Exuberance is a book about speculative bubble. I chose this book as it is a recommended book on an investment blog. This book is intended to provide a better understanding of the forces that shape the long-run outlook for the market. I am looking to find some investment advice in this book. This book is the third edition.


Robert J. Shiller is an American economist who jointly received a Nobel Memorial Prize in Economic Sciences in 2013. He is currently serving as Sterling Professor of Economics at Yale University and is a fellow at the Yale School of Management’s International Center for Finance. He is also the co‑founder and chief economist of the investment management firm MacroMarkets LLC.


Irrational Exuberance has 3 prefaces, 13 chapters and an appendix. The first 3 chapters serve as the introduction and the remaining chapters are divided into 5 parts.

The chapters in the introduction are The Stock Market in Historical Perspective, The Bond Market in Historical Perspective, and The Real Estate Market in Historical Perspective.

Part One is Structural Factors and contains 2 chapters. These are Precipitating Factors: The Internet, the Capitalist Explosion, and Other Events, and Amplification Mechanisms: Naturally Occurring Ponzi Processes.

Part Two is Cultural Factors and consists of The News Media, New Era Economic Thinking, and New Eras and Bubbles around the World.

Part Three is Psychological Factors. This part has 2 chapters and they are Psychologial Anchors for the Market, and Herd Behaviour and Epidemics.

Part Four is Attempts to Rationalize Exuberance. The 2 chapters here are Efficient Markets, Random Walks, and Bubbles, and Investor Learning – and Unlearning.

Part Five is A Call to Action and has only 1 chapter which is Speculative Volatility in a Free Society.

The appendix is Nobel Prize Lecture: Speculative Asset Prize.


First, I will share the author’s definition of speculative bubble. It is a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, and, in the process, amplifies stories that might justify the price increase and brings in a larger and larger class of investors, who, despite doubts about the real value of the investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement. We can see that there are multiple factors involved in the formation of bubble according to this definition.

There are too many factors that seem to explain speculative prices to analyze comfortably, thus we should not oversimplify by singling out only one. As with most historical events, from wars to revolutions, bubbles also do not have simple causes. When these events move in extreme directions, it is usually because of a confluence of factors, none of which is by itself large enough to explain these events.

The market prices of speculative assets reflect the current and expected future tastes and technology, the likelihood of discovery of new wellsprings of resources or the technology to develop them; sociology and psychology and their anticipated changes; government policy; other primary forces such as changes in income inequality and likely social and governmental reactions; potential threat of wars and other catastrophes; and the likely use of, and policy toward, the assets.

The author remarks that high expectations during upswing of a bubble may be wishful thinking rather than confidence. On the other hand, prolonged periods of disappointing growth is associated with public anger and increasing intolerance toward minority groups or other countries.

Many popular accounts of the psychology of investing are simply not credible such as investors are euphoric or frenzied during booms or panic-stricken during market crashes. There are 2 types of psychological anchors: quantitative and moral. Quantitative anchors involve weighing numbers against prices when investors decide whether assets are priced right. With moral anchors, people compare the intuitive or emotional strength of the argument for investing in the market against their wealth and their perceived need for money to spend now. Much of human thinking that results in action is not quantitative, but takes the form of storytelling and justification (moral anchors).

As I am principally investing in stocks, I pay more attention to his discussion on the stock markets. He mentions that one fundamental truth about stocks is they are residual claims on corporate cash flow, available to stockholders only after everyone else has been paid. Dividends historically dominates the average return on stocks. Stock prices do not simply responding to earnings or dividends, nor determined only by information about future earnings or dividends. The author also shares that there is no evidence of stocks will always outperform bonds or other investments over long time intervals. Thus, we cannot simply assume that stock is always a better investment than other asset class. Nonetheless, stock market seems to be performing better than the real estate market generally.

Regarding diversification, the author provides some advice. Diversification means offsetting the risks that are already locked into. The proper strategy is to invest in assets that help insure labour incomes, in assets that tend to rise in value when labour income declines, or at least that do not tend to move in the same direction.

A predictable component of irrational exuberance is the sense that we are all suddenly learning important facts and have arrived at a new enlightenment which turns out to be incorrect in the end. History tends to repeat itself.

Irrational Exuberance explains to the readers how a bubble forms and challenges some widely-held beliefs. The author always offers some suggestions to democratize and humanize finance in this book. What I find unusual is that the author believes in the ability to achieve good results in investing, hence he opposes efficient market hypothesis. Nonetheless, the author thinks that the level of returns we have seen in the past few years is unlikely to continue (this book was written in 2014). So far, this prediction remains elusive.

All in all, there is not much investment advice in this book. However, I have learned a lot about the factors influencing the market prices. Hopefully, they will help in my ability to price the stocks rationally.

Some knowledge nuggets that I found in the book: World Wide Web first appeared in news in November 1993 and Mosaic web browser was first available to public in February 1994. Thus, in just less than 3 decades, the internet has dominated the world.


  1. Most advertising is really not the presentation of important facts about a product but merely a reminder of the product and its image.
  2. People’s thinking abut the arcane field of investments is surely clouded with many half-thought-through ideas that may be mutually contradictory, or at least have not been put into any coherent analytical framework.
  3. Absurd prices sometimes last a long time.
  4. Ultimately, in a free society, the government cannot protect people from all the consequences of their own errors.
  5. One may have done calculations of probabilities, but one usually does not fully believe one’s own calculations and proceeds on gut feeling.


3 out of 3 stars

Interested in Irrational Exuberance?

You may get the book from through the links below*.

Get the print book from Kinokuniya Malaysia here

Get the ebook from Rakuten kobo here

*Disclosure: The above links are affiliate links. Thus, I may earn a small commission when you purchase the book through these links.

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